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Digital Banking: Building the Business Case

Success in the online space has a growing revenue consequence. Amid technological transitions, customer strategy will require much stronger attention.

As U.S. retail banks consider their future, it is clear that the industry has been launched into an era of momentous change, driven ever more strongly by a firming digital marketplace. Depository institutions will again find opportunities for profitable growth, but success will come on very different terms from the past.

The good news is that: 1) because of regulation and its barriers to entry, banks’ particular position as depositories will remain safe in the future economy; 2) because banks are still unmatched in depth of customer relationships and information, they have powerful advantages in the transition to a multi-channel marketplace; and 3) let’s not forget the branches. Despite their waning role in service delivery, they are still hugely important in establishing the brand and providing customers with the reassurance of “access,” (more important than convenience going forward). But nothing can be left to chance at a time of rapid change in customer behaviors.

The old paradigm of branch-based delivery of paper-based products is giving way to a multi-channel marketplace for the digitally empowered customer, and there simply is no turning back from this trend. Mirroring trends in publishing, music, travel and a host of other industries, banking’s consumer online migration is forcing a major re-think of retail strategy amid seismic upheavals in distribution systems.

The exact contours of the future banking market are unclear. But there is plenty of evidence to suggest that online strategies and capabilities will eventually become dominant factors in growth and competitiveness. A whole new level of business line integration will be required to tap the full potential of the multi-channel customer.

One of the most important priorities is learning how to win with online shoppers. Our research shows that nearly two-thirds of consumers now prefer to search online for banking products and providers, even though most still go to the branch to complete their transactions. A redoubled effort is needed to attract and engage online customers, with overall sales growth increasingly affected by the success of this effort.

Another priority is to preserve banking’s primacy in payments amid the ongoing shift from paper to digital transactions. This is critical in anchoring core customer relationships in a splintering market that is loaded with innovative, non-bank competitors. There is a growing revenue consequence as banks consider how best to merchandise their expanding array of digital payments services.

Winning Online

Customer online shopping and research already has a heavy influence on branch sales success (Figure 1), and the intensely competitive market for digital payments has become a battleground for control of core customer relationships and for fee revenue growth. These influences will only grow as the online channel facilitates and influences even more customer shopping activity and product and service innovations.


Most regional banks should be doing far more to beef up their online strategies and capabilities. But out of necessity to control costs, many institutions have rationed their online investments and developmental activities — often focusing on getting service delivery capabilities up to snuff. This investment orientation ignores the large and growing influence of online and mobile banking on branch and call center sales, as well as the role of digital payments in anchoring high-value customer relationships.

To move forward, banks will need a coordinated effort across multiple business lines, centered on winning with online shoppers and winning in digital payments.

Online shoppers. Although it is already the case that roughly two-thirds of consumers first turn online to shop for banking providers and products, most people still prefer to go into the branch to complete transactions. This preference for online shopping and branch fulfillment likely will continue for quite some time. In turn, a coordinated channel strategy will be needed to nurture sales momentum.

One priority is to elevate online strategy and functionality to drive branch sales traffic. This includes winning customer attention in the online space; clarifying website design so that people can easily find and understand products of interest; simplifying promotional offers; and facilitating handoffs to the contact center and the branch.

Another priority is re-framing the branch sales process to accommodate and leverage any online-originated or -enhanced sales momentum. People may be attracted to the branch by simpler online offers, such as free checking, but then it will be up to the sales staff to detect and fulfill customer needs for more complex products.

Along with a changed management orientation, this transition will require sharper customer analytical skills and also a shift in resource allocation. Banks must realize that their websites perform “double duty,” attracting a rising volume of sales that are completed online and also playing a prominent role in driving sales traffic to the branch. As such, the online team cannot be left in isolation with a maintenance budget. A coordinated effort will be needed to adapt to consumers’ changing shopping behaviors.

Digital payments. Banks held a long and profitable dominance over the paper-based payments system, but their primacy has been placed at risk by the accelerating transition to digital payments (Figure 2). As customers become increasingly comfortable using nonbank alternatives such as PayPal, the traditional strength of the checking relationship is being eroded, weakening customer ties and also fee revenue potential.


Unfortunately, many banks are limiting their own progress in fighting this war. Overlapping products continue to proliferate among different business units, leading to splintered website presentations that create barriers to customer usage. And often there is a slow and uncoordinated pursuit of key opportunities in areas such as pricing strategy, high-value services and targeted customer outreach. Meanwhile established products, such as online bill pay, stutter along with low rates of customer adoption.

