Branch transformation is hot. The evidence is everywhere: numerous industry articles, webinars, blogs and conferences on the topic. It appears everyone has an opinion about what needs to change or transform and a host of ideas on how to effect those changes. All this noise (or cacophony) has created great confusion among leaders at financial institutions—and in some cases led to poor decisions. Today, I hope to share some facts on the topic and pose some questions to consider when you think about transforming your retail branch network.
I mentioned that every journal, paper or blog seems to take a different view on branch transformation. I’m sure you have seen these views too. Like: bold statements that up to half of all retail branches will close in the next few years. Or: firm commitments that all branches will get much smaller; the express or fully automated branch will be the new norm; millennials don’t use branches; tellers are going away. Yet at the same time, every survey indicates that customers still want face-to-face interactions for more complex transactions and advice. That reflects a disconnect.
And if every vendor and consultant has their own “right” branch transformation game plan, they’re absolutely sure about it. They can’t all be right—so let’s talk about what’s real, what’s wrong and how the industry should respond.
- Branch transformation is not new. It likely began 50 years ago with the introduction of the ATM, which started to provide a new channel for customers who wanted to get cash. Over the years new technologies and upgrades offered customers more choices and made our bankers more efficient. I’d argue that branch transformation is just normal change and not a new event.
Let’s look at what’s changing in the industry. Teller volumes are off by about 50 percent over the last ten years. Lower branch traffic means fewer cross-selling opportunities for bank staff. Following the recent Great Recession, U.S. households now move less often, and moving a household is still the number one reason people change banks. The ongoing very low-interest rate environment has squeezed margins and put increased pressure on FIs to cut expenses.
So who is responsible for those changes? In large part, the industry is doing it to itself—whether introducing more self-service channels where customers don’t interact with branch staff, or deciding to reduce expenses rather than refocus those staff members to improve the customer experience.
- Branches aren’t going away. The reports that 30-50 percent of all branches will close in next five years is flat out lunacy. In the U.S. today, there are about 86,000 retail bank branches and another 21,000 credit union branches. In the first half of 2017, according to the FDIC, about 200 branches closed and another 100 new branches opened every month. So the expected decline this year will be a little more than 1000, a slower rate than in recent years. The closure rate would need to increase by at least five-fold to meet those wild predictions. There is no sign of that happening.
- Branches aren’t getting much smaller. Here are some sample quotes you can find in many industry journals: “In the next five years, 50 percent of branches will be express-automated locations.” “The average branch size will be less than 2000 square feet as bank branches are shrinking.” Well, Jones Lang Lasalle (JLL), the big property management firm, does an annual study that looks at construction trends in various industries. While this data focuses on NEW building construction and doesn’t cover retrofitting existing spaces, new new branches are in fact, getting bigger—with the average size running about 5300 square feet, slightly larger than recent years.
- Branch transformation isn’t all about migrating transactions. Bank branches perform these basic functions:
- they handle financial transactions,
- provide financial advice and counsel, and
- allow for opening accounts that provide access to capital and payment systems.
In recent years, banks have focused on driving financial transactions from the full-service to self-service channels to reduce staffing and labor cost.
The typical branch is open about 45 hours a week (excluding supermarket branches) and has low sales productivity. The average personal banker only sells about two new deposit accounts daily or spends about one hour a day selling. The rest of the time they service existing accounts and perform other administrative activities. If you do the math, that means the branch staff spends only about four percent of the month truly selling.
Where should you focus? Don’t think just about cost savings and shifting to self-service. Make your branch transformation about freeing up staff to interact and engage with your customers—and drive deeper relationships and incremental sales.
- Self-service technology has serious limitations. Most current technologies that migrate teller transactions to self-service don’t support all branch transactions. This applies to small business bulk deposits or night bags, coin and currency swaps, and the big one—non-customer check cashing. Plus, a long list of other less frequent transactions must still be addressed. Even the most advanced solutions only handle about 80 percent. Tellers are still needed—most vendors for ITMs recommend one-half to one teller per interactive teller machine, and while they may be consolidated in the call center it still limits that total number of staff reductions.
Which basic questions should leaders ask themselves before they decide what branch transformation means to their firm?
- Do I want to reduce headcount or free up full-time equivalent employees to better engage my customers?
- How will I drive higher sales levels?
- Is full automation the right answer for my bank?
- Do I have a burning platform that begs immediate attention?
- Is branch transformation about automation or cost-effectiveness?
No matter how hot the topic gets in 2018, branch transformation is not new: It’s been going on for at least 50 years. It doesn’t call for revolutionary change but rather continued, evolutionary change. A clear-headed strategy and realistic assessment of the changes that face the industry will keep you on target.
Meanwhile, expect the noise to continue. It will be everywhere. Knowing which pundit, whitepaper or blog has the “right” answer will be difficult at best, if possible at all. For the sake of your customers and your bottom line, resolve in 2018 to tune out the static—the hunches, opinions and dire predictions—in favor of facts and history that, if you listen hard enough, will speak for themselves.
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Jon Voorhees is an advisor at Austin, Tex.-based Peak Performance Consulting Group, which specializes in banking strategy. Before joining Peak, he was head of Distribution Strategy and Execution for Bank of America. He can be reached at firstname.lastname@example.org