A new Novantas survey makes it clear that many Canadian banking customers have moved solidly beyond the branch, raising the question of multi-channel strategy.
As in most retail industries, banking customers are embracing multi-channel shopping, both to select a new bank and to buy additional products. This shift creates a growing urgency for banks to meet the demands of a digital marketplace, where increasingly valuable chunks of business are being won or lost before customers ever visit the branch.
Not only are shoppers strongly influenced by online information and a user-friendly experience when searching for a new institution or an additional product, but many are willing to open accounts remotely as well – and a critical customer segment is willing to give up branches entirely. These developments are changing the game in customer acquisition and cross-sell.
Although Canadian bankers have a strong intuitive grasp of this development, our recent national consumer survey shows a much stronger market shift than many executives may have perceived. According to the Novantas 2012 Canadian Multi-channel Survey, 58% of customers review web site information when selecting a new institution, and 50% view user-friendly online banking as a “very important” decision factor. When established customers get ready to open an additional account, more than 40% prefer to do so outside of the branch, either online or with a live rep over the phone.
This transition to multi-channel shopping and competitive evaluation poses a new set of management challenges for Canadian banks. First, customer information will need to be more thoroughly integrated and analyzed so that banks can understand how relationships and behaviors play out across all delivery channels. Second, new levels of channel coordination will be needed, both to boost functionality and the overall brand experience for the multi-channel customer, and to broker critical investment decisions that may boost costs in one area as results are improved elsewhere. Third, there are many questions about the branch network, which, paradoxically, the majority of customers want to be convenient (open long hours and close by) but are less and less likely to visit.
Fortunately, Canadian banks are in a solid position to address these issues. Unlike their U.S. counterparts, they are posting record profits and also have healthy branch networks overall. Yet there is no time to waste in preparing for a burgeoning multi-channel marketplace. A bank can be technically adept in operating various individual channels, yet still fall far behind in multi-channel customer acquisition and cross-sell.
The Multi-Channel Shopper
The Novantas survey makes it clear that Canadian banking customers are leaning much more heavily into the remote space for high-value decisions, in line with the overall consumer migration to online shopping and services in retail industries. The branch still will play a key role, but within a larger and more coordinated context that prominently will include online and mobile, automated banking machines and call centers.
Choosing a New Bank. When asked about selecting a new bank, 58% of survey respondents said they would first check the web sites of competing institutions. That overshadows a 36% response on visiting competitor branches and a 35% response on asking family members and friends (Figure 1).
Shop and Fulfill.. When customers open their first account at a new bank, 21% prefer to do so online, with an additional 5% saying they prefer to use the call center. The comfort level on remote origination of accounts is even higher when customers are dealing with their current institution. When considering opening a new account with their current bank, 32% of survey respondents said they prefer to do so online, with an additional 11% citing a preference to do so over the phone with a representative (Figure 2). That leaves a 57% preference to use the branch, down from 64% in 2011.
We also asked specifically about mortgages, a more complex and high-value product. When seeking advice on home financing, 41% of respondents said they would interact with their bank both online and in the branch, and an additional 35% said they would only transact in a branch. A further 19% of respondents said they would be comfortable transacting entirely online, and the remainder cited other alternatives such as using the call center or meeting with a specialist.
For mortgages overall, most customers still prefer some level of interaction with a live bank representative. Banks will need to explore, however, whether more customers would be satisfied to interact with a mobile mortgage specialist or a skilled banker over the phone, lessening the dependence on expensive branch infrastructure.
Service and Delivery
Along with embracing multi-channel shopping, Canadian banking customers continue to shift their service and transaction activities to electronic channels. This presents further opportunities for branch cost reduction, with the proviso that key customer issues, perceptions and habits must be understood and proactively addressed. In many cases banks and their customers would also benefit from the further promotion and adoption of electronic payments, as well as the launch of mobile cheque image capture.
Day-to-Day Banking. Eighty percent of survey respondents report using remote channels for some or all of their basic transaction and cash-handling (online bill pay, receiving direct deposits and ABMs for withdrawing cash), and we expect the use of electronic payments and remote banking will continue to grow.
Within the space of one year, the proportion of Canadian customers who say they visit the branch at least once a month to make a deposit or get cash dropped from 49% to 40%. That is a big shift, but given that four of every 10 customers still use the branch for routine deposit and withdrawal transactions, there is a further major opportunity to redirect basic branch transactions to remote channels, with corresponding potential to lower branch staffing costs.
Achieving this will require a granular understanding of the drivers of customer behavior, which range from the desire for social interaction to the more economic need to avoid holds and limits restrictions on cheques. Meanwhile, some further migration to electronic channels will occur as government at all levels mandates a move to direct deposit or prepaid cards.
