Revenue generation in traditional banking comes from the interest rate spread on taking deposits and making loans while collecting fees in the process. With the economy now treading water (or worse), loan growth is hard to find and banks are investing their deposits in low-yielding bonds. Meanwhile, recent regulations have greatly reduced overdraft fees and debit card interchange income. With no clear sources of near-term revenue growth, where does a bank turn to make a profit?
The lever to pull in the short term is expense control. Results from a BAI Research series, which covered the areas of operations, retail distribution channels, retail marketing and product management, risk and regulatory compliance, sales and service effectiveness and technology and payments, indicates that banks are planning expense reductions in two main areas: back-office operations and branch network reduction or redesign.
Regarding the former, we asked bankers where they will allocate most of their investment dollars for operations over the next year or two. The top category was compliance. In fact, 79% of bankers expect regulatory compliance issues to have a material impact on earnings, return on assets and return on investment. At the same time, concerns over fraud and security are necessitating additional operational investments to safeguard sensitive customer data against increasingly savvy hackers. So, the second highest category of operations spending was fraud and security, with 38% of bankers citing this as a major focus of investment spending over the next year or two. It appears doubtful, then, that banks will be able to achieve significant back-office operations cuts over the next two years given the new compliance and fraud concerns; in fact, expenses in this area could increase.
As for branch network reduction or redesign, bankers are responding to the continued migration of customers to online and mobile channels. During BAI’s recent Branch of the Future Executive Roundtable sponsored by Microsoft, consulting firm Celent presented statistics showing that the number of branches ballooned from 21,839 in 1970 to 83,320 two decades later. During the same period, the ratio of population to branches shrunk from 9,340 to 3,684. Celent’s conclusion: branches are experiencing declining transactions, less foot traffic and eroding relevance.
I agree that the U.S. banking system is over-branched and underutilized. In fact, Starbucks stores have a lot more foot traffic than a typical branch and are one-fourth the size. In my opinion, bank branches will continue to consolidate over the next decade. In addition, branches will shrink in size to reflect less foot traffic and increased customer adoption of emerging mobile technologies. Branches will evolve away from their historic transaction-oriented role into consultative sales centers.
For the long term, banks hope to improve revenue generation by obtaining a larger share of customer wallets. BAI’s recent research shows that most banks plan to achieve this through relationship packaging and pricing. One approach, for example, might be enabling customers to avoid monthly checking fees by holding larger balances with their bank (credit card, mortgages, savings, etc). Unfortunately, 80% of bankers in our survey cited inflexible IT systems as the biggest barrier to realizing this customer-centric approach to relationship development. While most bank systems today possess silos of information about customers’ products and services, they lack a way to combine all of this data for relationship packaging and pricing.
Similar data issues affect front-line sales and service. Our recent research shows that banking’s investment priorities for sales and service focus on improving segment-driven analytics, generating and tracking the disposition of sales leads and improving the new customer on-boarding process. Hopefully, these data issues can be resolved soon so that banks can move away from the short-term reliance on expense cuts to the more promising strategy of improving customer relationships.
Mr. Riddle is a director, research and market intelligence, at BAI. He can be reached at firstname.lastname@example.org.