Retail banking today is more complex than ever for many reasons, including changing consumer preferences, regulatory uncertainty and the challenge of maintaining an array of delivery channels that are now available to and expected by customers. Each channel features different but robust functionalities and most customers use multiple channels to accommodate their banking needs. Additionally, with a packaging model that was built on free checking, customers have become accustomed to fee-less access to the various channels.
It all seemed to work – until now, that is. Retail banks face a grim outlook for revenue growth and profitability in the years ahead due to the recent regulatory restrictions on overdraft and debit card fees, sluggish loan growth and continuing pressure on the net interest margin. In fact, some experts predict a 30% to 50% decline in retail banking profits in 2012. Banks that established growth plans based on offering an expansive multi-channel delivery system now face some hard choices.
It is widely agreed that the U.S. banking industry cannot continue to meet its profitability targets while still supporting the current infrastructure with current and projected revenue streams. Some banks have entered into major expense reduction programs – including reducing their branch footprints to reduce costs – and many institutions are raising fees for retail banking services. Banks are also seeking to drive more revenue through their existing branches via improved staffing productivity and targeted, analytics-based marketing programs. Some banks are even shifting their focus from the mass market to segments not affected so much by the recent regulatory restrictions on fee income, such as the mass affluent and small businesses. All of these revenue-raising strategies are being developed in this new environment … the new normal.
As we go into 2012, a central strategic challenge for banks will be to maintain a multi-channel delivery system that offers customers versatility in access and convenience. In the past, technical and operational issues were dominant. Now, the need to meet increasing customer expectations while managing costs and profitability targets will be front and center.
Much of the debate will focus on the branch network, which represents half of total operating expenses for the typical retail bank and is the most obvious place to cut. Data from the U.S. Census Bureau and the FDIC show that the ratio of U.S. population-to-branches reached 3,684 in 2009, compared to 9,340 in 1970. Are markets over-saturated with bank branches? With the addition of other forms of access, particularly electronic channels, how much less critical are branches in overall service delivery?
According to a recent study conducted by TowerGroup, the number of branch transactions is expected to decline by 2.5% between 2010 and 2013 while the volume of online and mobile transactions is predicted to surge by 13.2%. Yet, retail banking executives know that these numbers don’t tell the full story. Many of their institution’s most profitable customers remain branch-loyal, particularly the segments that value personal interaction. For many banks, most account originations still come through branches and the profitability of those accounts is usually higher than those originated through other channels. Everything these executives have seen in their careers to date flashes a warning sign in their minds: cut branches and you impact growth and future profitability.
The focus for many banks will be to find a way to reduce the number of branches – keeping the right branches to sustain a strong network for face-to-face customer interaction. The challenge will include, however, the need to increasingly utilize self-service technology such as advanced ATMs, financial kiosks and video banking to meet customer expectations. The basic math, after all, is implacable: scanning check deposits at an image-capable ATM costs the bank about 59 cents per transaction, compared to $1.48 for teller-handled deposits, according to TowerGroup. And ATM technology is becoming ever more robust: machines recently installed by some European and Asian banks enable users to transfer funds to other accounts or payment devices via contactless cards or cell phones.
Such technology will inevitably migrate to the U.S. in coming years as the adoption of near-field communications (NFC) facilitates contactless and mobile payments, a view underscored by the ATM Future Trends 2012 survey, in which executives overwhelmingly ranked “mobile technology” as having the greatest impact on the global ATM industry over the next five years. Video banking also seems to hold promise as a way to provide a measure of personal interaction with customers at less cost than building a full-service branch.
It has long been an industry truism that bank customers never met a delivery channel they didn’t like – when new channels are added, customers patronize those as well as the existing ones. But BAI believes we may now have reached an inflection point in retail banking where some of those channels, particularly branches, may have to be cut back while access to others will come at a higher cost.
Ms. Bianucci is president and CEO of BAI and publisher of BAI Banking Strategies and BAI Banking Strategies Daily.
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