Offsetting the benefits of a lower branch transaction burden is a strong customer preference for extended hours of operation, including early opening and late closing on weekdays and operations on Saturday and even Sunday. Sixty percent of consumers prefer non-traditional branch hours, according to our survey, especially affluent and younger customers. To accommodate this preference while controlling expenses longer term, Canadian banks will need to develop lower cost alternative branch formats and flexible staffing configurations.
Turning to cheque usage, there was only a mild change in reported customer patterns between 2011 and 2012, with more than 40% of respondents still saying they write cheques at least once a month. One reason is that certain merchants and service providers still do not accept online payments. PayPal and other payments innovators are coming up with their own workarounds, which are especially meaningful to small businesses. This is a significant competitive development and banks will lose ground if they fail to provide a good alternative.
From another perspective, cheque-writers often said “it’s my habit” to do so, again emphasizing the need for proactive outreach to change behaviors. Banks should consider aggressively promoting and pricing electronic payments, both to further the trend and to deepen their engagement with their customers.
Problem Resolution. Our survey indicates that a large majority of Canadians prefer remote channels to resolve a problem, a positive factor in reducing branch overhead. But Canadian banks have more work to do in taking fuller advantage of this trend. The problem right now is that many customers appear to anticipate a “long wait time” when using the phone channel, with the result that they skip the remote alternative and instead use the branch.
Fifty six percent of respondents said they prefer to first phone the bank if there is a problem with an account, but a lesser 46% said they actually do so in practice. Conversely, while 23% said they prefer to resolve a problem by visiting a branch, a much higher 36% said they actually do so in practice. This is an example of how an under-allocation of resources in one area (in this case the call center) can drive up costs elsewhere (in this case the branch), underscoring the need for more coordination among distribution channels.
Interestingly, customers voiced a growing willingness to use online chat for problem resolution, with the survey preference rising from 8% to 14% just since 2011. This is another service conduit that should be nurtured, given its potential to further reduce usage of expensive branch services.
Although the majority of Canadian consumers still prefer nearby branches with extended hours, even if they conduct most of their banking over remote channels, banks will need to be alert to potential challenges from non-traditional online competitors. Though lacking a network of full-service branches, these players are able to offer attractive pricing and have a sales and service model that is optimized for convenient remote banking.
In the Novantas survey, 17% of respondents said they would be willing to select a new bank that had no branches at all. When combined with the 25% of customers who expressed a preference to open their initial account with a new bank over a remote channel, it is clear that a significant number of customers might be willing to consider a bank (or major bank sub-brand) that provides sales and service without a network of full service branches. While a non-branch banking offer may be handicapped in terms of market presence, its low-cost operations provide a powerful weapon in price competition.
Some Canadian banks have experimented with web- and phone-only products or closely tied sub-brands, but with mixed results. We expect however that retail banks might be wise to look at the success of Canadian mobile phone providers in operating multiple brands, each associated with a distinct value proposition and customer segment.
In any case, the requirement for a strong remote banking proposition will only grow in coming years, even for players with a strong branch network. The online space is steadily replacing the branch as the “first destination” for shoppers, providing a critical link both with people who prefer all-electronic banking and those who plan to make occasional or even frequent use of branches as well.
Instead of a supplement to the branch experience, remote channels now are forming their own center of gravity in customer relationships, not just for day-to-day transactions, but for high-value decisions as well. Is the pace of multi-channel strategy development keeping up with the pace of customer change?
It is not an abstract question because tangible and increasingly substantial performance factors are at stake. Priorities include attracting new customers in the virtual space; marketing and fulfilling product cross-sales outside of the branch; retaining valuable customers through a convincing multi-channel experience; and proactively steering customer transactions online to lessen the branch burden.
Often today, Canadian banks are being held back in addressing these priorities. Legacy practices and skills, while supporting profitable operations today, have tended to leave banks with far less coordination than what will be needed in the emerging multi-channel marketplace. Broadly, there are three areas which require management attention:
Customer Information. Canadian banks often have been North American leaders in the use of customer information and have solid data sets and analytical skills. Yet the bar has been raised as people step up their use of remote channels for transactions and shopping as well. There is a veritable avalanche of information coming from various product groups and delivery channels, and it now must be melded to paint a fuller portrait of the customer.
If the bank cannot track customer behavior on a multi-channel basis, then it cannot make accurate business decisions. This presents an incredibly complicated challenge with many ramifications for competitive success. One priority is the development of new marketing and sales models. Another is mapping and exploiting the frequent customer interaction with the bank that occurs across electronic channels, both to deliver and measure the effect of marketing messages and to better understand customer needs. A third is understanding and shaping the multi-channel experience in accordance with customer preferences.
As an example why this level of customer analysis matters, consider the emerging group of customers (roughly a sixth of the consumer base) who are becoming almost completely disconnected from the physical branch. While these “virtually domiciled” customers may visit a branch to open initial accounts, most of their subsequent activity is conducted remotely, making further cross-sales dependent upon successful outreach via remote channels. This is a much more sophisticated effort that critically depends on the ability to track and analyze channel behaviors over time.
