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A Look Ahead to U.S. Retail Banking in 2016

Top retail banking executives, at institutions both large and small, are expressing a mix of optimism and uncertainty as they look ahead to 2016.

Self-Service Revolution

Customers are migrating to electronic channels, making payroll reduction a necessity, but they still desire the same, or an improved, level of service.

Top Five Retail Banking Trends for 2014
Retail banks, in the coming year, will focus on improving omni-channel operations; sharpening the definition of branch technology goals; and driving more revenue outside of the branch. by WILLIAM WEIDMAN
Dec 16, 2013  |  1 Comments

One year ago, we outlined the most important trends for 2013 to help retail banks adjust to the monumental changes occurring in the industry. Developing a strategy to respond to these trends does not happen overnight, and the themes for 2014 are similar to those outlined a year ago. For example, banks have not yet cracked the code on benefiting from mobile/online, the future of the branch is still uncertain and banks badly need more revenue streams.

Yet, before you despair, consider that retail banks have made progress on some fronts. Experiments with small footprint branches are promising and banks are getting smarter about making the most of their staff with a shift towards universal banker roles. So, given the fact that retail bank evolution remains a work in progress, here are the top 5 trends we see for 2014:

Learning How to do Omni-Channel from Leading Retailers. Banks are siloed and too often operate each channel in a vacuum. For example, branch hours and staffing levels fail to take into account mobile and online banking usage. If a branch is located in an urban area and has high rates of mobile and online banking adoption with its customers, should hours be shorter or staffing leaner?

Banks also make overlapping investments across channels, looking only at return on investment (ROI) for the channel instead of maximizing return across channels. Does it really make sense to invest in new and expensive branch ATMs and mobile deposit technology at the same time?

A better approach is learning from retailers, who are more adept at running an omni-channel business. For example, their online sales have grown to over 5.7% of retail sales in the US. Retailers are rapidly learning how to coordinate and maximize benefit across channels. While cost can be higher for retailers to fulfill online orders, they are testing fulfillment using merchandise from nearby stores. Online orders tend to be smaller and result in less customer loyalty, so retailers are testing in-store offers when a customer buys online.

Banks, likewise, need to link channels more tightly and always consider costs/benefits across all channels. For example, banks could offer to have an investment specialist meet with high balance customers who bank primarily through online and mobile or have branch staff pick up some of outbound calls typically made by the call center during downtimes.

Better Definition of the Goals of Branch Technology. Banks continue investing in better technology for the branch, from touchscreens to video conferencing to increasingly sophisticated ATMs. Banks score highly in the innovation category but do not score as well in being selective with it. The tendency is still to invest first and ask questions later by rolling out expensive technology across much of the network before fully understanding ROI.

Banks will need to better define the goals of branch technology and subsequently be able to measure the technology’s impact on those goals. Is the goal to reduce cost, for example by allowing for shorter hours, less staff, or smaller branch formats? Is it to improve customer experience/convenience? Is it to facilitate cross-sell and relationship building?

Many banks continue investing in ATMs that can process more types of transactions. What is the goal of these ATMs? The only way these machines can reduce cost would be if staffing levels are lowered after installing these smarter ATMs, which often is not the case. The new ATM may improve customer experience, but existing ATMs are already quite effective and improved customer experience would likely not justify the higher price tag. Most of the smart ATMs have not been shown to help with cross-sell.

To make the investment worthwhile, banks should either be willing to test lowering staffing levels when the ATMs are introduced or build in technology to increase cross-sell. For example, the ATM might show targeted offers for additional products based on that customer’s profile and relationship, including pre-approval for certain loan/credit products.

Innovation is critical, but it must also be aligned with a purpose. Define the goals up front and select new technologies that align with those goals.

Drive More Revenue Outside of the Branch. The Holy Grail for banks is figuring out how to make money from mobile and online channels. Are you ready for the bad news? Most banks have not succeeded in adding fees for using mobile/online services. A few have added and kept new fees, but others are afraid of the backlash seen when adding fees for checking accounts and debit cards. Some customers simply will not pay for things they are accustomed to receiving for free, even if it is delivered through a more convenient channel. Bank of America, for example, recently tried to monetize mobile and online by providing free access to digital channels and then charging fees if the branch is used. However, this approach didn’t resonate with customers, and Bank of America rolled back this product.

