2016 is looking to be one of the most transformative years in financial services in decades. Disruptive competitors are growing, digital and mobile continues to evolve, branches look more and more like Apple stores and interest rates have started rising. Banks will need to embrace smart innovation not only to keep up, but to truly differentiate themselves in a cost effective manner. Here is our take on the top trends in banking for 2016:
Take the branch where it hasn’t gone before. Branch count has decreased by 6% since 2009. That is a noticeable difference, but it is hard to call the branch “dead” when there are still more than 94,000 of them. The branch continues to play a vital role in customer engagement and account acquisition, and the bottom line is that customers still want to have a branch for help with their more complex financial needs. Many basic transactions have already moved to online and mobile channels, and when a customer does walk into the branch, simple transactions are increasingly accomplished through technology (e.g. smart ATMs). To that end, many banks have created universal banker roles to better address the customer needs that can’t be automated.
Banks now have the opportunity to not only make branches more efficient, but also more financially successful than they were before. It was previously not possible for a branch to meet all the potential needs of a customer: banks simply couldn’t station a mortgage banker, a wealth specialist, and a business banker in every branch. Many banks are looking to add new technology to the branch to supplement customer needs in a cost effective way. For instance, Bank of America has launched “Interactive Teller Machines” (ITMs), which use video technology to connect customers with remote tellers. Banks should begin selectively investing in these technologies to determine where they should be launched.
Other banks have begun to improve integration between the branch and other channels to enhance the in-branch experience and allow for increased convenience. Some, such as Wells Fargo, have enabled customers to book branch appointments through their mobile app and other channels.
Think outside the box to optimize your network. Banks need to think more creatively when it comes to the branch footprint. The model of only having the traditional 3,000 to 5,000 square- foot branches across the network no longer makes sense. Banks will still need full service branches, but these branches need to be made more appealing to draw in customers. An example of providing an inviting, social atmosphere can be seen with Capital One, which is testing new café style branches. They offer a space for customers to socialize, work collaboratively and discuss their banking needs with staff.
But there should be fewer of these full service branches and more low-cost branches that are smaller, lightly staffed, and technology-centric. These branches will focus on convenience and giving customers more locations to choose from. Similarly, third party ATMs can be leveraged to create scale at a lower cost. Combined together, this network layout creates a hub-and-spoke model with the full service branches surrounded by less costly distribution points. The key for banks will be to understand where to put each type of distribution point to balance customer needs with cost and efficiency.
An omnichannel approach to branch closures. Since the number of branches in the U.S. peaked in 2009, banks have been strategizing how to streamline their networks to decrease costs and improve profit margins. While the first round of closures may have been fairly simple for most companies (prioritizing obviously redundant or underperforming branches), banks must now employ more innovative strategies to choose the correct branches to close. It is also crucial for banks to hone in on the right balance between cost savings and business retention when selecting how many branches should be closed. Branches remain relevant to many customers and shuttering a branch can be very risky if one considers the costs of customer attrition and lost revenue.
In 2016, banks will need to take a calculated approach to branch closures, incorporating the omnichannel impact of closures into their evaluations. For instance, a low performing branch may not have any nearby branches, making it seem like a bad candidate for closure. However, there may be a high level of online and mobile engagement for customers of that branch and therefore, minimal negative reaction if the location closes. Banks should analyze previous branch closures to better predict how sales and existing relationships will move to nearby branches or other channels in the future. Using these insights, target closures to branches where new accounts and existing customers will be impacted least across all channels.
Harness the potential of the mobile app. Having a user-friendly mobile app used to be a differentiator – now it’s table stakes. Millennials check their phones 45 times a day on average, giving banks an unprecedented opportunity to engage with their customers. While the first priority of the mobile app is to provide banking services on a convenient platform, it should not be the only goal banks have in mind. When leveraged effectively, the mobile app can strengthen relationships and provide deep insights into your customer base that inform critical decisions across the business.
Banks are increasingly beginning to communicate with mobile customers through push notifications and 2016 will see an expansion of this strategy. Push notifications are cheap, interactive, and can be easily targeted, giving banks the ability to contact the right customer with the right message at the right time. Further, they lend themselves well to experimentation; banks can compare the behavior of customers that receive certain notifications to those that do not. For example, a push notification could be sent to a subset of customers nearing their credit limit, and direct them towards another card offer or a limit increase if they are qualified. Banks can then examine the test vs. control impact of the messaging to determine how to roll it out broadly.
Don’t forget about the call center. With all of the buzz about the rise of online and mobile, it may be tempting to categorize the call center as a bygone of decades past and let it fall by the wayside. However, many banks are realizing that digital channels have actually reignited call center activity due to increased inquiries about technical issues, account fraud, and routine transactions that are increasingly executed outside of the branch. Banks are also finding that many questions revolve around digital, such as an online banking error, and call center representatives are not always equipped to answer these questions. It will be important for banks to develop the expertise required to handle these calls. For example, Associated Bank has been adding new technical experts to the call center.
While specialists are useful in some cases, in others it can be better to have the customer speak to someone with broader expertise. For example, a customer may call in with questions about online bill pay, but the person handling the call may realize that the customer might be interested in another product and could begin that cross-sell process. This model only works for certain calls, requires the right people, and risks increasing average handle time, so it is important to determine precisely where to deploy this “universal” call center representative.
