Brett King

Posts Tagged ‘branch’

How to reduce your branch footprint in an orderly manner

In Branch Strategy, Customer Experience, Future of Banking on May 4, 2012 at 00:50

I guess with a title like Branch Today, Gone Tomorrow it’s no surprise that a lot of people think I’m anti-branch. I’m not anti-branch, I just don’t drink from the branch kool-aid fountain that goes something like “if only we could find the right formula we’d reverse this trend of not visiting the branch and customers would flock back to our physical space”. I think most Bankers and Credit Union executives, instinctively feel there is a change in the importance of the ‘channel mix’, but as often as I hear questions about how quickly this is going to occur, I hear executives talking about how customers used to behave. “But don’t customers need to come into a branch for lending products; to talk to a loan officer about more complex products?” This is a legitimate question in the old world, but it’s light on today in respect to the facts, which don’t actually indicate the branch is central to lending.

The fastest growing lending institutions in the country right now aren’t the big banks, community banks or even credit unions. The fastest growing lenders certainly aren’t mortgage brokers. The fastest growing lenders in the United States at the moment are actually peer-to-peer social networks, namely Prosper and Lending Club (thanks to @netbanker for this gem). In terms of percentage growth of loan book, you’ll be hard pressed to find any FDIC insured institution doing better. In fact, I’d wager that a 375% increase in Loan Originations in the last 18 months, coming off the back of the Great Recession as the global financial crisis is being called, is one of the most impressive new FI growth stories you’re likely to hear globally.

Lending Club growth thru April 2012

Last time I checked, neither Prosper, Lending Club or Zopa had any branches…

Why customers think they want branches
Now my point here is not to argue that P2P Lending is better, it is to argue that the perception that to sell a complex product you require bricks and mortar, just isn’t supported by the data. To be fair, however, there is actually some valid behavioral data at work here that comes out through qualitative research supporting the role of the branch for legacy customers. That is, that there are still plenty of customers who say they want a branch – that doesn’t mean they will visit it, but they like to have them around. In Branch Today I examined the data and reasons for the recent rapid decline in branch activity, both from a visitation and transactional measure, but the question is why some customers still say they want to visit a branch?

There’s really only three things that drive a customer to a physical branch:

  1. I need a physical distribution point to deposit cash (primarily for small retail businesses)
  2. I need advice or a recommendation for a product or need I don’t fully understand, or
  3. I have a humdinger of a problem that I couldn’t solve offline, so I’m coming into the branch to get relief.

Branch bankers hang on to #2 for dear life, hoping that this will somehow keep customers coming back, helping justify those massive budget line items dedicated to real-estate; sadly it just isn’t happening that way. And yet, when you ask customers what determines their choice of ‘bank’ relationship, often the convenience or availability of a local branch, remains a stalwart factor.

Since the mid-80s, branches the world over have generally been transformed into streamlined cost/profit centres. The industry has attempted to reduce cost and improve efficiency to optimum levels and in this light customers have been forced to trade off between either big bank efficiency and utility, or the personalized service of a high street, community banker interaction without all the bells and whistles.

Despite this drive for efficiency there’s still a lingering psychology of safety in physical banking place and density, which stem from long memories over epidemic ‘runs’ on the banking system during the great depression. So what remains are two core psychologies that play to the need for physical places which reinforces the safety of a “bank” where they’re going to entrust their cash :

  1. I recognize that I visit the branch less and less for banking, but I’d like it to be there just in case I need to speak to someone face-to-face about my money or I have a problem, OR
  2. The more branches you have, the less likely you’ll go under in the case of a ‘run’ on the bank

But who is going to pay for the space?
The big problem with this, of course, is that as customers more commonly neglect the branch in favor of internet, mobile, ATM and the phone (call centre), the economics of the real estate and branch staff is no longer sustainable. So how do you have a space that still ensures the confidence of those customers that require the psychological ‘crutch’ of a space they might need to go to, but who aren’t willing to pay more for the privilege and won’t change their day-to-day banking habits back to the branch because the web and mobile are just so much more convenient?

The answer is two-fold.

