As branches lose steam and customers roam freely among channels, key questions about marketing, sales and network capacity require an expanded perspective.
As customers increasingly use the Internet and other remote channels for many of their banking needs, banks are facing perplexing questions about distribution strategy. The branch, which for so long was everything: the brand, the sales channel, the service location, is losing its place at the center of the customer relationship. While still an important part of the distribution mix, branch networks no longer can provide the kind of outsized sales and earnings growth the industry has been used to. With dense networks no longer being the only consideration for distribution strategists, planning for investments and efficiencies by market gets more complex. Banks now need a comprehensive look at “Total Market Equity.” The foundation remains branch density, but market assessment is expanded to include the presence of automated teller machines, the amount of marketing spend and media prominence, sales force size and presence, online presence and relative product attractiveness. This expanded perspective is critical in addressing the distribution challenges of the next few years. These include cutting costs while retaining customers in dense markets; boosting performance in strategic markets that are growing only slowly; and growing sales revenues among “virtually domiciled” customers, many of whom seldom visit the branch after opening their initial accounts. In each instance, a core challenge is selling and serving more strongly through non-branch channels. Ultimately, perhaps only 75% of the pre-recession peak branch network will be needed going forward, both for reasons of changed growth and profit dynamics, and accelerating customer migration to alternative channels. While branch cost reduction clearly has further to go, the larger questions concern proactive customer engagement — how can the bank acquire, retain and expand customer relationships as the traditional anchors of physical branch presence and face-to-face service erode? In designing a multi-channel strategy for this new environment, banks will need a much fuller view of customers, including a channel-based understanding of profiles, transaction patterns and sales potential. At many banks today, fragments of this information remain scattered in various product and operational silos, leaving important knowledge gaps as teams consider plans for each major locale. With so many customers roaming freely among channels (one of four either never or rarely uses the branch after opening accounts), important questions about marketing, sales and network capacity must be addressed through a multi-channel perspective. Winning banks have already grasped this nettle and have begun shifting the mix of network investments to support the new requirements of a changed market.
When Branches Were King
Up until around 10 years ago, branches were the bank. The brand was established by the universal presence of the network, and awareness and consideration among potential customers was driven by branch density and presence. Customer preferences and buying decisions were shaped inside branches in an experience driven by the quality and convenience of the location and the staff on hand. Customers knew the bank because they saw the bank; they bought from the bank because it was there; and they walked into the branch to shop, compare, fulfill and transact, often once a week or more. The result was a direct relationship between branch network presence in a local market and the ability to win market share of deposits and loans. Market share could even exceed branch share with the right coverage model and network density. Fast forward a decade. Only one of six customers researches bank products in the branch, the rest do so online first. Whole categories of products, including credit cards and high-yield savings, are sold directly to consumers by national brands having little or no branch presence in many markets (American Express, Capital One, Citibank). For day-to-day banking, consumer preferences are trending strongly online and to mobile devices, and in-branch traffic in many markets is falling at rates of 7% or more annually. Simply creating new channel capabilities and training customers to use them won‘t be enough, given the critical need to create brand awareness and customer consideration before the sales process can begin. This creates a three-part marketing and sales challenge in multi-channel strategy: 1) how to create the right market awareness and get into the consideration set for potential customers; 2) how to get the right products to the right customers at the right time; and 3) how to present an offer and close a deal in an effective and efficient way, considering the full range of channels that customers use to interact with the bank. Costs must be brought down further as well. And the situation has a major strategic implication that is counterintuitive to regional banking executives. Many instinctively will want to shield locales with the most dominant branch networks and simply refine them around the edges, while further squeezing second-tier markets. This “circle the wagons” mentality has several unintended consequences. First, network preservation in dominant markets will lock in an unsustainable cost basis while delaying needed transformations for emerging multi-channel competition. Second, the inordinate diversion of resources to dense, big city networks will cripple promising second-tier markets at a time when they should be nurtured for growth. For the good of the overall franchise, the higher path is to strongly accelerate the deployment and customer usage of alternative channels in dense markets; capitalize on channel migration to slash expenses for traditional branches; and use the savings to reinvigorate second-tier markets having the best growth potential (Figure 1). Importantly, some banks are already having success with elements of this strategy. One institution based in the Southeast, for example, has succeeded in notably reducing the branch count in several major markets while preserving market share of deposits, primarily by coaxing customers into more extensive use of ATMs as a substitute for branch transaction services. This type of progress will be needed across the industry.
