Brett King

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Branch Networks: Where do we go from here – Part 2

In Customer Experience, Retail Banking, Strategy on June 30, 2010 at 09:13

In my recent discussions on branches I got some reader feedback that some have apparently interpreted my positive reporting of the effectiveness of direct channels as evidence that I am ‘against’ branches. This is not the case. However, I do think that branch networks are currently in a precarious situation and bank’s might find themselves saddled with a costly anachronism if they don’t anticipate where the customer behavioral shift will take branch networks in the very near future. There is hope – but it will take a determination to revisit what branch networks really do for us.

The data shows that branch growth in the west is flat. Given that branch networks were already suffering in the 90’s we shouldn’t be surprised that branch networks today, when customers are rapidly adopting new ways of banking, are under even more pressure.

The facts are that branches will survive. However, not in the current form and function. Why? Because as-is, they are too costly and are ill suited to the customer of tomorrow. Here is where I see branches going over the next 5-7 years based on the fact that current branch configurations will become too costly to maintain as behavioral shifts start to bite revenue streams hard.

If you take just the one element of day-to-day banking — cheques (or checks if you live over the pond) — the fact is that a large portion of branch traffic globally continues to be attributed to cheque processing. Now, however, banks such as HSBC are seriously considering phasing out cheques over the next two to three years. When cheques disappear, how will this affect the operability of your branch?

High Counter to Low Counter

The core function of the branch moving forward will be about establishing the relationship with the customer at inception, and extending that relationship through an advisory or predictive sales process and excellent customer support systems. It is conceivable that all of the transactional elements within a branch will be moved to automated banking within electronic banking centres, automated branches, ATMs or the Internet within the next 5-10 years. What then is left? The face-to-face, value-add of a real, live human interaction.

As we’ve seen with stock trading, a transaction “platform” has no value being situated in a physical branch because the human “teller” or “broker” generally offers no value add to that transaction. Indeed, very few traditional brokers have survived the Internet trading onslaught of the dot.com boom. If we are honest, the only processes which will truly require a face-to-face interaction in the branch in the future are those that are sales and service related. These are also the only elements that will continue to make branches viable from a cost-margin point of view as the current over-the-counter transactions will simply remain a cost, rather than revenue opportunity.

Many of the traditional high street branches will inevitably close as decreasing traffic and increasing costs will invariably make such high cost properties no longer feasible in the current evolution. Flagship “brand- store” branches may emerge, but will need to change in function away from traditional high-counter, transactional focus to low-counter, sales and service focus. More than that, a “standard” one-type fits all branch is simply no longer going to be possible in the BANK 2.0 paradigm.

Deutsche Bank's Q110 model is an excellent template for 'flagship' branches

Form and Function

Banks need to innovate around form and function to get a better fit with customer needs. This has to be based on needs of the customer in respect of product and service, and not a transaction platform as traditionally held. Traditionalists here might argue that it is the very need to “process a transaction” that brings a customer to the branch and presents a cross-sell opportunity in the first place. The reality is, however, that despite cross-sell and up-sell opportunities the cost of over the counter ‘transactions’ increasingly are simply too high to warrant the long tail of the possible conversion.

This uncertainty around branch function versus cost structure and capability serves to illustrate the key differences in goals between the institution and the customer. The institution sees the branch increasingly as a revenue centre whereas in the past these were more accurately classified as cost centres. Thus, improvement in branch profitability has largely been the focus of the institution over the last 20 years.

Customers, on the other hand, simply expect service from a branch, and they expect this because they “pay for it” with account-keeping fees, over-the- counter fees and other such levies. For an exchange of “value” to occur between the institution and the customer, both parties need to be getting something out of this real estate. As direct channels have begun to dominate the day-to-day interactions for bank customers the convenience factor for the ‘branch’ has been lost. Thus, the remaining value must be about access to a unique “value-add”. Primarily this must be the advisory capability of in-branch staff – it is not a transactional platform.

What has to change?

Apart from a shift completely away from high-counter transaction processing, branches must become either intimate customer engagement havens, or locations of opportunity where the branch can maximize point-of-impact.