To turn the tide, banks need to lift their thinking beyond individual products and begin mapping a more comprehensive strategy for digital payments — one that recognizes that customers increasingly want a comprehensive day-to-day cash management solution, not just one-off products. One goal is to defend market position by channeling the maximum amount of customer payments activity (both transaction volume and balance flows) through the bank’s own conduits and products. Another goal is to optimize revenue growth by identifying opportunities to monetize payments, charging for value-added functionality. A third goal is to use digital payments as a proactive tool in driving down the cost to serve.

Network Transitions

Though compelling, the pursuit of the digital opportunities cannot come at the expense of rightsizing the more traditional branch and sales approaches. Concurrent with further preparations for competition in digital banking and payments, executives will need to rework the distribution system and local market strategy, such that the bank can wring maximum performance from existing infrastructure and begin to reposition networks for a much leaner coverage model.

A Novantas analysis of the entire U.S. branch system indicates that fully one fourth of the collective network is eligible for near-term closure, given trends in customer online migration and the altered economics of retail banking. But our research indicates that swift action would carry a steep price tag, upwards of $30 billion to $50 billion. In other industries, companies that face similar needs for re-structuring might take a big one-time charge or even go through court-supervised bankruptcy reorganization, but these options are obviously unavailable to banks with strict capital requirements.

Even more frustrating for banks, many customers remain wedded to local branch presence even as their actual usage decreases. Particularly for high-value transactions, such as applying for mortgage credit or solving a problem, people still want lobby service. Thus, branch presence still influences the selection of a bank. Costs aside, branches are a customer safety net that cannot be suddenly yanked.

The likely scenario is that the industry will close or reconfigure traditional branches at a slower pace over a period of years — probably 5%-7% annually. This pay-as-you-go approach avoids a big financial hit and minimizes customer disruption, but it extends the pain of carrying excess infrastructure.

Getting down to specifics, how can banks cope with the interim challenges of managing the legacy network while taking the right steps toward a new distribution model? One important answer is to focus and differentiate by market to reflect the new reality of lower margins and increasing local competition.

Market Playbooks. In the not-too-distant past, banks could count on branch dominance to drive marketing and sales. Local customers were aware of the bank because it had branches nearby; they considered the bank on that basis; and they opened accounts at the bank on that basis. Today, by contrast, there is strong evidence that awareness, consideration, and purchase pull-through can be created in many ways, using marketing, product and distribution in new, market-specific combinations.

Thus the new goal is to drive higher customer awareness, consideration and purchase results based on strengths as they occur by market. This reflects the reality that the costs of operating in one market differ from the costs of operating in another; the bank’s branch network and ATM density differ; marketing spend and ROI differ; and the competitive set (and structure) will vary, as well as growth and cross-sell potential.

ATM strategy. The ATM has reached an inflection point. New technology has made ATMs more viable for deposit-taking, both within and away from the branch. Meanwhile consumers are more open to the use of ATMs for more complex transactions. In turn, the ATM will likely emerge as a significant physical distribution and branding point of presence, creating new possibilities for local market coverage. This will require further progress with ATMs to broaden service capabilities; enhance the customer experience; and provide greater convenience.

The larger picture is about recasting the role of the ATM in local networks. These units can now work harder in reinforcing local market presence and absorbing a higher transaction workload to permit branch capacity reduction. But careful planning is needed to unlock these advantages. The count and placement of ATMs must be considered within an overall market coverage model that includes full-service branches, small footprint offices, special purpose offices, and roving representatives.

Executive Priorities

Although retail banking has at least stabilized following the recession, a further challenging journey lies ahead as the industry more fully transitions to a multi-channel marketplace. In the quest to optimize interim performance while preparing for the future, there are three priorities for executive management:

The first is managing a discipline migration to a new business system that ultimately will become the core of the franchise. A sharply higher level of coordination between business silos will be required. Innovation and experimentation must be fostered in a way that supports a staged progression, making sure that new capabilities are appropriately framed for a multi-channel market and also integrated systematically.

“Big Bang” transformations carry far too much risk of customer and operational disruption, and winners will be savvy about pilot-testing new business systems and learning from early experiments before placing bigger bets. Executive vision will be needed to plot a multi-year development timeline.

The second is the careful measurement and management of the traditional branch-based business model. Various kinds of leakage that have been overlooked in prior economic expansions now must be methodically identified and firmly plugged. The good news here is that there still are substantial opportunities for smart cost reduction, as well as revenue and productivity enhancement.

Finally, extreme attention must be paid to managing the pace of change. The main thing is to carefully track and anticipate customers in their multi-channel transitions, striving to avoid the extremes of over- or under-investing in new capabilities. Now more than ever, winning banks will rely on customer-driven strategy and decision-making.

Rick Spitler is Co-CEO and Managing Director and Sherief Meleis is a Managing Director at Novantas Inc., a management consultancy based in New York City. They can be reached respectively at and

For more information, contact Novantas Marketing

+1 (212) 953-4444