In reconsidering local market strategy, a variety of factors come into play, with only one set pertaining to branch presence and density. These market levers primarily include advertising, physical presence, pricing and product comparisons. Advertising — One factor that now becomes more important is traditional marketing that builds brand through advertising and focuses on the right mix of messages and venues. Banks with national brands built over decades of advertising may find they need fewer branches than other players to acquire new bank customers in new markets. Other banks have boxed themselves in by overspending in established markets where they already have high customer awareness by virtue of dense networks. Some of those resources need to be directed to thinner markets that offer growth opportunities without the expense of branch expansion. Physical Presence — The physical presence of the traditional branch network still matters, but increasingly will be supplemented with lower-cost alternatives for effective market coverage. Strategies for branded off-site ATMs and ATM partnerships are much more important these days. In-store, office and express branches are emerging options as well. These touch points extend bank presence and customer convenience, providing new opportunities to economize established markets and enter new ones.
The Segment Factor in Retail Distribution
Distribution synergies are even more important when customer segment is taken into account. Today, with the fragmentation of the marketing, distribution and sales funnels, the channel a customer chooses matters much more than those the bank makes available. In other words, supply-side constraints on customer behavior are falling away, and any future strategy will have to take into account that various groups of customers have sharply differing buying patterns. For example, one of the major attributes driving preference and behavior is affluence. While traditionally influencing issues such as advice, service and product development, customer affluence has brand, distribution and sales implications as well. Affluent segment — Our research shows that affluent customers are detaching from traditional branches much faster than other customers. They are more likely to want to carry out day-to-day banking in virtual channels, and are the most willing to buy products over the phone, especially simple products like certificates of deposit and checking accounts. Even for complex products such as mortgages and investments, affluent customers are more likely to value a direct or non-branch channel than a branch for sales fulfillment. They are also the most likely to be aware of the widest range of national brands, and in every market in our research, they showed the highest consideration for non-bank brands of any segment. It is important to note that among many affluent customers, awareness and consideration of local bank brands is not even remotely linked with branch density, while and the preference to buy through a relationship manager or financial advisor was much higher than for mass market customers. A bank seeking to attract affluent customers would be foolish to invest too heavily in branches while under-investing in brand and sales force coverage. Based on our analysis, a strategy of a strong umbrella brand (in the sense of being on a par with the non-bank competitors), coupled with strong direct channels including online and telephone service, plus significant sales force and niche marketing capabilities, would yield a sharply higher market share than a traditional branch-based retail banking play in this segment. Mass market segment — The dynamics of mass market banking are quite different. Density and universal access, whether via branches or other formats such as standalone ATMs, remain the single most important factor in attracting mass retail business. While brand matters, the competitor brands in many markets are more likely to be grocery stores and telephone providers, other dense utility businesses, rather than nationally branded players. For this segment, value proposition simplicity is the second most important factor in determining market share. Providers with complex offers usually have at least 5% less penetration than competitors with simple offers in this segment, in terms of consideration and purchase behavior. The third most important factor for mass retail banking is direct channel access, in particular phone channel capability. Price is the fourth factor, most likely due these days to the broadly low-priced environment in which the market is stuck. —Kevin Travis
Pricing — The relationship between pricing and deposit growth is well recognized, but there are important frontiers in this area, even beyond credit pricing. Increasingly, banks will need to tailor pricing for various customer segments, including consideration of their relationship status and channel usage patterns. Fortunately, alternative channels offer many new possibilities for precision targeted pricing, far beyond the generalized treatments commonly seen in the branch environment. Product — Customers still compare products locally, even if they are shopping virtually. Since most shopping occurs online, customers are often comparing products and features side-by-side from a whole series of local competitors. Customers perceive the merits of a particular bank‘s products in relation to their shopping priorities and competitor offers. Compared with three other banks that offer free checking, for example, a fourth bank without free checking may look “expensive,” even if customers aren‘t specifically shopping for a free checking account. Products need to be designed in such a way as to be self-explanatory on the web, and also need to be positioned relative to other offers in the market. Lack of a major product type or category may depress consideration, even when that product isn‘t the one customers ultimately intend to buy (lack of free checking depresses consideration, even for affluent customers shopping for higher value accounts, for example). Beyond these four main factors, increasingly a more orchestrated sales effort will be needed in local markets, one that tightly aligns resources with opportunity and leverages expertise across multiple sites and types of client outreach, including consideration of target customer segments (Sidebar, “The Segment Factor in Retail Distribution”). This has to be something more than back-end coordination of a separate retail plan; a separate small business plan; and a separate wealth management plan. Also new types of handoff and fulfillment arrangements will be needed for customers who arrive at the bank via non-branch channels. From another perspective, as customers become more comfortable in making purchase decisions outside of the branch environment, banks will need to up their game in direct marketing, including mail, phone and e-mail. In fact, many consumers (especially affluent ones) prefer to receive information in passive channels such as e-mail and online, and then fulfill their buying preferences on the phone or on the Internet. This trust of direct channels will only rise, based on our research. While many banks understand these issues, the problem is that they usually are addressed by separate teams. Each separate part of the bank has gotten very smart about its own piece of the equation: marketing for brand presence; distribution for sales force deployment and branch network configuration; product management for the value proposition and pricing; sales management for outreach and fulfillment. What is new is that each unit, acting on its own and optimizing alone, will not create the kind of returns on invested capital that banks need in today‘s environment, neither optimizing for cost savings, nor for revenue growth. In addition, the current disjointed approach will not provide the right set of responses to changing customer behaviors and preferences needed for success in the next decade.
