There is an old saying that goes something like this: “If you’re going to be dragged out of town by a mob, get out in front fast and announce it’s a parade.”
There isn’t much question that the conversation about customer banking channel migration is picking up pace. The fast maturing of mobile, everyday use of Internet banking, early adoption of P2P and other new payments channels is forcing us to re-examine branch networks, the role they play, their cost, and the number/type we’ll need in three to five years. Bank stock analyst Tom Brown, recently predicted that the story of banking in 2013 will be branch rationalization and consolidation.
Until now, though, the prevailing assumption has been that while servicing transactions will move to self-service channels, buying decisions (loans, deposits) will largely stay in branches for the next three to five years, slowly moving to online. The reason? People want advice, they want face-to-face experience and they want to build the initial relationship in person.
Good reasons all. But we know that there is an inevitable trend toward more online account opening, for both deposits and loans – if not for the entire transaction, for at least part of it. The question is which approach to take. Should we provide the tools for customers to open accounts if they want to, but don’t push them one way or the other? Or, should we provide the tools and proactively encourage/train customers to use them, i.e. actively accelerate the migration to online?
Planning for Obsolescense
Here’s a thought from recent history regarding Borders and Barnes & Noble. Borders really didn’t take an aggressive approach to online book buying. Oh, it tried to sell Kindles and the like, but it did not back up these offers with a strong online buying solution (in retrospect, maybe relying on Amazon to be there was a move that backfired). Essentially, Borders remained the superstore option for people who like to buy books in person, which includes me.
Barnes & Noble, by contrast, set up Kindle displays in its stores, made it easy to buy online even at the store, made it easy to pick up an online book at the store if necessary, and used employees to sell and promote online buying. In other words, B&N planned the demise of some portion of its retail locations. Guess which of these booksellers still has a physical presence near me? Clue: my Borders rewards card is now as useful to me as my old 8-track tapes.
Our latest statistics at Cornerstone show that some of our clients already get 30% to 50% of their loan applications online and 5% of deposit account applications. The deposit account number isn’t impressive yet, but it still means that one in 20 customers is willing to start there.
So, here’s what we know:
- We’re already at critical mass on online loan apps;
- Critical mass for deposit opening will occur within a few years;
- The need to reduce expenses (at least as a percentage of assets) is a hard reality in the next two to three years, and branches represent a substantial part of that equation;
- The talk about this industry having too many branches, which has been occurring for years, is finally getting real. New account transactions and teller transactions are flat or dropping on a per-branch basis, at least at the industry level, and that trend is likely to continue; and
- Some branches are chronic underperformers and it’s hard to see how that will change.
So, rather than waiting for trends to take us in the direction of self-service banking, why don’t we proactively make it happen? How about creating a channel plan that includes the following “we will” statements:
- We will set a goal to process 40% to 60% of our loan applications and 15% to 20% of our deposit accounts through online channels in three years;
- We will actively and enthusiastically show customers why they should use the new channels. We’ll make the experience easy, and we will make it equally easy to cross to a branch or call center channel if and when necessary;
- Our branches will have the skills and the incentive to promote and support this goal – they will be our biggest advocates;
- We will reduce our branch network by 10%, which will more than offset the cost of this effort and will in fact reduce the overall cost of new account/loan acquisition;
- We will track achievement of the goal quarterly.
No doubt, it’s more complicated than shown here and there are several roadblocks. One is that online account opening can be expensive right now on a per-account basis. However, prices for new delivery channels always commoditize as usage grows and this won’t be any different. Another problem is that branches are just plain hard to close, for cost reasons, lease reasons, community reasons and people reasons. Fair enough. A third is that all of this will diminish the importance of branches. Disagree. The opposite will be true. Branches that are tightly integrated with other channels, that promote and support them and that quickly finish transactions started there will be more relevant and valuable, not less.
This migration is going to happen. Will it happen to us or because of us? Will we be dragged along or will we be leading the parade?
Mr. Roche is a principal with Cornerstone Advisors, Inc., a Scottsdale, Ariz.-based consulting firm specializing in bank management, strategy and technology advisory services. He can be reached at [email protected].
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