Lessons from an Early Branchless Bank

As banks switch to automation so customers don’t have to go to the branch, and use remote staff to provide assistance when they are in the branch, they are essentially re-orienting the customer relationship dynamics to resemble more of a branchless format. Customers perform transaction services through ATMs or third parties who accept debit cards and provide cash back, and service is provided through electronic communications or mail with a centralized staff.

So, how should you handle the customer relationship under these different dynamics? I thought it would be useful in this context to provide lessons from my own experience marketing consumer deposits and loans for one of the first branchless banks, MBNA America Bank. We were highly successful in generating and servicing deposit and loan businesses without using branches. In six years, we developed a deposit portfolio in excess of $18 billion and over $2 billion in loans in four years.

Here are some issues you can expect to encounter as you move toward the remote customer service equivalent to branchless banking:

Product offers change. Each traditional branch in your system attracts some of those who travel past it on a regular basis, which enables you to collect a large number of customer segments in every branch and even more across your bank. When you reduce branches, for whatever reason, you have much less natural traffic to take advantage of. So, you must identify those customers you want and contact them to bring them in or you greatly reduce your growth rate. Therefore, your products and all processes need to be designed to meet the needs of your targeted customer segments. This means that your product line will probably become narrower as you eschew reliance on branches. You need products designed for the segments you have targeted instead of products to fit the many segments that pass by your branches today.

Greater customer control. Customers are much more likely to make purchase decisions without bank staff participating directly in the process in this new branchless environment. You contact your customers in their own environment to make the offer since they are rarely in your branch. As a result, the value of your offer is much more important. Without a superior product, success is questionable because product comparisons are easy to make and you have no way to close the sale since you are not present at the transaction.

For example, at MBNA, we had to offer higher deposit interest rates than were available locally to obtain new deposit accounts. Matching local rates generated no new customers. In lending, we offered market rates with larger loan amounts than almost any other bank.

There is also no social pressure to complete forms as there is in your branch. There is no one to fill activity gaps with conversation or smooth over interruptions. There is no one to explain why seemingly extraneous data is needed. Therefore, simple and clear operational processes are of greater importance in a branchless environment. According to recent studies, the completion rate is 25% when three fields of information are required on an online lead generation form, which compares to 20% when four to six fields are required and 15% when more than six fields are utilized.

Lack of physical proximity. Another impact on products, procedures and processes comes from the greater difficulty providing prompt access to newly purchased products. For example, you cannot provide starter checks and a debit card when a checking account is opened outside your branch. You cannot close an installment loan because the disclosures required are time-sensitive. CD rates could change before the deposit is received. This means that you need to change product structures and operational processes to work around these restrictions or continue to rely on branches to open new accounts. This can potentially be resolved if you rely on smartphone applications to give instant access to account tools, but that will not work for all customer segments.

The impact on customer relationship quality. Probably the greatest change from minimizing branch use is the reduction in customer trust. Every offer we made for a deposit account at MBNA had full product disclosure, in most cases including the legal documentation, and everything needed to open the account. Even so, over 98% of all new customers had to call and talk with a representative before opening an account, even though the customer was a member of an affinity group that endorsed our products. When we asked customers why they called, they said it was the same reason they went to branches to open accounts: it’s the only way to tell if we are competent.

Customers also never exceeded the FDIC-insured balance. In fact, they left room in their deposits so any accrued and unpaid interest was also covered. When we asked why, they said they did not trust us enough to risk losing their money.

We gained the required credibility because our representatives were accessible by phone. And we made sure we were reliable. If we promised to hold a rate to allow for mail time to receive a deposit, we did. If we made an error, it was promptly fixed and we followed up to make sure the customer was satisfied with the correction. We eliminated any risk of our being seen as devious through product design. For example, our money market account rate was set by a formula based on the average published rate, eliminating the customer’s fear we would depress the rate in the future.

Even with these measures, we were never able to develop the trust people have in their local bank. We had no way to provide the emotional component of trust that develops when people interact face-to-face. So, as you reduce your branch presence, much of how you operate will need to change because the customer has greater independence and control when dealing with your bank remotely. No matter how well you perform, you will enjoy less customer trust.

Mr. Merkle is the founder and CEO of Unionville, Penn.-based CashFlow Insights, LLC, a firm specializing in improving the profitability of financial services firms, as measured by return on assets, by improving customer management and loyalty. He can be reached at [email protected].