The Future of Branches: Reinvention
Many industry analysts and practitioners clearly believe the future of retail banking requires a dramatic reduction in the absolute numbers of bank branches across the U.S. In a recent column, banking investor and analyst Tom Brown went as far as to say that “sprawling branch networks are about to become high-cost millstones.”
There’s a problem with this position however. I believe that the new earnings dynamics in retail banking suggest that branches may be more important than ever to future profitability. Consolidating branches and cutting staff may make sense in some markets and for short-term profit improvement. But taking these steps before the bank has a clear plan for building new sources of revenue – and defining the branch role in delivering on that plan – may be a mistake.
As intermediation-based earnings, driven by interest margins and deposit/loan volumes, continue to fall, banks must find ways to build new revenue streams from fee-based businesses including investment management, retirement planning, insurance services and others with a high “advice” component. In addition, brand strength and marketing excellence will be hallmarks of successful banks going forward, and physical branch-based delivery systems provide a strong foundation for building these components of the business model.
Nearly all banks find themselves with a great deal of room to improve the cross-sale of banking services to key customer segments and humans – i.e., branch staff – remain an integral part of the cross-sell equation. As an October 2010 Bain & Company report made clear, service is the most important factor in determining loyalty and willingness to recommend a bank to a friend, and friendliness is the most important service factor in this equation – and this is hard to automate. While loyalty alone won’t guarantee deeper and more profitable customer relationships, it’s a great place to start.
There is no doubt that transactions are moving away from the branch channel, and that should be viewed as a good thing. It’s estimated that as much as 5% of all routine branch transactions are moving each year to automated channels, including ATMs, online, telephone, and mobile. This trend will continue, and bankers should consider that the time is right to reinvent the branch channel for today’s marketplace and, in so doing, leverage the channel to build new revenue streams.
Consider changing marketplace demographics and the opportunities they present. The first Baby Boomers begin to turn 65 this year, and, with more than $3 trillion in buying power, Boomers remain the most lucrative demographic segment in the U.S. Retail banking has essentially grown up serving this population. Many Boomers still “prefer” branches, but even Boomer behavior is changing as this demographic continues to adopt online and mobile channels. There is an opportunity to refocus the branch channel and the employees within on the new financial concerns of the Boomer population including asset preservation and liquidation strategies; affordability of elder care services; disability income strategies; and managing mandatory retirement distributions, government benefits programs, estate plans, taxes, etc. Some private banking groups already offer elder care advisory services. I believe many retail bank customers will be paying fees for these services in coming years. Who will they be paying them to?
Now let’s consider the other generational behemoth, Generation Y. It’s certainly true that members of this generation rarely, if ever, visit a bank branch. But that too may change. The leading edge of Gen Y is about to turn 30 and serious financial needs will begin to emerge, such as combining finances with a spouse, affording/buying a first home and saving for retirement. While this generation is typically considered financially conservative, nearly 50% of Americans born into this generation are below average when it comes to financial literacy, with little understanding of how to budget and save efficiently, according to a 2009 survey by the National Foundation for Credit Counseling. Branch staff can play significant roles in helping young adults improve their financial skills – regardless of whether the staff members do this in the branch, in the workplace, via online tutorials and Webinars or at the local college.
Face-to-face advisory services via branch-based delivery may be what both Bank of America Corp. and Charles Schwab Corp. had in mind when they recently announced their expansion intentions. Bank of America announced it will add 500 advisers in its Merrill Edge unit by the end of the year, nearly doubling the number of employees that work with clients with smaller investment portfolios (less than $250,000). The move, according to the bank, is intended to “give these folks more attention, to service them specifically.”And Schwab announced plans to expand its network of offices in promising U.S. markets starting this year, adding to its existing 300-plus storefronts.
Far from being a millstone dragging down the industry, branches, and the people who staff them, are critical to the future of retail banking.