Revitalizing the Branch

By Kenneth Cline

Spurred by new customer information technology, bankers are placing renewed emphasis on the revenue-generating potential of their branch networks.

The traditional branch often is portrayed as a throwback customer service mechanism meriting no more managerial attention than what is warranted to cut costs. But instead of documenting a descent towards extinction, regulatory statistics show a resurgence of these physical banking sites. Between 1984 and early 1998, banks and thrifts together boosted their branch outlets by 16.3%, or 10,162, to a record total of 72,340 sites, according to the Federal Deposit Insurance Corp.

The explanation for the comeback lies in the branch's enduring value as a sales platform. Electronics and alternative delivery systems have so far failed to provide an effective substitute for distributing financial products and services to the consumer mass market, and branches have resumed their central role in retail banking strategy. Only now, the focus is less on reducing expenses and more on improving revenues through sales.

These conclusions emerged from a roundtable discussion convened by Banking Strategies during the Bank Administration Institute's recent branch banking conference in Nashville. Delving into the future of branches in retail banking, we began with an assumption that any discussion would gravitate to issues of cost control and downsizing. Instead, the talk immediately veered to how institutions are using customer information technology to revitalize their traditional brick-and-mortar offices.

The new technology helps branch employees better attune sales pitches to specific customer needs. It also helps banks in configuring the right mix of traditional and self-service delivery systems in particular markets. Said David L. Pope, senior vice president at Wachovia Corp., "We're creating, in fact, a portfolio of physical points of presence. And managing that portfolio is becoming our biggest retail challenge."

Joining Pope were three other prominent retail bankers: Alexander (Sandy) Berry 3d, executive vice president, Crestar Corp.; Thomas K. Fisher, senior vice president, Comerica Inc.; and David Mooney, a senior vice president at Chase Manhattan Corp. The group also included an expert on branch design, Robert Steele, vice chairman of John Ryan Co.

Banking Strategies: Are branches past their prime?

Mooney: At Chase, we don't believe the branch is obsolete. Part of the reason is that consumers are not monolithic in their channel preferences. Different customers prefer different ways of accessing the bank. In our market, branch availability and location still influence customer decisions about which bank to do business with. Branches are also extremely important to many of our small business customers, who to a large extent still value and need physical access.

Pope: Wachovia operates in some rural markets, so the branch is vital. Customers expect it to be there. And for some especially valuable customer segments, such as business banking and upscale households, the quality of branch service is still a major determinant of success or failure.

Berry: A couple of years ago, I heard a speaker use the term "prestalgia," which he defined as "the longing for things that have not yet occurred." We bankers have displayed that sentiment about delivery networks. We look at the huge costs associated with branches and say, "Gee, if we get rid of that overhead, then we can have better earnings." Instead, we should be thinking about enlarging the already-tremendous value derived through the branch.

Branches are like hundreds of billboards that advertise the bank every day. They're places where our customers can come and do the many things that still can't be accomplished electronically. They bring us together with customers face-to-face.

But it's a mistake to think of branches in terms of one-size-fits-all. Instead, we need to configure different types of delivery for particular markets. Small business banking, my area of responsibility, contributes a great deal to the overall value of the branch system. When delivery decisions are made, however, our customer segment oftentimes seems to be thrown in as an afterthought. At Crestar, we are experimenting with business-only branches to serve highly concentrated areas of small business and middle market companies, for whom the branch is still extremely important.

Banking Strategies: Are any of you planning major reductions in your branch networks?

Mooney: By most measures, we already have downsized fairly radically at Chase. But that was largely a function of merging the predecessor Chase with Chemical Banking Corp. We had numerous overlapping facilities serving pretty much the same trade area.

Fisher: Our branch count at Comerica will probably go down somewhat. The mix will also change considerably. Of the branches that remain, fewer will be full service in the old sense.

Pope: Until recently, we just didn't have the information we needed at Wachovia to make smart decisions about configuring the branch network. As we got that information, we made some fairly sizable reductions in branch numbers to reach a "right-sized" state. As we move forward, we'll continue to aggressively manage that investment. We think of it as "continuous network management," not just something you do every once in a while.

Banking Strategies: What kind of information helps in configuring branch networks?

Fisher: We've done a lot of customer research at Comerica to determine which branch permutations work best in which markets. We're experimenting with a lot of different models. Some sites will lean to commercial uses, and some to self-service, depending on the market. From an industry perspective, I think we'll see a lot of industry experimentation with smaller offices that don't include all the components of a full service branch.

Berry: In the old days, we'd go out and say, "This is a really attractive corner, let's put a branch here." Now we use our improved information to find a certain group of customers we know will be valuable to us and then determine what delivery mechanism they want. It could be a traditional branch or more self-service electronics.

Another observation: no matter how ambitious a bank may be about downsizing its branch network, we repeatedly see those plans get moderated when managers come face to face with the issue of losing customers.