The Flagship Store
If you need to instill confidence in the brand, then the best way is to build a new, large square footage space that screams new-age, tech-savvy branch banking with coffee and comfy chairs! Think the opulent Airline loyalty lounges that started to emerge in the late 80s. Think Virgin Megastores or the “Gold Class” cinemas of the 90s. Think Apple Stores today.

Brand spaces that inspire confidence. Enable a connection with your customers. Spaces that tell customers you’re all about service, advice and solving their banking problems – not about tellers and transactions.

Jeff Pilcher at FinancialBrand.com regularly covers the best of these new Flagship and Concept Stores, so head over there if you want some examples to work from. However, this is not exactly going to lower your bottom line around distribution. If anything it’s going the other way. Knowing that you’re going to have to downsize, the average FI will only be able to support a handful of Flagship stores in key, high-traffic, high-visibility location. So how do you equalize the ledger?

The Satellite Service Space
Supporting the Flagship stores at your secondary locations (i.e. anywhere that is not your best, most densely populated geography) will be very simple, cash-less brand presence stations. These will be small spaces in prime traffic locations like shopping malls, without any teller space, but the space to service the pants of a customer who needs that advice or help with a sticky problem. If they want cash, there will be an ATM. If they want to deposit notes or checks, the ATM can do that too, or you might incorporate a dedicated check deposit machine in the space too. In fact, the bank representative in the space could just use his iPad for that – although it’s better to move them to the ATM and go no transaction in the service space.

A good example of this sort of space would be the likes of smaller UPS franchise stores, or the BankShops of the TESCO variety in the UK. Small footprint of no more than 300-500 square feet, but enough space to represent your brand and tell customers they can still come and see if you if they need a solution.

UPS Franchise Stores

Spaces don't need to be big to provide service

The ratio of flagship store to satellite spaces will probably be at least 10 to 1, if not greater. You don’t need every branch to be “big” in the new reality; to give your customers a level of comfort that you are safe enough to put your money with them. In fact, as the likes of UBank, ING Direct and Fidor show, for some customers you don’t need any spaces. But for those that still want a space ‘just-in-case’ then this strategy is a great transitional approach.

One day soon, within the next decade, we’ll need less than half the branches we have today. But as we make that transition, the need for a space to be an available component of service and support remains a key component of what we call financial SERVICES. It just doesn’t have to cost us the earth.

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The unintended consequences of the Durbin amendment

In Branch Strategy, Economics on March 26, 2012 at 09:38

In the UK and Australia, account keeping fees are nothing new. In the US, however, since the introduction of the Durbin amendment, many US banks have been moving to monthly fees on checking accounts (we call them current accounts generally outside of the US) for the first time. These moves have resulted in often massive backlash from the public, including social media campaigns, “Bank Transfer Day” and further fuel for the Occupy Movement.

In the US, there are actually people you meet who will tell you that free checking is, or at least should be, a constitutional right. Thus, emotion runs high when a bank suggests that you now have to start paying for the right to keep YOUR money with their bank – it’s an outrageous concept to many!

The biggest problem for the US banking industry is that for the longest time it trained customers to believe that this was exactly how they should feel, what they should demand. Advertisers promoted ‘free checking’ for decades as the basic hook for new customers, although it could hardly be called a differentiation. The logic is that there is nothing better than free to attract customers to a new service platform. So how did banks pay for ‘free checking’?

Not really free

Well, it was never actually free. Banks initially made money off deposits (or Assets under Management), but as regulations tightened in the last 2 decades, rates dropped and spreads decreased, margins became razor thin. In th 80s as interest rates climbed, some banks instituted basic fees to combat the cost of savings accounts, but when credit cards became popularized in the 90s, banks now had fallback sources of revenue in credit fees and interchange that could sustain ‘free checking’. A side effect of the Global Financial Crisis is that credit card usage has declined as consumer “saving has become the new spending”, this means that a credit card isn’t working as an offset against basic account costs. With interest rates at historical lows and with no immediate signs of improvement, basic account profitability is at further risk. Then to add to all of this pressure along came the U.S Senator from Illinois, Dick Durbin…

The Durbin amendment to Dodd-Frank, has cut off the lifeblood of interchange fee from larger institutions, many of whom claim it will cost Billions in lost revenue. So while account keeping fees are seen as a mechanism to claw back loses on interchange, I expect it will have a secondary, more subtle consequence on retail banking.