While the details of multi-channel strategy may seem remarkably complicated, winning banks will center their efforts on pragmatic applications that begin to address the most pressing issues. There are three challenges that banks should begin addressing in 2013. Cutting costs while retaining customers in dense markets. Costs have to fall at least another 10% to 15% in order for the industry to reach sustainable overhead ratios. With most banks having taken out 5% to 10% already, most of the low-hanging fruit, (i.e., cuts in staffing, branches, and other expenses) has been realized. The next 10% slice will hurt. And to hit the kinds of targets needed, it will have to come from dense markets, the only ones with enough reduction opportunities to help meet the savings targets. Today these dense markets have a certain precedence in the planning process, often retaining investment dollars long after thinner, less successful markets have seen their budgets zeroed out. This has two causes: a misunderstanding of the financial benefit of scale, wherein the density of the network somehow creates a glow that makes all marginal spending look valuable; and the traditional marketing allure of physical scale: better brand, better awareness, better consideration, better sales. In reality, an advertising dollar might be better spent in a lower scale market, but in order to understand the value of that dollar, a better marketing mix model is needed, coupled with a clear understanding of the value of network density, ATM presence and sales force effectiveness (Sidebar, “Quest for Synergy.”) To find the money they need to save, banks will need to cut branches and retain share by decreasing branch density while upping alternative format coverage, advertising and marketing efforts, and sales force outreach. Boosting performance in strategic, low-growth markets. After multiple rounds of cost-cutting, many banks are situated in large, strategic markets where their networks, while not dominant, still rank from number three to number five in branch share. Often, these markets have lower performance than the cities where the parent company has the largest network footprints. Under traditional approaches to investment allocation and cost reduction, their budgets for advertising, branching, and headcount have been slashed as spending chased the higher returns of the large, dense markets. The problem, though, is that these are often markets where significant opportunity still exists, and where the bank has large, complex networks, but where cost-cutting has likely reduced growth prospects by depressing awareness and consideration among possible new customers. As awareness and consideration fall, so does sales performance. When the next round of cutting occurs, theses markets look even worse and come in for more reductions, further reducing sales performance and “proving” the case for starving them of resources. At some banks, half the footprint or more is now in this category. To arrest this vicious cycle, banks will need a complete rethink of the approach to the local market, starting with understanding the bank‘s current total market equity; how it has changed as costs have been cut; and how targeted, tactical steps can increase it in a way that fosters greater sales. Consider, for example, a market that has had no renovations for five years, is starved of advertising resources, and where the highest opportunity may be in small business. In this situation, the tide may be turned by a targeted sales force, coupled with a new marketing campaign focused only on those businesses in the target market, plus a carefully planned set of high-visibility renovations of branches in business hubs. Growing sales revenues in virtually domiciled customer segments. With at least a quarter of the customer base no longer transacting in branches, these same issues become acute in terms of cross-selling and wallet penetration. Since virtually domiciled customers only come into the branch for rare, isolated transactions (if at all), the ability of the bank to communicate with them clearly about products and services is almost as troubled as for new, prospective customers. Most of these customers prefer not to receive calls, direct mail is dead, and yet the bank is interacting with them multiple times a week in other channels such as the mobile phone and the Internet. A targeted strategy for these customers requires an element of brand building to grow awareness and consideration for the bank in product categories they don‘t currently own at the bank and in the channels they choose. This should be coupled with the right set of fulfillment arrangements to create a “virtual network” of sales, service and marketing points that maximizes their value to the bank. In the rest of the footprint, in markets small and/or thin, the lessons learned from the virtually domiciled can be applied to help reduce costs and boost profits as resources are re-deployed away to larger or more profitable areas. A simultaneous strategy of cost reduction in physical plant and greater focus on remote sales and service, along with community involvement looks interesting.
To move more firmly down the path of multi-channel strategy, banks will need a lot more coordination between the business units. While this may imply a new organization, top-down structure is not enough. Often today, the marketing team chooses where to spend the money, the distribution team separately opens and closes the branches and deploys the sales force, the product team separately designs the offers and set the prices, and the sales management team separately develops the campaigns, set the goals, and incents the performance of the people in the system. Many skewed decisions result.
