As banks increasingly grapple with trying to reduce the high cost of their branch networks, one would think that more institutions would look at lower-cost in-store branches. The opposite seems to be occurring, however. In the past few years, North American banks shut down 468 in-store branches, including the likes of Bank of America Corp. (66), M&T Bank Corp. (30) and International Bancshares Corp. (55).
On average, in-store branches generate only 30% to 40% of the income of traditional branches. Though in-store branches may cost significantly less to build and have shown some promise in attracting deposits, they are often unable to sufficiently grow assets. One might even ask why banks would want to add grocery store branches in an era when financial institutions are flooded with more deposits than they can profitably lend out.
That view would be short-sighted, however, because in-store branches satisfy two conditions critical for a healthy growing bank. First, they present the opportunity to organically grow the customer base. In the long run, these organically grown relationships provide clear potential to cross-sell profitable products, including loans. Second, in-store branches help grow the bank’s market footprint, while minimizing risk by doing so at low cost. Because banks are able to both enter the market at a lower cost and piggy-back on the retail partner’s brand and infrastructure, in-store branches can help incubate a bank’s growth ambitions in new markets.
The problem, as many financial institutions have discovered, is that the in-store puzzle is not easy to solve. A large part of why in-store branches often fail is because the banks simply try to replicate a traditional branch in the corner of a retail store rather than recognizing that a different approach is required. Before risking significant investments on in-store expansion, banks need to answer three key questions:
How do we correctly staff in-store branches to generate new accounts? Banks have always wrestled with staffing models to determine the right number and mix of employees. A primary goal of these staffing models has been providing a high level of service to reduce customer wait times and increase customer satisfaction. However, in-store branch staffing needs to focus significantly more on the ability of the employees to generate sales rather than simply serve customers in the least amount of time. In-store branches cannot be successful if the staff hides behind their desks all day without making an attempt to engage passing store traffic.
The in-store model requires a different mindset than a traditional branch – one in which staff are actively initiating conversations with potential customers. Banks that successfully staff in-store branches often hire employees with retail experience and then train them in banking. It can be difficult to train traditional tellers to become great retail salespeople since they have always been incentivized to excel at customer service rather than closing new sales. However, it is easier to train those with active retail sales experience (particularly those with commission-based retail sales experience) to sell checking accounts instead of merchandise. Banks can mitigate the risk of staffing in-store branches by systematically testing which types of employees are most effective in generating new accounts to understand whether, how, and where to roll forward the new staffing models.
Which retail stores should get in-store branches? The ability of an in-store branch to generate new business varies significantly based on factors like the demographic profile, market size and competitive area around the store. The characteristics of the store itself, such as square footage, annual sales and location of the branch within the store, can also influence the success of the in-store branch.
The relationship between the store and the bank needs to be an active partnership, where both see a mutual benefit. While the advantages to the bank – such as lower infrastructure cost and the potential for more traffic – are clear, retail partners need to be sold on the in-store bank as a tenant that increases customer loyalty. In this industry, where customers can easily switch where they go every week to buy groceries, having an in-store branch helps “pull” customers back and nearly guarantees repeat visits for the store.
Often, in-store branches are rolled out based simply on the availability of space at the retailer rather than robust analysis of various store-level factors that impact the sustainability of the new addition. When banks negotiate and decide on stores, it is important to align with retail partners on what specifically makes each store a good candidate for an in-store branch.
Decisions regarding addition and format of the in-store branch need to be made after carefully considering how customers react to various formats. More often than not, in-store branches are rolled out with a pre-planned format. But not having the correct format makes it difficult to achieve the expected synergies between the two stores. Minneapolis-based U.S. Bancorp, for example, has been doing dramatically well with their in-store branches throughout the Midwest and have identified a successful formula for their retail partnerships. Thus, as banks build in-store branches, it is important to identify the type of store partner, format and the profile of more successful locations and prioritize those types of locations going forward.
How do you effectively market to in-store customers? Banks try a variety of marketing ideas for traditional branches that are focused on “stand-alone” marketing, such as sending mailers to prospects, grand openings, etc. For in-store branches, these marketing plans inadequately exploit the store brand and also fail to appeal specifically to the in-store customer.
Banks are accustomed to customers who are willing to drive to their branches to engage in a transaction; they need to understand, however, that in-store sales are driven more by “quick-trips,” rather than “planned banking trips.” Appealing to customers who run in for a few grocery items has a major impact on how the bank can market, merchandise, and promote in-store branches.
As these customers are focused on shopping for store merchandise, banking may not be top of mind for some of them. In an age when customers can bank through a variety of platforms, there needs to be a clear reason why a new customer would consider going to an in-store branch for the first time. Offering in-store-only promotions can help build out new customers for a nascent branch. In-store-only promotions enable the in-store branch to attract new customers, as it is a compelling differentiator from other branch/online banking. To successfully offer in-store promotions, the types of offers by location and by customer need to be robustly tested.
Additionally, in-store branches need to ensure that customers are thinking through their banking needs while shopping for grocery or general merchandise. When in a store environment, many customers may not be thinking that they need to refinance their home loan, open an account or consider new investment options. In-store branches need to cajole store customers to think through their banking needs as they make their regular purchases. A variety of merchandising, collateral, signage and promotional offers needs to be stationed beyond the confines of the actual banking area in the store. An innovative idea is for store greeters to hand out banking offers to customers as they walk in. This enables customers to read through the offerings as they work their way through the store, finally culminating in visiting the in-store branch.
The impact of these efforts varies substantially by product and location. Banks need to test innovative cross-promotions with the retail store, carefully reconsider branch signage and revamp co-branding to make the most of store traffic. Being on the customer’s “shopping-list” is a new idea for most banks. To make in-store branches successful, banks need to find the right employees to engage prospective customers, identify the best locations and try innovative new marketing approaches to draw in shoppers.
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