Branch Economics Fail

In the light of revised economics of interchange and debit cards, the first reaction to loss of interchange fee in the US was to try to find new sources of revenue. However, the second reaction inevitably will be a realization that the cost base banks carry to support checking accounts via the branch is no longer viable – network is simply a luxury in a world where consumers just aren’t utilizing physical spaces for their relationship. With the best customers only visiting branches occasionally as they become increasingly digitally enabled, the expense of sustaining a network for a core product or relationship which looks more and more like a cost than a profit, becomes rapidly apparent.

The UK has had more than a decade to deal with this, which is undoubtedly why the UK has halved the number of retail bank branches since 1990. The US, with the false economics of consumer credit and interchange, have paid for their bloated physical infrastructure without the realization of the cost of changing behavior on their distribution model. That realization is now hitting hard as the real costs of an outmoded business model hit home.

Unintended Consequences

The Durbin amendment will give banks the imperative to better manage the economics of their debit card and checking account business. As they are forced to be more disciplined around metrics, two issues will emerge. The first, that while the economics of branch banking are oft justified as supporting high-net worth customer interactions, that increasingly this demographic is moving to digital channels and the branch is no longer the lynchpin in this coveted relationship. How can it be when I use my mobile or internet to talk to the bank 30 times a month, but I visit the branch only twice a year? Secondly, the least profitable customers also are laggards to digital (largely due to adoption cost) and rely more heavily on tree-killing paper statements, ‘free’ checks and over-the-counter interactions.

Once you’re forced to re-examine your cost base in the light of changing distribution, behavior and regulation, the realization emerges that branches are not the profit centre they once were, but are now largely a cost that was hidden by the buffer of high interchange and credit card fees. Couple this with new challenges to the distribution model through Internet direct banks and non-bank FIs who offer better savings rates and lower fees on the basis of better economics, and branch banking will be mercilessly attacked by the big banks looking to retain their earnings-per-share.

The unintended consequences of Durbin may very well be the rapid unwinding of branch banking in the US. It takes a long time to turn the ship, but once that turn starts the momentum of branch closures will speed up rapidly.

Big Banks are like SuperTankers - they don't change direction easily

Lessons from Apple – Great Branches don’t bring customers back

In Branch Strategy, Customer Experience, Retail Banking on March 8, 2012 at 13:22

The new iPad just launched to the usual hype, anticipation and fanfare. Every time a new Apple product comes off the assembly line, it gets put under the biggest magnifying glass imaginable as crowds of onlookers parse the announcement with scholarly intensity, hoping to piece together a picture of what might emerge and what the implications for the world at large will be.

Apple calls their latest release “Resolutionary” in reference to the retina display capabilities of the screen embedded in the new iPad. The New iPad’s “Retina Display” has 1,000,000 More Pixels than a HDTV, and its resolution is so dense that it is beyond the capability of the human eye to recognize individual pixels. We’re reaching the theoretical limit of display resolution – higher resolutions won’t matter if we can’t see the detail.

But that’s not the interesting observance. Apple is the most valued company in the world right now, and it is in that position because it inherently understands consumer behavior in respect to product, brand interaction and purchasing behavior. There’s a lot of banks that would like to think if we turn all our branches into “Apple Stores” that customers will flock back to the branch. But that’s not what the Apple story is telling us.

Will “Apple Store” Branches Save us?

On the eve of 16th December, 2010, Citi opened a glamorous, high-tech branch in New York City’s Union Square. The 9,700 square foot branch was designed by Eight, Inc., the same firm of architects responsible for the unique design of the iconic Apple store. Although Citi actually launched their store concept in Singapore first, the New York store was almost positioned as the saviour of branch banking itself and the “Apple store” moniker was applied repeatedly to indicate it’s revolutionary nature. If you read some of the reports and commentary on Citi’s branch it was clear that many bankers believed that if you just got the branch format right, made the space more attractive for customers, that they’d storm the branch and all would be made right with the world.

