As customers shift more purchase-related activities online, retail banks must overhaul former store-centric practices to meet the challenges of a digital marketplace.
The leaders of the banking industry have been extraordinarily preoccupied with the post-recession environment and all of its challenges. But as directors and executive management continue to dig out from the biggest crisis since the Great Depression, many are being caught under-prepared by an exigency of a very different sort.
After years of accommodating the customer transition from paper-based transactions to electronically-enabled remote banking, banks are now being swept into a digital marketplace where valuable business can be won or lost before people ever visit a bank lobby. This is having a profound impact on the economics of the business, particularly consumer banking, and on the requirements for marketing and sales success.
More than half of U.S. households now research bank web sites and online product offerings before selecting a new bank, according to our national consumer surveys. Instead of first selecting a new provider on the basis of nearby branch convenience and then buying with the assistance of sales staff, electronically-informed customers now remotely identify their desired products first, only then picking the bank at which to open their accounts.
While many customers still prefer lobby service for key transactions, a third seldom return to the local branch after opening initial accounts, and that figure could soon rise to 50%. Branches are playing a diminishing role in service delivery as well.
Such transitions will force a cultural shift in retail banking, with the management orientation expanding from the narrow agenda of sales fulfillment within the branch store to serving the empowered multi-channel customer. It is a familiar story in U.S. retail industries, where bookstore and consumer electronics chains are already deep into the digital revolution of their sales and distribution models.
One major implication is that banks must now reassess the purpose and value of street corner presence. Previously consumers built their perceptions and banking activities almost entirely around banking’s storefront system of local branches. Now they roam freely among Internet and mobile banking, automated teller machines, call centers, and physical outlets. Here the competitive advantage is not so much local branch density but rather the overall brand of the bank, which now heavily depends on the efficacy of the online/mobile/phone space and local marketing efforts.
In this new world the branch store must play a more selective role, primarily focusing on high-value activities such as customer acquisition, problem resolution and loyalty-building activities. And much stronger coordination will be needed among all of the customer touch-points, not only to permit a cohesive customer experience, but also to enable the parent company to strengthen critical marketing and sales activities as more purchase-related activities shift away from physical outlets into remote channels.
Unfortunately, this evolution stands in direct conflict with the way that many banks are managed today. Typically retail banks are managed as a collection of semi-autonomous channels — branch vs. call center vs. Internet — with a limited exchange of customer information and inconsistent execution and results in marketing, sales and service; a roughly familiar scenario in many retail industries.
Compounding the problem, many cost-conscious regional banks have slashed developmental budgets in a continuing tight market, preferring instead to nurture their limping branch networks. In extreme cases, this has had the perverse effect of redoubling the management focus on the branch at a time when customers are redoubling their focus on remote banking through multiple electronic delivery channels.
From a Board perspective, a critical question is whether enough is being done to prepare consumer banking companies for the transition to a digital marketplace. The technological disruption of the industry is real and getting stronger, and it cannot be effectively addressed by the piecemeal best efforts of various individual teams within the bank. The problem is more complex than online retailing because of the need for local presence, so an Amazon-like, online-only proposition is not the answer. Ultimately, multi-channel customers will have to be managed by multi-channel management teams, with electronically-enhanced banking a more central consideration in retail strategy.
This also is a situation where there is potential for competitive tilting and an eventual shakeout, with the biggest banks having the upper hand. Equipped with powerful national brands and a scale-driven advantage with developmental resources, the mega-banks stand to claim a lot of new territory in the virtual space. This is especially true given customers’ loosening ties to local stores and the growing propensity to research and shop online among multiple providers.
Eyes on the Prize
On the bright side, the new multi-channel banking marketplace holds significant opportunity for winning players. Customized products and pricing, for example, will be much more feasible for the analytically adept bank, and precision targeted marketing promises to reach new levels of effectiveness in customer acquisition and cross-sell. By proactively encouraging even more remote channel usage for everyday transactions, moreover, banks will also gain more leeway to scale back expensive physical branch store operations. There are possibilities as well to strengthen customer retention and cross-sell — the switching barriers in a multi-channel relationship become higher, as does the composite knowledge of customer behaviors, preferences and sales potential.
Inside of each regional banking company today, there should be the beginnings of a multi-channel marketing and sales culture, with special emphasis on Internet and mobile banking. In time, we believe this orientation will overtake the traditional sales and service culture of the branch — a profound shift in the management center of gravity.
Coming from various industry backgrounds outside of banking, directors know full well that the digital marketplace is inescapable in retail industries. It is not so much that the banking transition is particularly surprising; it is that it is coming at a hugely inconvenient time when the industry is still contending with recession repercussions. Yet the industry has no choice but to cope. The customer has spoken.
Rick Spitler is a Managing Partner at Novantas LLC, a management consultancy based in New York City.