Mark Riddle Jun 12, 2015

The only partly digital future

The future of banking gets a lot of attention these days, and for good reason. New and evolving digital capabilities offer exciting possibilities, from more efficient operations to improved customer loyalty.

The recent BAI/SAS special report on digital banking and analytics explores many of these possibilities in depth and illustrates the importance of digital capabilities to both financial institutions (FIs) and their customers. Based on research by BAI and others, the report reveals how consumers use digital banking services today, what they want and expect from them and how banks can benefit by meeting and exceeding those expectations.

As appealing as the future is, though, the road to it is longer than many people in the banking industry realize, and it’s not wide open. Instead, it’s full of challenges inherent in progress. Therefore, banks need to remember two key truths. First, digital capabilities will likely never supplant other channels, and they certainly won’t do so anytime soon, so the future of banking is not exclusively digital. Second, there’s no roadmap that will help FIs to avoid the obstacles. That said, two opportunities are available today that can help make the journey faster and more productive.

Relationship Foundation

The first of these relates to the branch, and I’m not talking here about a virtual branch or branch staffed with just sales people. The full-service branch continues to be the foundation of the customer relationship and, for multiple reasons, will remain so even as customers increase adoption of digital channels. In a recent joint BAI-First Manhattan Consulting Group study, “Optimizing Retail Distribution Channels,” consumers rated having a branch within five minutes of their home or office as the most important attribute when selecting a bank. Even survey respondents who indicated they prefer using self-service channels ranked this attribute first.

What about younger respondents, say those between 18 and 29 or 30 and 44? They must feel differently about branches, right? Actually, they also ranked branch access first. All groups, regardless of age or channel preference, negatively viewed branches that lacked staff to conduct or help with transactions. So, virtual branches or branches with personnel solely dedicated to sales are not, as far as customers are concerned, acceptable substitutes for the branches of today.

Customers are also reinforcing the value they place on branches with their transaction behavior. They continue to make the vast majority (72%) of deposits at the branch, either through a teller or a drive-thru, according to the BAI Retail Banking Outlook survey (BAI RBO), conducted in August 2014. Roughly a quarter (24%) of deposits are made at an ATM, and only 5% are done through remote deposit capture (RDC). Although RDC has grown quickly, it still covers only a small share of deposits.

At the same time, digital channels are not yet well suited to opening accounts or loans. Only 10% of FIs offer customers the option to open deposit accounts through their mobile apps and 8% for loans, according to BAI RBO. More than two-thirds of customers continue to prefer to open accounts and apply for loans and credit in the branch, as we found in the digital banking survey. Furthermore, cross-selling and up-selling don’t yet occur much, if at all, in digital channels. So, the primary products banks sell are still sold almost exclusively in-person at the branch.

The good news is that efficiency gains are possible; there’s almost no doubt the branches of the future will be smaller than those of today. At the same time, as we’ve already seen, customers want to be able to conduct both routine and complex transactions in the branch and that they want branches nearby. As a result, banks can benefit by carefully considering where to locate branches. They will also want to reconsider the role and compensation of branch employees. Branches staffed with universal bankers, who handle routine tasks and sell products, can satisfy customers and reduce staffing and space needs. Another alternative is to staff branches with a small number of employees who specialize in a few, rather than one or two, service areas and also handle transactions. Compensating these employees primarily based on production can also result in savings. FIs shouldn’t pay more unless branch employees produce more. And, employees, meanwhile, should be provided more incentive to cross-sell and up-sell.

Over time, more routine transactions will migrate to digital channels, and it’s tempting to think that will make it possible to eliminate other channels. History, however, has shown that customers rarely meet a channel they don’t like and don’t want to preserve. Mobile and online will not do away with the call center any more than they will do away with the branch. In fact, branches and call centers will likely soon deal with more complex customer concerns spanning a variety of topics, especially those related to issues that customers cannot resolve themselves. In turn, calls may take longer and require more highly trained staff. That means banks need to reassess how they run call centers and how they train the people working there.

It’s also tempting to believe that simply offering digital channels will persuade customers to adopt them. In reality, banks need to act now to improve their existing digital capabilities, especially security. Nearly half (45%) of bankers responding to BAI RBO, from both community and large institutions, cited security concerns as the biggest challenge to expanding mobile banking. This view is supported by the Federal Reserve’s Consumers and Mobile Financial Services 2014 survey, where 69% of consumers cited security issues as their main reason for not using mobile banking. With data breaches making the headlines regularly, overcoming these concerns is likely to be an ongoing challenge.

Partnership Opportunities

FIs don’t have to take the security journey alone, though, which brings us to the second opportunity: working with technology partners. These firms can help banks efficiently address security challenges, which in turn can help increase adoption and potentially decrease operating costs. Partners can also provide technology that creates a seamless experience for customers. Customers could, for example, begin a loan application online and, if necessary, visit a branch to complete it. Customers who attempt to resolve issues themselves but ultimately need assistance could contact the call center and speak with an agent who can see what they’ve tried. The customer and the agent save time, thereby increasing customer satisfaction and keeping call times in check.

With partnerships, FIs can realize the benefits of technological advances without having to build capabilities in-house, which can be expensive and time consuming. Banks can also introduce new products and features more quickly and, as a result, stand out from their competitors.

FIs can best leverage these opportunities and identify new ones by thoroughly understanding their customers and using that knowledge to guide strategy. For example, banks with large concentrations of younger customers may want to accelerate digital, especially mobile, offerings. FIs with geographically disparate customers may be better off slowing down their branch consolidation plans and instead focus on getting the branch staffing mix right. Knowing what customers want also helps optimize spending on channels. Customers will continue using the channels they like; knowing which ones they like helps ensure you spend resources on the channels customers use rather than the ones that might be most digitally advanced or exciting to you as a banker.

Above all, knowing your customers helps you prepare for the future of banking, in which digital channels will generate new and more customer data. Data is only truly useful in combination with a thorough customer understanding that provides context. After all, phones, tablets and computers don’t open accounts or take out loans – people do.

Mr. Riddle is director of Research at BAI. He can be reached at mriddle@bai.org

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