Editor's Note: An earlier version of this article appeared here.
Despite the growing dominance of digital banking, the physical bank branch is not extinct. But to ensure the viability of branches, the size and nature of the branch network must change more substantially and more quickly than most banks acknowledge.
A cost-benefit analysis reveals that many branches are underperforming. As currently configured, the typical U.S. branch requires at least 5,000 teller transactions per month to justify the cost of operation. We estimate that for a typical U.S. regional bank, one-third of its branches fall below this level. If the 20 banks with the most U.S. branches reduced both their branch footprint and costs per branch by 30%, their total cost savings could well exceed $10 billion.
In response, banks should eliminate some branches while streamlining others, first by redirecting branch activity that is more clearly suited to digital channels. The institutions that undertake such a project more quickly will stand a better chance of reaping the benefits of having convenient digital channels combined with smarter branch networks.
After downsizing the branch network, what should banks do with the branches that remain? Whichever route retail banks take, here are four principles behind a successful transition.
Much of Your Branch Activity Belongs Elsewhere
From our work with banks worldwide, we know that about 70% of branch activity at most banks is tied to errors or would be better routed to lower-cost, more convenient digital channels. Consumers clearly prefer digital channels for many transactions, particularly routine ones such as making deposits and payments. For those transactions, banks should avoid policies that force customers to go to a branch and stand in line, such as ceilings on remote deposits.
The savings achieved by reducing inefficient branch interactions should help banks enhance their capability to digitalize customer experiences — highlighting convenience and speed — to help compete with many fintech insurgents. Banks can also look externally, through partnerships and acquisitions, to accelerate their offerings of digital channels to replace activities that had been encumbered in physical branches.
Another way to streamline the network is by changing the way employees interact with customers. Some communication, such as giving mortgage advice, does not have to occur in a branch but could be done through mobile chat or video. As banks plug their front-line staff into a digital hub, that can raise productivity by reaching more customers and reducing paperwork.
Savings generated through reductions in volume and physical footprint can be reinvested to expand digital transactions. This will require the commitment of the entire leadership team, because the nature of the work cuts across most functions of the business.
Focus on 'High-Potential' Branches
Banks can test and implement new branch models by progressively closing or remodeling locations, and by realigning staff for new roles that emphasize sales and advice. Within a bank's branch network, the profitability of individual branches usually varies widely. Sorting the portfolio of branches into several groups, based on profit potential, is the prelude to determining how to handle each group.
The high-potential group consists of branches with underutilized strength. These are branches that are well-located but have certain drawbacks that can be corrected efficiently. For example, their signage is not visible from the main street, they have not had a renovation in at least the past 15 years, or senior staff positions that could drive a branch's progress remain vacant. By contrast, the lowest-potential branches should be considered for consolidation.
To improve the overall effectiveness of the branch network, some banks are experimenting with alternative network formats. One model is the hub-and-spoke configuration: advisory offices, consumer shops specializing in light retail activity and self-service kiosks arrayed around a full-service flagship store. These new formats incorporate digital technologies to enhance the customer experience and provide self-service capabilities that customers increasingly expect. An advantage of hub-and-spoke is that it can be built in one local market — say, a city neighborhood — at a time and then built out more broadly over time.
Make Projections Over the Long Term
When assessing the business potential of a branch offering, banks need to really look broadly. For example, an institution should be aware not just of its own product line but of what others are doing as well, factoring in the customer defections and reduced cross-selling that will occur as competitors expand digital offerings.
Similarly, when calculating the upside of an offering, banks cannot think only in terms of current assumptions and only about cost. Banks should consider the longer-term impact on revenue and profit lift from improved customer experience.
Customer Priorities May Vary by Market
In a branch network, one to two dozen branches are considered a "micromarket." As banks look to make improvement in each micromarket, the plan should address the specific priorities of the local customer base and customer feedback should inform service improvements. The plan should model the expected shift in channel interactions and the attendant reduction in physical volumes, which in turn can inform the number and type of assets, such as staff and ATMs, required in the future.
One retail bank took a micromarket approach to simplify its branch processes. The bank determined that roughly half of the activity at its branches could be classified as non-revenue-generating noise or, at best, discretionary. About one-third of activities related to cash transactions. Root-cause analysis showed the procedures that could help get these volumes out of the branch. In a group of 23 branches, the bank redirected cash and check deposits and withdrawals to smart ATMs, modified teller scripts to coach customers on using digital channels and adjusted counter service levels.
The test worked well, and the bank was able to roll out the changes throughout its network. Addressing cash transactions and other branch processes resulted in a number of tangible benefits for the bank overall: a 10% reduction in branch staff capacity, which freed up time for higher-value activities like selling and serving customers; a threefold increase in ATM use for deposits; accelerated migration of customers to digital channels; a reduction in customer complaints by nearly one-quarter; and a rise in employee engagement.
Richard Fleming and Mark Schofield are partners with Bain & Co.'s financial services practice. They are based, respectively, in New York and Toronto.