In major city High Street locations this means a shift to the flagship, megastore, coffee-enabled, rich engagement model. In smaller locations mini-branches, pop-up branches, bankshops and 1-2 person advisory stations at locations where customers are most likely to be. In shopping malls, at airports, at football stadiums perhaps? One idea I heard recently was to put an advisor in the business class section of a A380 airbus. The trick will be to be where customers will get value out of the mini-branch. But that value won’t be transaction based.

Timing will be critical too. The days of the 9-3 or 9-5 branch hours are dead. We might find some branches that specialize in mortgage products only open at weekends, perhaps in a mobile branch located outside display homes or show flats for major developments. We’ll find shopping mall branches that are open till the wee hours, and we’ll find embedded ‘advisor’ desks in corporations assisting group employees with their problems and issues.

We’ll see technology interactions move into the branch with media walls, iPad carrying advisors, integration of sales experience from the RM to direct channels seamlessly (engage in the branch, but execute at home online) and we’ll see RFID technology that recognizes who you are when you walk in the door so we have a few more valuable seconds to prepare our sales script. We’ll see mobile and internet channels hand you off to a branch much more competently and vis versa. We won’t see channels compete for the customer – we’ll see them cooperate (nice theory I know).

The one thing we won’t see a great deal of is branches as they look today. The other thing we’ll see is smaller branch networks, unless banks recognize the shift in consumer behavior that is going to drive bank/brand experience from this day forth and start to think out of the box.

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Branch Networks: Where do we go from here?

In Customer Experience, Retail Banking, Strategy on June 28, 2010 at 08:59

I’ve spent the better part of the last three months meeting and talking to some of the best and brightest bankers in Australia, Asia, UK and the USA and what I’ve learned is fairly predictable, and just a little disappointing. Direct banking (mostly Internet and Mobile) is going off everywhere I go, but most banks are still saddled with an unhealthy attachment to their branch networks. I decided to try and figure out where Branch banking is really going and surmise the strategic options for Retail banks.

Branch Networks under pressure

In the US last year branch growth was non-existent, well to be technically correct branch growth was 0.39%, but that is the lowest it has been in 14 years and the trends are clear – there will be no more branch growth in the USA. In the UK branch growth has declined on average 24% in the last 5 years. In Australia, after fits and starts, branch decline has definitely set in, with 2010 being the 4th year running that branches have declined in numbers. In Sweden last year,88% of Swedes didn’t even visit a branch. In the annual American Banker’s Association survey on channel preferences, the branch continues to suffer (41% decline in just 3 years) as Internet Banking has become the dominant day-to-day channel of choice.

So does this spell doom and gloom for banking? No. There is some good news, in fact some may say excellent news on the horizon.

What UBank and ING Direct tell us

In Australia, UBank, an exercise in direct banking for NAB has rapidly paid dividends. Within just 3 years UBank has become the 8th largest bank by deposits in Australia. But where can UBank go from here after such a strong start?

While UBank has faced some leadership challenges in recent times, I spoke to Sam Plowman, Executive GM of Direct Banking at NAB, last week and I was delighted to hear that UBank is a big part of their forward-looking strategy, with a host of new products planned over the next few months.  This must be the only sensible move for NAB given their current market share and the unbridled success of UBank. In fact, UBank would probably have to be considered the single most successful initiative NAB has launched in the last 5 years, wouldn’t it? Sam’s colleague Simon Terry is currently working on the launch of the Oracle-powered NextGen platform that will power future innovation in customer experience. Between Sam and Simon, they hold the future of the bank in their hands.

If UBank continues to perform so well though, what happens to NAB itself? The key lesson from UBank’s success must be that direct banking is at the very core of NAB’s business moving forward – if NAB falls into the trap of thinking it’s a one-hit deposit taking wonder, they would be missing the point; Customer Behaviour has already shifted. How do you deal with the runaway success of a new direct banking brand when you run a $100m branch network? Tough question…

Is UBank an isolated case? ING Direct recorded profits of US $101m profit (EUR 75m) last year up 70.5% year-on-year, this in the tail of the global financial crisis. Rabo Bank, Jibun, Shinshei and PayPal have all had similar results as either Internet-only or mobile-based models of banking and payments. But it’s not just profitability.

Branch networks are contracting as customer behavior shifts

In their annual customer satisfaction survey, UK-based consumer sentiment research group Which? polled over 15,000 UK members to see what they thought about the relative performance of the various high street and direct banks. First Direct and Smile were top of the ranking this year, with scores of 89% and 87% respectively.

