Banks have a historic opportunity to sharply reduce branch count and expense in a way that may actually increase customer satisfaction. Proactive campaigns will be critical.
Ever since the intense merger consolidation of the 1990s, banks have struggled with the question of how to streamline expensive branch networks without driving away customers or hurting revenues. Any effort that seemed to “force” customers to accept reduced branch service has inevitably backfired.
Now, however, banks have a historic opportunity to sharply reduce branch count and expense in a way that may even increase customer satisfaction. They key is to go one step further as customers migrate to alternative channels — online, mobile, automated teller machines, contact centers — and begin to proactively encourage people to use the alternatives as complete substitutes for branch service.
Already in the industry, for example, some major banks have coaxed customers into extensive use of advanced ATMs, significantly shifting everyday deposit transaction activity out of the branch. In turn, one major player has been able to reduce the branch count in several major locales while retaining market share of deposits.
Extended across an entire regional banking franchise, this kind of true channel substitution could potentially permit an additional 10% to 15% reduction in branch network overhead over a period of three to five years. And these savings are critically needed as economic and regulatory headwinds continue to gust.
Viewed standalone, the U.S. branch-based deposit business generated roughly $52 billion of pre-tax income in the pre-crash year of 2006, according to our estimates, with a towering 60% return on equity. By contrast, the Novantas forecast for 2012 is just $6 billion of pre-tax income, with a return on equity of only 6%.
Essentially there are three phases of industry response in right-sizing and repositioning the U.S. branch system. Phase I was about quick-hit cost reduction; finding the low-hanging fruit in opportunities to close weak outlets and reduce staff and other network overhead. A future Phase III will be about transforming sales and service for full engagement of the remote customer. Standing in the middle of those two is Phase II, achieving true customer channel substitution for tangible cost reduction. This is the place where bankers can take meaningful action now for near-term benefits.
Fortunately, there are strong indications that many retail banking customers would willingly accept alternative channels as true branch substitutes. Already, almost a third of customers seldom if ever go to a branch for routine transactions and service, and almost 40% prefer to open any additional accounts online. Over the long run, customers are becoming “virtually domiciled,” preferring to interact with the bank through direct channels and using branches only as occasional backstops.
Winning banks will use a combination of approaches to move more customer activity out of the branch. These include deployment and promotion of image-enabled ATMS; customer incentives and fees; and staff training to encourage and facilitate customers as they adopt alternative channels as true substitutes. This is the path to drive down costs and better utilize branch resources for revenue-producing activities rather than expense-producing transactions.
Overcoming Customer Inertia
Compared with only a few years ago, our research shows that customers are much more willing to change their mode of interaction with the bank. Remote technology is becoming an essential part of consumers‘ daily lives, as reflected in social media, Internet shopping, on-demand video feeds and similar activities. So there is no learning curve for the technology itself; the financial institution simply has to convince customers that remote transactions are the best way to conduct their banking as well as their shopping.
That said, customers are creatures of habit. Inertia is powerful, most customers will continue with old habits unless offered one or more compelling reasons to change.
For example, most major banks have provided electronic bill payment programs for more than a decade. Yet while EBP offers convenience, cost savings (no cost for postage or checks) and ease of use, millions of customers continue to write paper checks.
Similarly, ATM deposits have been available since the first machines debuted in the 1970s (Chemical‘s 1969 unit only accepted deposits). But even as the devices have improved to include imaging, same-business-day crediting of deposits and other enhancements, a high percentage of customers continue to rely on drive-up and in-branch deposits, limiting the time that branch staff can devote to value-added activities.
As banks lay plans to overcome customer inertia, one of the first important steps is to study today‘s frequent branch customers. The two types of customers who use branches most are the multi-channel/heavy branch user and the branch dominant user.
In looking at the profile of the multi-channel/heavy branch user, it is clear that this customer segment is already strongly oriented to branch alternatives, with fewer strong concerns or objections to overcome. With a median age of 47, people in this group are mid-stream in their professional lives and tend to make extensive use of technology both in the work place and at home with their children. Conducting nearly seven transactions a month at the branch, the average customer in this group carries a balance of nearly $14,000 with his or her primary bank.
By contrast, the branch dominant customer tends to belong to an older demographic group, with a median age of 65. These are people who grew up with branches and never changed over the years. These customers concentrate 80% of their banking activities in the branch, with five branch transactions per month on average. Balances are higher, with a median approaching $20,000, but there is more reticence within this group to try alternative channels.
Many of these customers were using banks even before the advent of ATMs. And they may have been put off by earlier versions of these machines that were far less customer friendly — slow recognition of deposits; possibly even no receipts; clumsy user interfaces; limited or no graphics; slow underlying telecommunications technology, etc. Within this group, a big breakthrough would be simply getting people to try the latest and greatest technology even one time.
Clearly, banks will need multiple customer strategies to encourage more widespread channel substitution. Some customers already “know the woods,” so to speak, while others won‘t go near them. Then beyond familiarity, there are subtle questions about the particular combination of incentives, fee structures, promotion and coaching needed to carry the day with various types of customers.