Rates are finally rising. After seven years with the federal funds rate held near zero, the Fed has finally announced an increase to its target rate. While the rise is expected to be gradual, the monumental shift in monetary policy will fundamentally effect how banks operate in 2016.
Higher rates will force banks to change deposit and lending rates that have been relatively static for years. Amidst a sea of macro-economic change, in-market testing can help banks hone in on optimal rates to offer across accounts and products. Increased rates mean that competition for deposits will be fiercer than ever while loan volumes will likely decline. Banks will need to innovate to attract customers and will need to be surgical in where they extend more favorable pricing and richer deposit acquisition offers.
Combat shrinking fee income. In the third quarter of 2015, many banks experienced a significant decline in fee income. Some of this weakness was due to decreases in trading-related fees, but retail banks’ margins suffered too, as nearly every mortgage-related fee decreased on average. This was caused by a confluence of events, including competition from nonbanks as well as an accelerated shift away from profitable refinancings and towards new home purchases. As this trend continues into 2016, banks should prioritize developing strategies to replace this lost revenue stream.
Banks are trying different ways to replace this lost income. Huntington Bank, for instance, focused on selling new fee-bearing retail deposit accounts. KeyBank took a different tack and focused on marketing its corporate banking services to niche companies often ignored by larger money center banks. As banks grapple with declining mortgage fee revenue while rates increase only gradually, it will be even more important to prioritize generating alternative forms of fee revenue in 2016.
Defend your territory by emphasizing personal service. With the emergence of fintech startups as major players in personal banking, traditional retail banks have more reason than ever to be focused on defending market share. Much has been made about the rise of firms like Venmo and Wealthfront, and they have undeniable appeal for millennials. Many analysts have predicted a dismal future for the traditional retail bank in the face of these competitive challenges, but they overlook the power of banks’ biggest strength: personalized service.
Banks will need to continue to innovate on a number of fronts to keep pace with fintech startups. But rather than scrambling to mimic every capability of these new players, banks should double down on their edge in personalized customer interaction. By developing a truly customer-centric focus beyond mere lip-service, traditional retail banks can maintain prominent positions in the market. Optimizing incentive structures to prioritize customer service, investing in employee training programs, and highlighting service advantages in marketing campaigns are just a few ways banks can defend their territory.
The millennial question. Millennials are a favorite topic of discussion in the banking world. Some feel this segment is the key to future success while others are skeptical, but it is clear that big banks struggle to engage with millennials. Last year, large national and regional banks lost 16% of account holders aged 18 to 34, while community banks won 5% and credit unions gained 3% of the same segment. But as millennials become a larger part of the population (in five years they’ll be the majority of the workforce), banks can no longer deny that they’ll need to figure out how to attract and retain the millennial customers. In the coming year, it will be more important than ever to target the correct offerings to millennials.
The segment does present unique challenges, especially in the credit area: millennials are wary of holding large credit balances, and are more likely than other age groups to use debit or pre-paid services. Banks need to try strategies to cross-sell more profitable products to these customers. Perhaps this even means designing new offerings with the millennial perspective in mind. For instance, Bank of America is introducing new products with transparent fee schedules to appeal to millennials who are skeptical of “gotcha” pricing. Many millennials do not have a substantial credit history – how do you score a 24 year-old who went to a good school, took a gap year travelling through Europe and has had a job at a startup for two years? Banks should experiment with incorporating different types of data to properly score these customers.
Millennials also tend to be less loyal to their primary bank, and are almost twice as likely to switch to a competitor as other customers. Millennials have access to a wealth of information and shop around. However, these same traits present a good opportunity to consolidate a relationship with a millennial. Banks should focus on communicating with customers about the benefits of consolidation, and should also try adding incentives to encourage this behavior with the most profitable customers. This information should be readily accessible through digital channels given millennials’ tendency to research products online.
Keep up with the Test & Learn revolution. Banks have embraced the in-market testing approach for years, but recently a new class of truly sophisticated testers has emerged. The most analytically advanced banks today maintain a well-developed experimentation pipeline, rigorously testing ideas across groups (from branch distribution to marketing to products) and channels (digital, in-branch, call center, etc.), and consistently targeting programs to the most receptive areas or customers. Banks don’t have to be large to achieve this sophistication. Many small, innovative banks are able to leverage their agility to rapidly test new programs and speed past larger organizations.
Improved technology has also made the testing process faster and easier – according to our annual client survey, companies have consistently increased the number of tests run each year with a 15% increase year-over-year in 2015. Indeed, the volume of tests is even more amplified when considering the rapid, iterative testing that is possible with customer-level experimentation. Sophisticated banks are conducting upwards of 1,000 tests per year and rapidly changing their strategies based on the results. As the financial services ecosystem continues to quickly evolve in 2016, it will be important for banks to avoid risky decisions and maximize the impact of good ideas by adopting a rigorous testing culture.
Mr. Weidman is senior vice president at Washington, D.C.-based Applied Predictive Technologies, a data analytics firm that helps retail banks test how various business changes alter customer behavior. He can be reached at [email protected].
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