Mobile increases the threat to Branch

Mobile is now a huge area of investment. Bank of America has more than 4 million customers actively using their mobile banking platform currently, making it the most successful mobile bank in the USA. BofA say they’ve added more than 150,000 new customers just because of their mobile platform. But mobile is more than a transactional channel for BofA as this excerpt from a recent Bloomberg article shows:

Bank of America Corp. went from buying an occasional mobile campaign to paying Phonevalley, the agency run by Publicis’ Mars, a $1 million annual retainer, said Kathryn Condon, a vice president of digital marketing at the bank. Google’s AdMob is among the ad-placement companies used by Bank of America, the largest U.S. bank by assets.

With Direct and Internet banking at all time highs in terms of adoption rates, with the breakout success of mobile Internet banking in recent times, and customer channel preferences clearly shifting for the bulk of retail segments, where can we go from here?

Where to from here?

There are three scenarios for Branch Networks:

  1. All the trending data is wrong and the branch is about to face a resurgence in popularity because people seek a return to high quality, face-to-face engagement
  2. Nothing will happen – branch population will neither grow nor decline in the next few years
  3. All the trending data is right and we are seeing a shift in customer behaviour that will increasingly see branch-based banking at risk

When retail distribution specialists are looking at the positioning of branch real-estate there are a number of considerations, but the foremost consideration is where physically to put a branch to enable the most visits – essentially, how convenient it is to get to a branch. But these days, the branch simply isn’t the most convenient channel to use – Internet, Mobile and ATMs are far more ‘convenient’.

Key segments like Mass Affluent, and key product areas like mortgages, wealth management and loans are just too easy to position and service through direct channels. Branches better start figuring out how they’re going to make money over the next 5 years, and they better do it fast.

The first thing banks need to do is reorganize their organization structure to be channel agnostic. The days of ‘alternative’ channels are gone – Internet, mobile, direct are mainstream. Thus, the organization structure should reflect the same – Head of Branches, Head of Internet, Head of Mobile, Head of Social Media should be equals in the retail team- why? Because that’s how customers think.

The second thing is banks need to get better at measuring where the money comes from. A customer might end up at the branch, but how does he get there? Does he get there because of a compliance procedure (“Can you come into the branch to sign this?”) or does he end up there because he wants a face to face discussion? By better understanding the behavioral drivers, we can determine those branches which will remain profitable and those that no longer cut the mustard, as they say.

BANK 2.0: SME Banking in the Cloud

In Customer Experience, Groundswell, Internet Banking, Retail Banking, Social Networking, Twitter on June 24, 2010 at 01:57

I met Friday with Mike Hirst, CEO of Bendigo and Adelaide Bank, one of the top banks in Australia today. As we discussed the need for community banks to get better at servicing SME business needs moving forward, we had a really interesting brainstorming session on where to go next. Mike is an easy going guy and I think he’s created a really positive, open culture at Bendigo that will pay dividends as they take market share away from the majors in Australia.

I guess it’s an obvious statement, but for small to medium size businesses, banks provide a logical partnership as an enabler for a range of bank services. Mike explained that Bendigo and Adelaide Bank has, in recent times, been providing a range of services to small businesses beyond the traditional merchant, trade finance and credit services including extended services such as cash flow and accounting analysis, SME advisory, website/minisite development, telecommunications deals as a reseller, and similar services. Recently ANZ launched The Small Business Hub, as a way of extending more services to their SME clients. American Express has gone one step further with their Open Forum platform as an attempt to engage the broader business community in actively sourcing solutions. Bendigo Bank has tried to facilitate community involvement through their PlanBig portal.

As Mike Hirst and I discussed Bendigo’s wish to provide a better platform for SMEs to grow their business, it occurred to me that almost all the services we were discussing were candidates for the cloud. Here are a few that came to mind:

Accounting, Cash Flow Modeling and Credit Services:
Plugged into an SME’s basic accounting package (think MYOB, etc) the ability to provide some intelligent tracking of cash flow, help businesses to think about aged receivables and rightsizing a credit or overdraft facility is a very valuable tool. A plethora of these are being introduced into Internet Banking facilities this morning, but extending a basic accounting facility with cash flow analysis tools that is an extension of your banking relationship is not a stretch. Ben May, MD of OnlineFactor, recently showed me a new tool they had been playing with called Imagineering Profit which allows users to plug in their basic financial statements and get some great analysis on break-even, cash flow, and various what-if scenarios.