Quest for Synergy
Banks have already experienced the downside when weaknesses in one area of distribution spill elsewhere. Dwindling branch traffic undercuts the rationale for heavy advertising in dense markets. Pricing is constrained by market conditions and customer resistance to fees for service. Traditional direct channel marketing and sales approaches are seeing significantly reduced rates of conversion even on targeted campaigns. Branch density has become hard to justify on a standalone basis for organic growth. And the existing network is likely unaffordable as it stands today without some significant change in either cost or revenue growth or both. However, our work has shown that combinations of factors — such as pricing and advertising, or pricing and branch density — act as multipliers to each other. For example, a 5% increase in relative pricing may be worth a 7% increase in share growth. An equivalent 5% increase in advertising spend in a local market may be worth a 3% increase in share growth. When an increase in advertising is coupled with an increase in pricing, share growth becomes 10%. Similarly, when a bank has more than an 8% branch share in a market, it may be able to achieve the same level of sales growth at 8% percent lower prices compared with markets where it has lower branch share. Not only are there direct and clear trade-offs between pricing, advertising and branch share, but also between sales force density and activity, branch presence, value proposition simplicity and online share and shopping behaviors. While these correlations challenge the traditional approaches to marketing, sales, and distribution, they are good news. They imply that with the right set of analytics and the right understanding of the value of each of the levers, banks can smartly optimize investment and realize savings much more aggressively that they have to date, whether in current dense markets or in new growth areas. —Kevin Travis
In response, some institutions have started integrating pieces of this puzzle. Examples include sales goals that are based on network density and market opportunity; pricing that is linked to density and customer segment; offers and products that take into account channel behavior; and marketing and branding that build awareness for online channels via traditional mainstream means. While many of these advances are brought about by formal organizational changes, others simply need an enlightened executive attitude, accepting that cross-silo coordination is critical. An organizational change will succeed only if the goals and attitudes of the various team players are aligned. Coordination critically depends on a second priority, which is a companion effort to building out the data infrastructure to capture, analyze and integrate all of the information needed for cohesive decision-making with the customer at the center. For example, behavioral analytics are needed to track longitudinal customer behavior at the transaction level, and ultimately tie it to changes in network density, market spend and campaigns, product and pricing changes, and changes to sales force coverage and skills. While banks have begun to integrate their data sources and develop the managerial tools to measure some of these cross-factor influences, these steps are in their infancy, and the complexity of the tasks coupled with the traditional timescales involved in large data integration projects means shortcuts must be found now if these data are going to be useful planning the next bank network and customer set. A third priority is building out the multi-channel framework for product offers and fulfillment. Banks thus far have been unable to replicate branch sales effectiveness in alternative channels, translating into countless lost opportunities to expand the “share of wallet” with core relationship customers. Results are constrained by lack of cross channel capabilities; limited investment dollars; and often a “one-size fits all” model (i.e. distribution, marketing and sales investments) that ignores the emerging differences in segment preferences, behaviors and profitability.
To be sure, as senior executives ponder this new strategic phase and look inside their organizations, they will see incremental progress on a variety on fronts. Advances include new data warehouses and analytic capabilities; new direct-to-consumer selling initiatives; new web applications; new metrics; new teams and new people with critical skills. The challenge is steering all of these efforts and resources in the same direction. There is no time to waste, yet gridlock is a very real challenge at many organizations. The biggest risk is adding so much complexity that a difficult problem becomes worse: fiddling on the web while the branch burns, so to speak. Another risk is letting the perfect be the enemy of the good: “We can‘t start selling until the new upgrade comes through,” or “We have to wait for the reorganization to move forward.” It is critical to act now, even as the broader infrastructure gets built. To begin breaking through, one clear and immediate priority is to center on the growing ranks of virtual domiciled customers. They haven‘t been studied adequately at most banks, and they are continually under-sold relative to branch customers. A growing proportion of revenue growth — near, intermediate and long term — depends on effective targeted marketing and sales to customers who seldom visit the branch. Also, virtual domiciled customers are at the vanguard of a trend of true channel substitution, not just using alternative channels as a complement to the branch experience, but firmly adopting alternative channels in a way that begins to permit excess branches to be closed. Looking internally, a second clear priority is to assemble a multi-disciplinary distribution team. The legacy organization of the retail bank — branches at the center with everything else managed as separate add-ons — is fading into obsolescence. Customers have finally “taken the bait,” so to speak, swarming to alternative channels that banks have worked for so many years to provide. But now that a tilting point has been reached, the managerial center of gravity must shift along with the customer center of gravity.
Kevin Travis is a Partner in the New York office of Novantas LLC, a management consultancy.