Consumers have a stronger digital center of gravity, but most do not want to completely sever branch ties. The situation calls for a new type of “Digital First” strategy.
Primary checking accounts remain the lifeblood of retail banking, but the terms of competition are changing dramatically in the age of digital banking. Instead of making a clean leap from the branch to online and mobile channels, many core customers want it both ways — digital as the first option with the branch as a required standby.
As revealed by the 2014 edition of the Novantas Multi-Channel Preference Study, two in every five primary checking customers now fall into a group that turns first to digital for key activities — not only everyday banking but also shopping for products and providers — yet want at least some local physical presence as well.
Rising from a 25% concentration to 39% in just the past two years, these customers have developed a set of attitudes and behaviors that define them as “thin-branch ready,” meaning that a much leaner local branch network likely would work just fine for this group so long as other requirements are met.
Though not necessarily dissatisfied with their current bank, Thin Ready customers are in play for competitors that can provide the necessary elements of brand, product, digital convenience and a convincing online shopping experience, supported by a targeted physical presence. From a larger perspective, these customers represent the likely future of retail banking competition as consumers adopt a stronger digital center of gravity but are only comfortable with lessening branch ties — not severing them.
The situation has opened a new front in the battle for core banking relationships, giving rise to a competitive approach based on “Digital First” strategy. Reflecting the fact that digital channels are a growing first instinct for many customers, this strategy has a value proposition based on a trusted brand, digital tools and low, simple fees, backed by a thin, carefully-design physical presence to win acceptance in target markets.
Some banks are already using Digital First strategy to win market share in several major banking markets. But importantly, this is not a pure distribution play. Winning relies on five principles: 1) fostering the perception of convenience; 2) positioning branches as a reliable fallback; 3) leveraging digital and out-of-home marketing; 4) emphasizing digital ease of use; and 5) providing online decision support.
Branch Sales Relevance
While the general imagery surrounding digital banking is one of accelerating consumer adoption at the expense of the branch, our research underscores critical exceptions to the trend. Transaction activity is one thing; high-value sales and service is quite another.
At the transaction end of the spectrum, the most recent strong digital impact on the branch is with deposit-taking. The proportion of surveyed consumers preferring to use the branch to deposit paper checks fell from 54% in 2012 to just 35% in 2014. A major driver is the extensive deployment and marketing of mobile deposit capture, on top of the ever-increasing availability of image-enabled automated teller machines.
Meanwhile the proportion of consumers preferring to go into a branch to withdraw funds fell from 25% to 22% over the past two years, and the branch preference for transferring funds fell from 15% to 13%.
Viewed from a sales perspective, however, the branch trend is more robust (Figure 1: Branch Relevance in High-Value Transactions). Looking at account origination, 45% of respondents said they would go to the branch when opening an additional deposit account with their current bank. And 55% said they would turn to the branch when applying for a home equity loan or line of credit. Both of these response rates exceed the corresponding preference scores for digital fulfillment, underscoring ongoing branch relevance in sales.
The branch also remains the preferred channel for financial advice. Compared with an 18% preference to use online or mobile banking, 44% of respondents said they preferred to deal “with someone in the branch” for financial advice.
Albeit reduced, service relevance is also a continuing branch strength. While the consumer preference to go to a branch to resolve a problem fell from 53% to 37% between 2006 and 2011, the preference level has stabilized since then, holding at 36% among 2014 survey respondents. For service issues that really matter, people still value face-to-face interaction in the branch.
The twist in the story is that sales and service relevance is something different from shopping relevance. This is where digital is exerting a powerful new level of influence. Including people with a stated preference to shop purely online and those who prefer to shop both online and in the branch, banks are now in a position where roughly 80% of the origination stream for new checking relationships is partly or heavily influenced by digital shopping.
The situation places the branch in an increasingly narrow role. It is still prominent in booking sales but increasingly dependent on digital to drive traffic. People want to be able to come by to solve an occasional problem but are generally quite happy “not to have to go to the branch” for daily transaction services that now can be fulfilled digitally.
In balancing the new marketing and sales dynamic between the branch and digital channels, it is clear that channel preferences vary among major customer groups — but few would prefer to use a branch solely or avoid the branch altogether. Even the most diehard branch-centric segment shows a substantial preference to include online channels in the shopping mix, and few online customers are ready to cut all branch ties.
To segment checking customers, we scored each survey participant on two axes: branch dependence and branch attachment. The dependence ranking reflects the frequency of branch visits and the intensity of on-site banking activity. The attachment ranking reflects the extent to which respondents agreed or disagreed with sample statements about the value of the branch in a primary banking relationship (Figure 2: Checking Customer Segmentation).
Thin Ready customers emerged as the largest customer group in this schematic. These are people who visit the branch infrequently but still affirm the branch’s value to some degree (e.g., legitimizes the bank; is a valuable resource; is expected from the provider of the core checking account).
Online shopping is warmly received by individuals in this group and is much more likely to be cited as the most valuable shopping method (Figure 3: Top Channel Preference for Shopping among Recent Purchasers). As they shop online, Thin Ready customers tend to orient themselves to a certain cluster of brands competing for their attention, and then search among them to understand the product options — a sharp contrast with the traditional approach of going to the most convenient nearby branch and sitting at the desk of a platform banker to see what is available on the spot. While these customers are more likely to cite a preference to open accounts online, few actually complete the account enrollment process in that manner.
Taking one step closer to the branch center of gravity, the Mass Market segment comprises 29% of the survey set. These checking customers visit the branch more often, express a bit more attachment to the branch and more strongly prefer to use the branch for specific tasks, such as requesting a new ATM/debit card. Compared with Thin Ready, their online preference is a third lower, while the branch preference among this customer group is 25% higher.