If this could be married with basic account information, accounts and invoicing data, etc – this could give SMEs a nice tool embedded within banking to start to look at a basic overdraft facility, factoring, inventory financing and a whole range of complementary services.

Easier Merchant and P2P Enablement
E-Invoicing is becoming increasingly important as part of the SME toolset for commercial banking. RBS recently has launched a range of services including e-Invoicing and electronic accounts receivables/payables management. HSBC Net for some time has offered Accounts Payable Integration which allows for e-Invoicing, better cash-flow projections and management, etc. The name of the game here is simplifying processing, improving the likelihood of rapid payment and better bank integration into your payments and receivables process.

By 31st October, 2018 the UK Payments Council has mandated that central cheque clearing will be phased out. The decline of cheque use in the UK has been widely documented. In 2000 cheques represented 25% of all non-cash transactions, but by 2008 they accounted for less than 10%, this year they will be less than 5%.

This is also where the mobile device and P2P platforms come into play. While debit cards have had big success in recent times, as credit and debit cards are integrated into your mobile phone for contactless payment capability, it is obvious that the use of cheques and cash will further decline. With the introduction of Square and Verifone PayWare it is becoming increasingly simple to provide merchant type services to accept payments.

But Person-2-Person is the big innovation for SMEs and businesses. In 2009, financial institutions including Bank of America (BAC), ING Direct and PNC Financial (PNC) rolled out so-called P2P technology that lets customers use the Web or a mobile phone to transfer money from their account to any other account. Within the next 3 years our phone will become the payment device of choice for paying SMEs who work in the service arena. This makes cloud services even more viable as SMEs will increasingly rely on virtual platforms to effect and receive payments. The ability to augment basic banking services to capture the need for virtual P2P and payments capability is a no-brainer.

SME Community Building
There are hundreds of thousands of groups currently active on LinkedIn, many dedicated to SME forums and the like. Ecademy is an social networking site based in the UK, but active globally with more than 17 million members. A survey by O2 in the UK showed that more than 600 SME businesses were joining Twitter everyday, and that 17% are already actively using Twitter to support their business.

SME community building is a great way to empower businesses and is a logical extension of the already powerful network that banks have with their customer base. Banks don’t use their community of clients to encourage interactions, but as a trusted intermediary it makes absolute sense for bankers to utilize their community to encourage internal business between their SME clients. The cloud and online communities such as LinkedIn, Ecademy and others seem like the perfect partner to kick this off.

Conclusions
The cloud is increasingly critical for SMEs not only for facilitating business, but also for enabling closer connections with partners, integrating shared services, improving payments and cash flow and marketing their services. Banks have a huge opportunity to be not just a trusted partner for banking services, but extending their platform to help SMEs build their business.

There’s one key problem with banks extending platform for SMEs. To illustrate, the current e-Invoicing and Accounts Payable Integration services banking provide today, a process designed ostensibly to reduce paperwork for an SME and improve cash-flow, is saddled with an antiquated, compliance heavy sign-up/application processes that mean the initial onboarding for such services is erroneous and time consuming. The benefits aren’t there for SMEs if the application process takes more effort than the benefits.

By better integrating customer learning and moving SME accounts management to the cloud, a bank could provide a range of great services that really help SMEs manage their businesses and cash-flow more economically, but to do so they are going to have to think differently about engagement.

Telcos need to think about different mobile pricing

In Mobile Banking, Retail Banking, Technology Innovation on June 15, 2010 at 11:24

The greatest competitive differentiation a mobile operator can give me today is an always on data plan across devices. Right now I have an iPhone, a Blackberry, an iPad and a Mac and I effectively have to manage different data plans for each device. This sucks. I also maintain a broadband connection at home, although I would abandon that gladly if my wireless data deal were better.

Not only does multi-device connectivity cost me more than I believe it should, but I actually have different plans with different providers for different devices. Some are monthly WiFi deals, others are mobile data deals that actually limit my downloads on a monthly basis, and others are pre-paid deals that I pick up when I am visiting other countries.