But that’s not what happened. While Citi’s “store” was certainly innovative, there’s no evidence that there’s been any net gain in retail activity because of the evolution in branch design. However, some brands like Umpqua, Jyske (Danish) and Che Banca (Italy), playing on the same premise, have claimed some increased branch activity as a result of their evolved spaces. So what is the reality? Are innovative new branch layouts going to change behavior when it comes to banking?

You only need to look at Apple to answer that question.

Store First?

For many Apple newbies their first interaction with Apple products is through an Apple Store or a Apple retailer, but not always. The new iPad that was released yesterday is not yet available in-store, but already there are tens of thousands stacking up to buy the product through their online store. Pre-order activity for the iPad has already had an effect on the online store for Apple.

Checks by Computerworld through 4:15 p.m. ET from multiple locations in the U.S. found the Apple e-store either still sporting a “We’ll be back soon” banner, or if it did load in a browser, becoming unresponsive during the purchase process – Computerworld Article March 7th, 2012


What we know of Apple is that they don’t insist on you coming into a store to make a purchase, or start your relationship with their brand dependent on some process that requires a face-to-face registration for their first product. For the release of the iPad Apple had to actually restrict online customers to buying only two of the devices, due to overwhelming demand through the online store.

The argument often heard by bankers is that regulation forces physical face-to-face compliance processes on us, but even regulations don’t force chartered banks to insist on a face-to-face interaction to onboard or identify a customer. Like Apple, today’s behavior of consumers means we should be ambivalent to the channel a customer chooses.

For the sake of the argument though, let’s assume that the first interaction is in an Apple Store or in-branch. How do customers behave in their interactions with the Apple brand once they have purchased their first iPad, iPhone or Mac computer? Does the most excellent ‘store’ experience drive them back to the store repeatedly over time? No

Great "Stores" don't bring customers back

Let’s look at the revenue story.

Show me the Money!

The average Apple Store makes approximately $34m in revenue annually, with $8.3m in operating income. However, if you examine the 10-K filing for Apple, revenue is split almost 50/50 between online (& device-based store) sales and their retail presence.

Since the Apple “App store” opened on July 10, 2008 Apple has booked close to $6 billion in revenue just on “Apps”. CyberMonday is used as the benchmark for US online and mobile retail sales, and figures show that iPhones and iPads account for a staggering 7-10% of all US online sales activity on those days.

What we know from all the data is this. Customer’s might start their relationship with Apple in-store, but they don’t have to, increasingly they’re choosing not to. Even if they do, 70-75% of the lifetime revenue from the average customer comes from sales online and that is increasing over time.

Customers simple won’t ever go back to the store to buy an App after they’ve bought an iPad or iPhone in-store.

There’s a lot about banking that are like Apps in our financial relationship. Credit limit upgrades, wire transfers, bill payment, CDs/Fixed Deposits, etc. In fact, once we’ve started our relationship with a bank as a customer, pretty much every product we engage with could be purchased just like an App through a better ‘store’ interface online.

Banks don’t sell well online because unlike Apple, we think that the primary store customers want to shop at is our ‘branch’ and when they come to internet banking, we often don’t even integrate sales into that ‘transactional’ platform. But the behavior of Apple customers shows that even with the best benchmark retail presence in the world, customers don’t come back time and time again to your store or even chose the store first. Once they are connected with your brand, they buy your product and utility wherever is most convenient, and that isn’t at the store or branch.

The big question is, how many branches can you afford to support if customers only visit them the first time out and do the rest online?

The Total Disruption of Bank Distribution – The Conclusion

In Bank Innovation, Customer Experience, Future of Banking on August 11, 2011 at 16:10

As we detach ourselves from physical artifacts associated with traditional businesses, traditional distribution models rapidly fail. The fact that you own or participate in a network or virtual monopoly that supports an outmoded distribution model is of no benefit when that network is surpassed by a generational leap in technology delivery at the front end or a significant and irreversible shift in behavior. The challenge is re-tasking your business to be a part of the technology or new distribution model that enables that different behavior.

Typically, the new technology or business model disrupts in one of the following ways:

  1. Creates a cheaper, simpler or more convenient approach when compared with the old method or processes,
  2. Involves a new technology that is vastly superior in speed, quality, form or function when compared with the old method (not an iteration, but next generation improvement),
  3. Creates a dynamic shift in components of the value chain such that the old method is no longer viable or worth the premium levied, or
  4. Results in the creation of a completely new model that completely replaces the need for the traditional players such as in the case of combining two previous products or business.