The latest research is really quite favorable toward the branch, in that the majority of the most profitable customers use branches extensively. People stand back and say, "Now wait a minute. I didn't realize that."

Banking Strategies: But isn't expense control still an issue?

Mooney: The issue isn't so much expense per se. The issue is productivity and how much revenue you can generate in support of any given level of expense. A lot of it gets down to how you use all your resources -- the employees, the physical space and your customer base. Some of our studies show that branch personnel spend more than half their time on activities that aren't directly related to revenue generation and maintenance.

We also have more than 600 discrete policies and procedures governing the operation of a branch. It's inconceivable to me that any business can function efficiently with that kind of operating complexity. So the operating environment is a problem. It not only needs to be simplified but also truly re-engineered, with obstructing processes either eliminated or automated.

Pope: The physical branch itself doesn't do anything. The value really flows from human interaction. We're talking about the staff members who work in that market and create value through face-to-face interaction with customers. The reconfiguration that we all talk about goes back to this human factor. Banks are reallocating their human resources to focus on targeted groups of customers.

Steele: We've certainly seen a shift in the last couple of years in terms of a focus on revenue instead of cost. That doesn't mean that efficiency no longer is a priority. But there is certainly far more appreciation of the leverage available on the revenue side.

Fisher: It depends on the part of the branch you're talking about. In the teller area, lowering the cost of cash handling is still a major concern. You'll continue to see cost control in that area as new technology replaces physical labor. On the platform side, I would agree that the revenue-generating capacity of the branch has been underestimated and underutilized in the past. There's a lot of room for improvement there.

Pope: One of the important issues in branch operations is: what happens during the quiet part of the day, when nobody's coming in? As an industry, what processes and tools are we adopting that allow branch employees to productively fill the times when customer traffic is low?

Berry: At Crestar, we're finding that one way to fill up this excess time is through telephone service. And by God, it works. Not only is it working in terms of product sales, but also in terms of retention -- letting your best customers know you really care about them.

When customers change banks in the small business market, they frequently do so because they didn't think their bank offered a particular product when, in fact, it did. No one ever told them. We need to be in communication with those customers and let them know that we do have those products.

Mooney: We preach a philosophy that says there's no spontaneous success in selling. In other words, you have to be in contact with the customer for a sale to take place.

Fisher: We recently did some training on outbound telephone calls by branch employees. About 70% of the customers that we reached around dinner time were willing to divulge their financial needs over the telephone because they could identify the caller as someone in the building where they had opened their account and with whom they felt a relationship. No other outbound sales force could do that. There is an inherent advantage in being a branch banker that we've only begun to exploit.

Mooney: We sometimes underestimate the value of personal familiarity. We know that emotional responses largely govern customer satisfaction and loyalty -- not rational evaluations. After 10 years in retail banking, I have yet to hear a customer compliment our products, pricing, systems, or our great policies and procedures. The feedback always revolves around the quality of service delivered by an individual.

Banking Strategies: Tailoring products to customers requires detailed customer information. Do data warehousing and database marketing capabilities provide the keys to revitalizing the traditional branch?

Pope: For Wachovia, yes. Take the issue of keeping branch employees busy during slow times. Those employees can now hit a button on their personal computer and receive from our data warehouse a prioritized customer communication list. The list includes suggestions on reasons to call the customers. In turn, as our bankers or salespeople talk with clients, all the new information they learn is fed back into this customer management database. So I think data warehousing is a huge part of how you leverage your investment in different types of branches in different places.

Fisher: Those people who deal eyeball-to-eyeball with customers, or those who are placing outbound phone calls to customers, constantly glean fresh information not reflected in the database. You have to implement processes that will funnel to the database that information which can only be acquired through dialogue with the customer. As you enrich the database, it will become even more helpful to the front line people.

Berry: Tom's statement is particularly apropos to the small business market, which is data-poor. We don't have huge amounts of information on small business clients like we do on retail customers. So the knowledge that you get from face-to-face contact is crucial in building a database that allows you to make good decisions.

Steele: Banks have spent a huge amount of money on building their databases. But the key really is teaching employees what kind of information to extract from those databases and then how to use that information to increase sales.

Banking Strategies: Do you see the branch changing much in the next five years?

Fisher: We bankers have probably been guilty of overstating the pace of change. I don't see things being radically different in five years. But you will see more use of alternative channels. The amount of technology used inside a branch will increase, as will the use of customer knowledge databases. The effectiveness of our selling processes will also improve.

Pope: I don't think there will be dramatic change. We're still talking about consumers, and in general, their behavior changes quite slowly. They'll add things to their repertoire, but they also like to hold on to the old things. It's better to be a step behind their willingness to change than a step in front.

Fisher: At the end of the day, it's the consumers who determine the pace of change. And they will do what they want, not what we want.

Mr. Cline is senior editor of Banking Strategies.

Copyright © 2003 by Banking Strategies, published by BAI.

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