My best deal is a great 3.5G solution through CSL in Hong Kong, where I pay around US$50 a month for 21Mbps access speeds and unlimited downloads. Unfortunately when I am working in the United States, UK and Australia on my iPhone or iPad, I can’t get a deal even remotely close to this sort of value for money. Firstly, 21Mbps isn’t available on AT&T, Telstra or many of the UK providers.  Secondly, unless you are Sprint 4G in the US, there’s not one provider who gives an unlimited download deal.

In the US, UK and Australia on my mobile plans I am restricted to downloading between 6 Gb and 10 Gb per month. You might think that sounds like a lot, but I’ve recently been conducting webinars and Skype teleconferences frequently, and I can chew through 1 Gb of data in a single day. If you exceed the monthly download limit, then that’s where you start to singlehandedly make an sizeable direct contribution to the profits of the telco themselves. Normally this manifests itself as overage charges that resemble the budget of a mid-size multinational.

Plans need to be for access, not data

I understand the need and right of an operator to make margin from their business. To some extent with fixed line business I understand the cost of running cable and the fact that as a user of the infrastructure I must pay a penalty. But let’s face it, when it’s wireless data of the 3G or 4G network, essentially the operator is providing this over cell tower infrastructure that was installed in most cases over 10 years ago, and has just undergone successive upgrades of antenna and firmware to operate at the new frequencies. Unless you are a VNO (Virtual Network Operator) the data is costing you nothing.

In any case, the cost of the infrastructure is a sunk cost, and regardless of how much data I suck down the pipe, I should be paying for the size of the pipe, not for the data because the operator most certainly isn’t paying for the data.

To illustrate the great digital divide let’s compare the more progressive countries with US, UK and Australia based on 12 month contracts.

The great digital divide
2010-06-15-images-DataPlans35G.png

Pricing plans should get cheaper a lot faster than they do

You’ve heard of Moore’s Law right? Well there’s a law for the telecoms sector in respect to bandwidth too. It’s called Gilder’s law. Gilder’s law effectively states that the capacity of a pipe to carry data will increase by at least 3 times Moore’s law. Moore’s law says that computing capacity/power will increase at 200% per 2 years, so that means bandwidth will increase 600% in carrying capacity every 2 years.

So the cost of data over a 7Mb Next-G modem, if it is $50 today, should be $8 in 2 years time for the same deal. From my experience, this is extremely unlikely.

So what is happening is operators are getting increasingly cheaper pipes, and are maximizing the profit of those pipes over more years than they need to. If South Korea can provide 1 Gbps broadband in the home for the same price as Australia charges for a 2.5Mbps connection, you know something has to give eventually. So what is the great equalizer?

4G – Herein lies the problem

The next generation of mobile standards (4G) allows for much faster download speeds, infact, when 4G taps out the upper end will allow 1 Gbps download speeds. The problem is that when Australian, UK and US providers move to the next generation of technology, capping downloads with limits just won’t make any sense whatsoever. What would you cap it at? 100 Gb?

It gets a little ridiculous. I could download a DVD quality movie every day and still not exceed my download limit. But more importantly, once in place, the whole benefit in 4G is the fact that I become permanently unwired as a consumer.

To understand where we are going means that we will move from one device to another seamlessly. This is already happening with the iPad, iPhone and your HD TV. I am looking for a data provider that allows me access to connectivity as a bundle, not by Mb.

Conclusion

In a Wired article back in 1993 George Gilder predicted that Bandwidth would eventually be free. I believe that bandwidth will eventually be so cheap that it is effectively free, but right now operators need to understand that charging for the pipe, and not the data is how they can both enable business and future revenue.

BANK 2.0: Are Banks too Big to Change?

In Customer Experience, Retail Banking, Strategy, Technology Innovation on June 11, 2010 at 13:18

Reformists and regulators in the US, in the EU and in other jurisdictions are grappling with the problem of massive banks and how their financial health is tied up with the very vitality of the economy. This happens because as the banks are so large and represent a major indicator of the health of the stock market, and thus the macro-economy, it is possible that one of them went under it would have deleterious effects on the economy at large.