The customer migration to alternative channels can be accelerated through a dual strategy of incentives and fees. Examples of incentives include the availability of image-enabled ATMs; later cutoffs for same-day availability of ATM deposits; and a promotional bonus for the customer‘s first use of ATM deposit.
Image-enabled ATMs offer deposit-confirming receipts and fast transaction times. Later cutoffs give customers more flexibility toward the end of the day and help to eliminate last-minute rushes to the branch. Perhaps most important is encouraging the customer to make his or her first ATM deposit transaction. Once the customer takes the first step with the first ATM deposit transaction, the odds are sharply increased that he or she will eventually adopt the technology as a substitute for branch lobby service.
Already we have seen how image-enabled ATMs have been a key driver of change for some financial institutions. These state-of-the-art devices enable customers to see the checks as they are deposited, removing the fear of depositing cash and checks into a “black box.” They empower customers to conduct transactions on their own schedules rather than on the schedule of the bank branch. And they provide quick availability of funds by converting check images into electronic files for faster processing.
Banks can further motivate customers to change their transaction habits through a fee structure that promotes ATM over branch usage. This includes special rates for accounts that exclusively use remote deposits and withdrawals; rebates of ATM fees; and/or deposit account fee structures that encourage remote channel usage.
Often, the swing factor in channel substitution is staff effectiveness in educating and convincing customers to make the change. Proactive branch staff can coach customers through the migration and promote ease of use, convenience and other advantages in making deposits at the ATM rather than at the branch. To get branch staff mobilized in this important effort, wining banks are addressing the basics of training but also going from there to provide performance incentives, such as bonuses for accounts shifted from branch servicing to remote channels.
Reaching the Next Level
As banks work more seriously on customer channel substitution, it is important to recognize that there is a continuum of activities. Today‘s focus mostly is on basic everyday transactions; simply convincing people to skip those time-consuming trips to the branch lobby and make more complete and permanent use of all of the convenient remote substitutes at their disposal.
On the next horizon are pivotal initiatives with sales and service, comprising Phase III in branch network renewal. One upside of lobby service is that it provides many opportunities for relationship-building; consultative sales; and quick and reassuring problem resolution. These strengths must somehow be recreated as people do more of their banking on the screens of personal computers, mobile devices and ATMs.
Novantas research shows that customers are increasingly willing to open new accounts online, a more complex exercise that requires a more concentration and confidence on the part of the user and careful planning on the part of the provider. While one ultimate goal is to be able to win a high volume of new-to-the bank business via remote channels, a more pragmatic starting place is simply to do a better job of cross-selling to established customers.
In continuing tight market conditions, one the best avenues for growth is to serve current customers more fully, and capture greater “share of wallet.” It continues to be the case that for every dollar that a core customer holds with the primary provider, another two dollars are held with a variety of external institutions, so the cross-sell potential remains significant.
The good news about alternative channels is that they provide lots of opportunities for offer targeting and customization, far beyond what can be done in a branch setting with sales generalists. But to capitalize, banks will need an in-depth understanding of “virtual domiciled” customers‘ needs, attitudes, behaviors, relationship value and sales potential. Some pieces of this information already reside in various areas of the bank, but most players have yet to formally analyze their remote customer base.
A companion question is how to solve problems remotely, not just checking an item off a list, but assuring that the customer is comfortable with the quality of remote interaction and truly satisfied with the outcome.
The first line of defense on problem resolution is of course preventing mistakes in the first place. But they will happen. The bank then needs to essentially “triage” the situation with remote customers, quickly categorizing the type of problem and providing the right avenues for self-service resolution. These include online information and advice, chat capabilities with a live representative, and fallback service from the contact center.
As has been pointed out countless times over the years, customers often do not cleanly adopt a new technology in substitute of an older one. This reality extends all the way back to the days of the horse and buggy, which people continued to use extensively for many decades after the advent of the automobile.
With branch banking, the clear goal is true channel substitution, the kind that extends far enough as to permit significant tangible reductions in branch network expense, including outlets and staffing. Many bankers believe they already understand this, yet they continue to focus on channel functionality without taking the important extra step of developing the informed, convincing and proactive campaigns needed to swing the tide with customers.
True channel substitution is no longer a hypothetical goal. Several major banks have made real progress in shifting deposit transaction activity out of the branch, such that market share is preserved while installations are closed. Such progress is imperative for a retail banking industry that simply cannot afford to maintain the elaborate networks of yesterday, yet also must succeed in preserving customer relationships, balances and growth potential.
As customer migration to electronic channels accelerates and branch transactions decline, the bank can further right-size its retail business. Organizations and functions can be consolidated. The FTE burden can be reduced by shifting to part-time staff for known branch high-traffic times, and by cross-training staff for problem resolution and value-added sales activities. Our research shows that through a combination of incentives, fees, staff training and image-enabled ATMs, banks can free up nearly 15% of branch capacity in the medium term — over and above the latest round of cost cuts.
Of course there will be those customers who will still come to the branch, but the focus should be on taking time to cross-sell them on other products and services, rather than simply on processing deposits and withdrawals just to get to the next customer in line. It is a matter of sculpting the surviving branch system to serve high-value customer needs, while positioning the virtual bank as the new full-service destination.
Rick Spitler is a Managing Partner at Novantas LLC, a management consultancy based in New York City.