At a time of massive overcapacity in the U.S. branch system, merger-based consolidation is once again being touted as an industry solution in pressing times. But are potential acquirers looking at a major opportunity or stepping into a major trap?
A critical question is whether dealmakers will stay focused on preparing for future competition. The challenge facing branch banking is not just a slack market — it is accelerating obsolescence. As banking transactions cascade into alternative channels such as automated teller machines, online banking, call centers and mobile devices, branches have become an extremely thin tether for up to a third of the customer base.
In the face of such profound customer migration, there is no possibility that merger partners can succeed by simply producing a tighter rendition of their traditional brick-and-mortar networks. Acquirers face a distinct risk of overpaying for branch networks and then winding up competitively handicapped in a changing market.
For dealmakers on the hunt this year, there are two main implications. First, the whole process of franchise valuation and due diligence needs to be overhauled to reflect the growing ranks of “virtual domiciled” customers who seldom use branches. What are local networks really worth if up to a third of local customers do not use them? And if the deal emphasis truly is on acquiring customers, what do buyers and sellers really know about their physically disconnected customers never seen in branch lobbies?
Second, merger implementation must be much more than an exercise in combining old pieces of things. A strategy, budget and plan will be needed to build a progressive distribution framework that can thrive in multi-channel competition. From a bank technology perspective, this entails much more channel coordination and integration than we see today. Think of how Apple devices seamlessly sync with each other, as opposed to the banking hodge-podge of ATMs, call centers, online, mobile, etc.
To be sure, the battlefield is littered with branch casualties and there is a lot of cleanup and expense reduction to be done. Based on a recent Novantas analysis of the entire U.S. branch system, about 16,000 outlets, or about 18% of the total, will either need to be closed or reworked over the next three years.
The good news is that perhaps two-thirds of these “zombie branches” can be revived if placed in stronger networks under better management. And yes, mergers can be a major instrument in getting this done.
But this is not the full story at a time when the role of the branch is changing. Based on a Novantas national survey, for example, 70% of consumers first go online when researching banking products and services, up from 42% five years ago. The preference to check deposit balances online has jumped to 68% from 40%. Consumers increasingly are looking beyond the branch for financial advice as well, with 35% of survey respondents saying they first turn online or to the call center.
When transferring funds, 60% of consumers primarily use the online channel, twice the rate five years ago. Twenty-six percent now primarily use ATMs for depositing funds, up from 19%. Various flavors of online deposit also have gained popularity, with 15% of consumers now saying they prefer channels such as automated clearinghouse transactions, person-to-person payments, and remote deposit capture.
Consumers are also making greater use of mobile phones for basic banking services, such as account information and balance transfers, strengthening the tilt away from branch-delivered basics. More than a third of consumers now have smartphones.
Despite these trends, few regional banks have developed robust marketing and sales strategies for their “virtual domiciled” customers, many of which are high value. Most players need a closer study of transaction data to see how various customer groups interact with the bank, as well as improved profitability metrics for channel behaviors.
Instead of expressing urgency about closing this gap, some bankers still think in terms of “locking down the franchise” for several years following a merger while systems and organizational cultures are integrated and branch networks are combined.
For a bank doing a major deal this year, that is tantamount to saying that larger transformational projects will have to wait perhaps until 2014 at the earliest — a huge handicap in repositioning for multi-channel competition.
As an example of the innovation that will be needed, consider the challenge with branch staffing. Novantas research indicates that branches are experiencing a 4% annual decline in teller transaction productivity. Over the next three to five years, up to one-third of full-time teller staff may become surplus to network requirements.
Along with branch cost reduction, major customer-facing adaptations will be needed as well. Banks must work to accelerate the pace of customer online migration so that alternative channels become a “true and complete” substitute for the physical branch.
In the new era of “demand engineering,” there is a pressing need to study specific categories of customer branch activity and then establish migratory paths that guide customers into alternative transaction channels. In the best outcome, efficiency (and/or revenue) improves; customers are more satisfied; and job assignments are more valuable and rewarding for employees.
Kevin Travis is a partner in the New York office of Novantas LLC, a management consultancy.