So, if you cannot charge for mobile or online and cannot use digital access as a way to justify fees for using other channels, what can you do? Banks need to flip this model on its head and leverage mobile/online to improve cross-sell and retention. Few banks understand how mobile and online engagement affects retention. Find which types of mobile and online services create stickiness and which customers experience the biggest retention benefit when using these channels.

These channels are also not utilized enough to cross-sell new products. Over 80% of accounts are still generated in the branch. Some accounts can only be opened in person, but why not make it easier to open some types of accounts online? Messages should be shown to selected customers that have been pre-approved for a credit card with a simple online process to open the credit card. Customers can be notified that they are pre-approved for a mortgage with a rate offer and an option to automatically schedule an appointment with a mortgage banker. To monetize mobile and online, banks need to think outside the box and focus more on cross-sell and increased retention.

Bifurcation of the Branch. There will be two types of branches in the future: small footprint, technology-heavy branches with light staffing and a low cost structure along with a smaller number of larger and more expensive branches with full-service staffing. Significant progress was made on this front in 2013. In the Washington, D.C. area, for example, Well Fargo has been testing the former model. Others have started deploying universal bankers to prepare for a model where a smaller number of employees perform all branch functions.

Banks will need to divide their branch templates into the aforementioned two styles in the future. This requires closing/consolidating existing branches, relocating and downsizing existing branches and opening up new branches that are small and inexpensive but convenient for customers. The key will be determining which spots warrant a large, expensive branch and where the smaller format branches will work best.

The trend towards universal staffing will continue, but you simply cannot turn an employee into a universal banker overnight. Banks need to invest more in developing the right training programs. It will be important to determine the profile of employees who can succeed as universal bankers and focus hiring efforts on that profile. Banks should also empower these employees with the right technology to help them succeed. For example, consider deploying tablet technology that helps employees navigate customers through mortgage or investment product options.

Increasingly Targeted Advertising. Chief marketing officers increasingly want to know the ROI for each dollar spent on ads, and banks are doing a better job at measuring the ROI of marketing spend. Going forward, this means that ad spend will become increasingly targeted.

Marketing budgets are shifting towards online and social media. Digital marketing makes it easier to selectively target investments but also requires rigorous measurement of effectiveness. Which websites, types of offers, types of advertising (e.g. video, search, social, display), or messages are most effective? Which types of customers respond best? What products should you recommend for a particular customer?

The advertising world gets more complex every day. When running online or social ads, take advantage of the ability to go dark in a subset of markets. Measure impact relative to ad markets to answer these questions and continually optimize ad spend.

Mr. Weidman is senior vice president at Washington, D.C.-based Applied Predictive Technologies, a data analytics firm that helps retail banks test how various business changes alter customer behavior. He can be reached at wweidman@predictivetechnologies.com.

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robert vinnacombe
12/20/2013 12:39 PM

I have been working with small branch formats since the 1990's and the current attention this concept is getting is long overdue. The recession caused many weaknesses in banks structure and operations to be highlighted and branch capital costs and operating cost is near the top of that list of weaknesses. Small branch formats are more than just reduced square footage versions of conventional branches, they are a totally different way of building and operating the branch. Universal staffing requires the proper branch layout to function efficiently and the old teller-centric branch does not work well. The knowledge and understanding needed to create the new small branch is beyond most branch designers simply because they have never done it. Some retail store designers understand the staffing model and how to layout a store but fail to understand how banking is different and why a branch has to meet certain functional requirements. The solution is to use a company and people that have successfully done both retail work and small branch work for many years. For those interested in learning more about the actual process of designing and operating a true Small Branch, I suggest a visit to www.BranchDevelopmentGroup.com to see what all the talk is about and why Small Branches should be part of your strategic discussion. Sorry for the plug but this is a subject that is finally getting the notice it should. Imagine if banks had converted to Small Branch formats 5 or 6 years ago, their P&L would look a lot different today.