In the US space JP MorganChase, Wells Fargo and Bank of America are all in the top 20 traded stocks by market capitalization, Citibank makes an appearance also in the top traded stocks by volume. If either of one of these 4 banks were to go under, the effect on the stock market and the economy would likely be devastating. This is the classic argument of those that support the ‘too big to fail’ position.

Entities are considered to be “Too big to fail” by those who believe those entities are so central to a macroeconomy that their failure will be disastrous to an economy, and as such believe they should become recipients of beneficial financial and economic policies from governments and/or central banks.

Source: Wikipedia

There is another factor at work here, however, these organizations are structural behemoths. Between these 4 organizations, they employee just under 1 million people in North America alone. Between Google, Microsoft and Apple these top tech firms manage only 150,000 employees. In a tough year financially, the big 4 banks struggled with collective profit of $21.4Bn, while the top 3 tech firms reached a whopping $29.3Bn in operating profits.

To put this in perspective employees of the top US banks contributed roughly $22,256 each to the profit of their employers, whereas top tech employees amassed an impressive $195,973 each as a contribution to the bottom line. This difference in core profitability comes from relative organizational efficiencies and the ability to generate new revenue streams through innovation.

As banks have grown, they appear to become less efficient at generating returns for shareholders. This is where the issue of proprietary trading comes in. Proprietary trading has been used by banks in recent years to generate arbitrage opportunities for profit taking where shrinking margins no longer allowed the same. However, proprietary trading turned out to be an extremely risky way of earning profits during the financial crisis with bets on CDOs going the wrong way and banks getting hammered as a result…

“Merrill Lynch lost nearly $20 billion… Morgan Stanley had a nearly $4 billion loss in proprietary trading in [Q4] of 2007. Goldman Sachs spent $3 billion to bail out one of its hedge funds… Citi lost big — as much as $15 billion, on the CDOs it decided to hold rather than sell off…”

Stephen Gandel, Is Proprietary Trading Too Wild for Wall Street? Time.com, Feb 5th, 2010

So in an environment where product margins are being squeezed, markets are struggling (further reducing margin on investments) and where prop trading is under the microscope, where are new revenue opportunities to come from?

There are a raft of innovations rapidly occurring the in financial services space at the moment, largely independent of the banks. Smartypig, as one example of a cooperative model with traditional players, has developed a platform that has put a unique web 2.0 approach to deposits. Since launching in April of 2008, Smartypig has already taken deposits of more than $400m and are well on the way to more.

P2P lending, derided by traditional players as risky and unregulated, has started to generate some serious looking results. In May the Lending Club, a P2P collaborative social lending network, passed more than $10million a month in Loan Originations. Zopa, another social lending network based in the UK, is approaching half a million users who are happy to lend and borrow to each other.

In the payments arena, there is a plethora of competitors to the mainstream card issuers Visa and MasterCard. There’s PayPal, who continue to go from strength to strength. There’s Square, founded by Jack Dorsey of Twitter fame. More recently Facebook has entered the P2P payments space too.

The thing is – all of these really interesting innovations in financial services are being driven not by banks, but by start-ups, technology innovators and much more agile organizations. Why aren’t the banks at the forefront of these improvements?

Innovation is tough

Innovation is very difficult in traditional institutional structures

The issue lies in two core hurdles. The first is organizational inertia, the fact that for a very long time banks have focused on an organizational structure that is built around the branch as the core of the customer relationship. Products are manufactured around the branch, and marketing is limited to either branding or campaigns of the month. The most senior bankers in the organization are generally those from the ‘distribution’ side of the business. It all works like a grandfather clock.

The second issue is that banks have a metrics and financial system that is fundamentally flawed. Today bank strategy is reinforced by line item budgets that were built during the branch era, and management teams dominated by bankers with 30 years of traditional banking pedigree heavily invested in their real-estate.

These two hurdles are leaving third-parties to innovate the customer experience, and evidently this is where the intersection of changing consumer behavior and business models is creating real opportunities for improved revenue and profitability.

Banks need to hive off a portion of their best people, along with some new aggressive Y-Gen and digital native thinkers, to start thinking out of the box in an independent, cashed-up tiger team. This can’t be under the traditional organization structure because it will otherwise die a slow and agonizing death. This has to be about incubating very different approaches to an otherwise very traditional business, and it can’t happen within the current structures or environment.

Future EPS depends on it!