As in the case of the Telegraph and Fixed Line businesses, this was about a better approach to person-to-person communication. In the case of Encyclopedia Britannica, Stock Trading and Travel Agents, the new technology disrupted the value chain so that traditional distribution methods were no longer able to compete, or the ‘value-add’ of a human interaction was no longer worth the premium. In the case of media such as print, music and movie/TV content, it is a combination of disruption of the network, new technologies at the front end (i.e. computers/tablets/smartphones instead of TVs/newspapers/CD players) and a change in the distribution model in respect to the value chain and cost structures.

Is it really going to happen?

So how viable is this shift in banking? Well almost all the physical artifacts in banking can be replaced by something better. The cheque has already been replaced in most developed economies by debit cards and electronic transfer methods, but even plastic cards themselves are a target for disruption via NFC-enabled mobiles. Cash itself is increasingly becoming a poor instrument for day-to-day payments.

The branch, which originally was designed as a transaction point for cheques and cash, is increasingly facing the same challenges that Britannica, Merrill Lynch and Travel Agents faced – is the value-add of a human interaction enough to differentiate against a rich, optimized, digital interaction when and where you need your banking?

Everything about retail financial services that relies on outmoded physical artifacts, proprietary and outdated networks, and processes that are complex and unwieldy – all lend themselves to disruption. If you can think of a better way to do your banking, then you already realize that the current status quo is not sustainable. In today’s environment, if you can imagine it, then someone is probably building it.

If you are an incumbent player you might argue, for example, that NFC requires critical mass to reach adoption, but so did the internet, so did music downloads, so did Wikipedia and electronic stock trading.  The question is, do you wait until the disruption takes place to start planning for the new reality?

Where are the key threats?

The biggest single threat is distribution model changes. By 2015 aggregate interactions for retail banking will mostly have shifted away from branches to mobile, web, ATM, and call center. On that basis alone banks that are carrying large branch networks will face major disadvantages on an operational cost basis, against competitors who are more nimble, efficient and enable day-to-day behavior better. The good news is, before the decline really starts to bite, the evidence shows that when you strongly support new channels that it doesn’t cannibalize your existing business, it just adds new revenue to the mix. Get focused today on revenue generation through direct channels. Remove the friction, go after revenue.

The cloud, mobile and social will certainly be a part of the shift as well. PayPal has already shown that a new interface can work on top of the old architecture. Increasingly mobile payments are going to sit on top of that old architecture too. The opportunities, however, are more than putting new skins on the old payment system. The opportunity here is to understand the context of payments and work to augment the payments architecture through understanding payments behavior. Start focusing on why, when and how customers make payments, and work to reduce friction and enhance value.

Physical artifacts are going to continue to be challenged by modality. If you have retail banking management asking the question about how to get customers back into branches, or arguing that cash is king, ask yourself how these leaders will fare as increasingly they are faced with disruptive behavior and the breakdown of traditional models. Start looking for leaders who are excited about the future and see the opportunities for adaptation.

The Total Disruption of Bank Distribution – Part 4

In Branch Strategy, Engagement Banking, Future of Banking, Mobile Banking, Retail Banking on July 26, 2011 at 06:48

The Widening Gap between Behavior and Capability

In 1980 the average bank in the developed world would receive a visit from a customer once or twice a month, making an average of 20-25 times a year. As ATM machines started to emerge, by the end of the 80s average branch visits per customer were already starting to level off as the primary reason for visiting the branch – to get cash – was moving to the ATM.

In the early 90s to combat this decline in visitation trend banks started to create specialist branches around High-Net-Worth-Individuals, and seek to attract the most affluent and profitable customers back to the branch. This strategy was successful in attracting new and highly profitable customer segments stimulated by loyalty programs, specialist branches and better service, but could it last?

Internet Banking Disrupts Banking Behavior

The reality was that it wasn’t until around 2006 that Internet Banking fully reached its potential as a disruptor. By 2006 the trend for Internet Banking adoption had become very clear, it was ready to overtake the branch as the preferred method of day-to-day banking. Between 2005 and 2009 Internet Banking usage doubled, and across the United States, UK and throughout most of the EU, Internet banking emerged as the leading channel for day-to-day access to banking services.