Finally, with the highest preference for in-store shopping, Branch Traditionalists have the strongest remaining branch loyalty. They have retreated into a corner of the customer base, however, representing only 15% of the survey set.
These customers exhibit above-average branch attachment and dependence. Yet even among the holdout Traditionalists, digital is having a visible influence, with 18% of survey respondents in this group citing online channels as the most helpful for shopping.
Putting these findings together, it is clear that the branch, in some shape or form, remains vital to the acquisition of new primary checking relationships. But given the widespread impact of digital, it is equally clear that the new optimal branch count and experience is far different than what most national and regional banks offer today.
From the competitive perspective, a pressing question is how to win new business in the changed environment. Consumer sentiments and decision processes now are subject to the eclectic influences of both physical and electronic distribution, with implications for marketing, product design and presentation, sales and network configuration.
Five competitive principles are already being used by some players to gain market share, and a fuller industry embrace is all but inevitable as pressures mount to engage the growing ranks of customers with a digital center of gravity. To win with a Digital First strategy:
Appear bigger than you are. The goal is to create a perception of physical convenience among shoppers who will use the branch only rarely once they open their accounts. This approach favors a smaller number of large, visible and attractive stores located near high-traffic nodes. Coverage gaps for local transaction services can potentially be filled with large-format ATMs, providing additional market visibility.
Position branches as a reliable backstop. The primary basis for branch attachment among the thin crowd is a desire for standby help to resolve problems. The value of the branch in dealing with contingencies can be part of the promotional message. Then as customers come on-site, branch staffers gain opportunities to coach people on how to solve current and potential future problems online.
Emphasize digital and out-of-home marketing. Effective multi-channel marketing is critical in establishing presence in a new market and in offsetting a lower branch count, but not all marketing is created equal. Out-of-home advertising, such as bus-stop wraps, billboards and subway signage, will help to establish and sustain local market resonance.
Digital marketing benefits the bank in two ways beyond direct demand generation: First, as Novantas has found, digital marketing creates perceptions of convenience in a way that other forms of advertising do not. Second, social media in particular can allow the bank to selectively participate in the community dialogue on topics of local interest. Finally, there is direct mail.
Emphasize digital convenience. Customers who are Thin-Branch Ready rely heavily on online banking, especially mobile, but are not especially swayed by special applications such as account aggregation and person-to-person payments (at banks that offer P2P, less than 2% of active online/mobile banking customers use it today).
With feature innovation less of a swing factor in convenience, the promotional emphasis turns to providing superior renditions of digital capabilities widely in use. In many cases a bank may already be fielding a strong suite of core digital capabilities but simply is not winning commensurate customer recognition in the marketplace.
It is important to review applications with an eye toward reliability and ease of use, and then turn those strengths into marketing advantages. Easy-to-use mobile banking, marketed heavily even around features already offered widely elsewhere (e.g., mobile check deposit), often matters more than P2P and other secondary features.
Provide attractive, simple choices. Especially when shoppers first arrive at the bank web site, it is important to simplify decision-making. At the web site of one of the largest U.S. banks, the checking landing page that comes up when people click on search engine links presents just two accounts, accompanied by short, needs-related descriptions displayed in large font. Another national brand is pursuing a thin-branch strategy on the back of just one checking product.
Also with self-directed online shoppers, banks need to be cautious about posted fee arrangements. Consumer hot buttons with checking fees include cost, complexity and fairness, and click-search capabilities allow people to instantly re-direct their online consideration, so simple and low fee structures are best.
Streamline online account opening and fulfillment. The unvarnished reality today is that, when switching banks, most Thin-Branch Ready customers shop online but then open accounts in the branch. But the rate of online account-opening varies inversely with a bank’s physical density, which will be low in a Digital-First strategy. For sales success in thinly-branched markets, the road that leads from digital shopping to digital purchase needs to be well-paved.
Today, however, some digitally-oriented shoppers wind up feeling forced to seek branch origination following a failed attempt to complete an application online, either because of a poor online experience in general or a lack of decision support in particular. As the bank streamlines these elements of its digital presence, online applications in its thin-branch markets will flow (Figure 4: Top Channel Preference to Open New-to-Bank Checking).
Despite the popularity of mobile banking and the rise of digital shopping as a driver of checking origination, banks are finding that checking acquisition is still a market-by-market battle. For some players, the digital/local dynamic provides multiple avenues for growth. For others it presents multiple forms of exposure. Often today, mid-size regional players are at the greatest risk of market disruption.
It turns out that the very largest U.S. banks have natural appeal to Thin Ready customers, both because of brand strength and because of the outsized investments these players are able to make in digital channels and capabilities.
In some markets, this appeal has enabled one bank to scale back expensive branch presence while preserving service and customer relationships through a combination of web and mobile banking and imaging-enabled ATMs. Elsewhere, this same bank is capitalizing on the decoupling of branch density and perceived convenience to penetrate expansion markets at low cost, using a small number of highly visible branches.
Nimble small players also are putting Digital First strategy to work. Our research confirms that in some high-density markets, one new entrant has been able to gain meaningful traction through a blend of marketing, online appeal and a sprinkling of high-visibility banking centers that do not even have teller windows.
Developments such as these underscore the point that a tipping point has been reached in checking competition. The branch is less of a foundation and more of a multi-channel component, and meanwhile digital is becoming a swing factor in customer awareness and purchase consideration. The situation clearly calls for a different strategic orientation going forward — is your bank prepared?
Chris Musto is a Managing Director in the Boston office of Novantas, Inc. He can be reached at email@example.com.