Customer behavior can also fluctuate. People who shop online may also be happy to fulfill online (and some increasingly do). But many others are shopping online, buying in branches, and then returning to online and mobile to transact day-to-day banking. This is especially true when it is time to buy a house or plan for retirement. There is work to be done in tracking and analyzing these behaviors, both to improve the customer outreach and also to support a variety of internal decisions and initiatives.
Channel Coordination. Although many banks have recognized that their customers want a seamless experience across all touch-points and have appointed a central senior executive to oversee all of the channels, the various major functions of the retail bank often continue to operate as distinct disciplines, with separate budgets, metrics and performance incentives. This permits a lot of internal cohesion within specific lines of business, but it can work against larger tradeoffs that can benefit overall performance.
Today the bank is embodied by overall brand presence in a market, including ABMs, physical advertising and online/mobile/phone capabilities. Resources that previously were more strictly expended to drive branch lobby traffic and in-person sales now must be carefully reallocated to ensure that the bank wins and retains business generated through remote channels as well.
Among other things, this requires an expanded definition of market presence and an orchestration of delivery channels to maximize sales through all customer touch points. These developments speak to the need for a revised governance and rewards structure that recognizes the interaction of channels.
Branches and Live Interaction. The physical branch will continue to play a major role in Canadian banking, but questions about capacity and configuration will need to be addressed as more customer activity shifts online. Customers still say the top factor in selecting a bank is the nearby presence of branches and ABMs where they live and work. Also as we have mentioned, people still like to go into the branch for more complex and high-value transactions, such as applying for a mortgage or retirement planning.
Generally, however, high attachment to branches no longer translates into high usage. A conservative and reasonable estimate is that Canadian banks can expect a further 20% to 25% decline in annual branch transaction volume in five years.
Canadian bank branches are overall financially healthy and tend to be heavily staffed right now. It is important to look beyond the current situation and begin to prepare for an era when there will be far less demand for teller services and a rising need for flexible staffing arrangements, especially given pressures for longer hours of operation. How will the bank deliver a compelling person-to-person experience in a way that is affordable?
Also there are questions about how to configure and coordinate the full spectrum of conduits for live customer interaction, including online chat, the phone, video links and the mobile sales force. There is now a multi-channel mandate for marketing and sales effectiveness, and increasing consequences for growth and profitability as more purchase-related conversations occur outside of the branch. Service enters the multi-channel equation as well as banks continue to guide customers into more cost-efficient arrangements that lessen the burden on branches.
There are several management priorities in addressing the fuller transition to a multi-channel banking marketplace. At a basic level in the online space, players will need to plug any competitive gaps in features, functionality and presentation, recognizing that the first place where many banking shoppers now turn is the web.
The next wave of activity centers on using multi-channel approaches to achieve high-value business outcomes. This is where the marketing, sales, product and distribution teams come together to identify priority initiatives in customer acquisition, cross-sell and retention — and to flesh out a true multi-channel brand experience. In turn, these priorities will provide key context for developmental activities in areas such as refining customer information, strengthening the call center, and setting the growth agenda for various local banking markets.
There are also questions to be addressed in distribution, particularly the branch network. Even though Canadian networks have not gone through the sort of revenue crisis seen in the United States, they still are exposed to changing customer behavior patterns that inevitably will require a major re-think of capacity and configuration. A number of bank executives have asked the question: “What is the risk of our branch network being Blockbustered?” Staffing is a more immediate consideration, as is the further migration of low value transactions to lower-cost remote channels.
One immediate question is how to justify and fund all of the developmental work needed to meet the demands of a multi-channel marketplace. In our view, one answer is the prospect of improved customer retention and cross-sell, contributing to a higher lifetime value of customer relationships. The goal is to make it easier and easier to become an in-depth multi-channel customer, with implications for increased relationship “stickiness” as people settle into sophisticated banking arrangements and become more reluctant to switch providers.
A second answer is improved customer acquisition and possibilities to defend or even expand market share. The terms of competition are changing and banks will need much more than an attractive array of street corner branches to win new business. As our survey highlights, consumers already give heavy consideration to the online banking proposition when selecting a new provider, and one of every six respondents said they would consider doing business with a bank that had zero branches.
Finally, branch cost reduction through channel substitution needs to reach the next level. This topic has been discussed and worked on for quite a few years, yet it remains fresh because there are continuing advances in customer receptivity to using remote channels. In many cases much of the needed technology is in place, but more proactive campaigns are needed so that customers are alerted to the benefits of remote transactions and services and receive the education and encouragement needed to make the leap away from expensive lobby-based services and paper-based transactions.
Andrew Spears is a Partner in the Toronto office and Kevin Travis is a Partner in the New York office of Novantas, Inc., a management consultancy.