The perception reinforced by some within the retail banking set was that this emerging behavior around Internet Banking was isolated to newer generations of customers only, and that older, more established customers were still keen to have the personal experience of a face-to-face interaction, or that customers seeking to start a relationship would always opt for the richer experience of the branch. However, the data did not bear this out. The earliest adopters of Internet Banking turned out to be the time-poor, affluent HNWI segments who valued their time over the upside of a branch visit. They could afford computers, the fastest Internet connections and had a strong incentive to use iBanking – they sought convenience and time saving.

In 1985 70% of transactions occurred through physical artifacts and networks, namely Branches, Cash and Cheques. By 2010, however, 75-90% of retail banking transactions were processed through Internet, Call Centres, Mobile Devices and ATM machines. Today branches make up at best around 5-13% of total transactional traffic, and that is on a good day. As a result, branch staff are poorly motivated and in many markets staff turnover is toping 40% annually. The average customer is now visiting a branch in the United States less than 5 times a year, in some EU markets the average is less than half this number. This is resulting in massive closures of bank branches. That number doesn’t get better if you look at it another way – it’s just bad news for branch focused brands.

RBS is closing 55 branches this year, this is the behavioral effect

In 1990 11 million cheques a day were written in the UK, by 2003 that figure had ballooned to 36 million cheques a day. By 2010, however, Internet Banking had caused that figure to crash dramatically to less than 1 million cheques per day. Why? Behavior has irreversibly changed. What used to be second nature to many is now a dwindling holdover for an ever shrinking demographic; those who hark back to the days of good old fashion banking.

What happens in the next 5 years?

Today we’re seeing mobile banking take off as the fastest ever growing channel for retail banking services. Today some banks are reporting a 300-500% faster adoption of Mobile Internet Banking than what they saw with Internet Banking. Rather than take traffic away from Internet Banking, the trend is for mobile banking users to actually increase their use of Internet Banking.

So what’s more likely in the next 5 years? Is it more likely that customers will suddenly, spontaneously buck all these trends and spontaneously start using branches more, or will Internet and Mobile simply increase their march of dominance for day-to-day banking? The answer is obvious (to most).

Why, then, do branch networks still command the massive bias in funding that they have today within retail banking P&L, and why do leaders in the digital space struggle for board-level attention and legitimacy?

It’s not about Internet vs Branch, it’s about behavior

We’re not going back to vinyl records, the telegraph, or steam powered transport – we’re just as likely to go back to a banking system dominated by branches and cheques. This is an undeniable, statistical truth. The majority of us now (over 50% in developed economies) are simply too busy to drive down the branch, find a parking spot, stand in line for 15-20 minutes, to hand over the counter a cheque that will take 3 days to clear for a nominal processing fee. But it’s not just transactional behavior that takes the hit.

Today if I’m looking to start a new relationship with a bank, the first place I go is to my search engine, and possibly my social networks. Admittedly there are still some who will seek to visit a branch to kick off a new relationship, but after that initial visit my day-to-day banking becomes pure utility and convenience. In 2007 when I worked on a global survey for Standard Chartered, 75% of customers in 42 countries said that Internet Banking capability was their primary criteria for deciding on a new banking provider. Regardless of whether I might come into the branch to get started, the fact is you aren’t going to be seeing a lot of me. That’s not the way I behave anymore.

By continuing to favor branch from a channel investment perspective or organizationally from a strategy perspective, and by insisting on multi-year business cases before making real investments in mobile, social media and web, we are opening up a gap. This gap is a behavioral gap between how our customers behave everyday, how they want to bank, and how prepared “the bank” is to facilitate their needs. This gap can easily be exploited.

The more banks insist on me conforming to their behavior and processes, the more I will feel the bank is irrelevant, out-of-date and a poor match with my needs. I’ll start to find workarounds like PayPal for transfers, or Prepaid Debit cards for day-to-day billing and payments. I’ll start to move my cash to other banks that have a mobile banking and iPad App.

There are many who will argue that this is not enough to kill the branch – I say you won’t be able to afford not to kill them off yourself very soon.