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Virtual Customers: Who’s Minding the Store?


Are retail banks overlooking a major segment of their customer base? It seems improbable, especially given the intense hunt for growth in a tight market. Yet, that is exactly what’s happening at many regional banking companies.

The customers in question are those who have drifted away from the branch and now do most of their banking at arm’s length. Seldom seen in lobbies, these “virtual-domiciled” customers have built their banking lives around alternatives such as online and mobile banking, automated teller machines (ATMs) and contact centers.

According to Novantas research, infrequent branch users now constitute from 20% to 40% of the retail customer base at various regional banks. And their ranks likely will grow, mirroring the trend in other retail industries, such as electronics stores and book store chains, which have seen dwindling customer traffic in storefront outlets.

Banks need an organized, deliberate response to this trend. Yet, most have thus far failed to effectively manage this critical virtual-domiciled segment. To successfully retain and grow this customer group and capture a greater share of wallet, retail banks must change the way they do business across five areas: sales and marketing; controlling delivery costs; network configuration; customer analytics; and ultimately, organizational structure.

Cross-Sell Opportunity

Clearly, the near term priority is sales and marketing. Banks have an immediate opportunity to cross-sell credit to the deposit customer base. Yet, rare is the bank with a robust multi-channel strategy to cross-sell virtual-domiciled depositors. Players that succeed in capturing this business in the next 12 to 18 months will enjoy a virtually unassailable lock on the virtual-domiciled customer relationship.

While branch lobby-based initiatives still deserve considerable attention, these need to be complemented with a more deliberate outreach to the multi-channel customer. Our research indicates that the majority of new retail customers acquired over the past five years seldom see a bank lobby. Banks need to learn how to reach these customers on their own terms, and provide products that are clearly designed for non-branch marketing and servicing.

Second, as branches become less central to the marketing, sales and delivery of bank products to more and more customers, some branches must be repurposed, downsized or eliminated. As customers increasingly disregard the branch, and banks simultaneously succeed in transitioning customers to self-service, branch transaction volume will continue to plummet. The industry will very quickly reach a point where the drive to achieve branch efficiencies collides with minimum staffing requirements for each outlet. At that point, branches will need to be fundamentally repurposed, perhaps into a distributed form of the central contact or processing center.

We estimate that currently 25% of the retail customer base is attitudinally receptive to using alternative channels as complete substitutes for everyday branch transactions. And we believe the receptivity ratio is destined to increase. However, while such transitions can be artfully encouraged, they almost never can be forced. To steer customer transaction patterns in a constructive way, banks will need targeted channel migration campaigns.

One major U.S. bank, for example, already has re-directed about 40% of check deposit activity out of the branch system to ATMs. Meanwhile, numerous banks have aggressively promoted mobile check image deposit and early feedback indicates that this feature weighs heavily in capturing new accounts. Other services, such as e-mail or text notifications for balances, funds clearing, and fraud alerts, are simultaneous drivers of customer satisfaction and reduction in customer transaction costs.

Repositioning Branch Networks

Longer term, a third priority is network configuration. Through a careful study of virtual customer segments and their channel behaviors, the bank can do a better job of forecasting branch requirements, everything from operational issues such as staffing and hours, to strategic decisions about how many branches to build, close or restructure.

Branch networks represent 60% of the retail cost base and are in need of streamlining. Yet, they also need to be repositioned for emerging multi-channel competition, with a lighter physical presence that is more firmly integrated with remote alternatives.

As banks strengthen their management emphasis on virtual domiciled customers, one critical requirement will be improved channel metrics, including customer transaction behaviors and their financial implications. The leaders in the use of such analytics, credit card companies, have made a science out of studying transaction patterns to anticipate emerging customer needs and changing risk factors.

In retail banking, by contrast, there is far less compilation and analysis of longitudinal data about customer transaction behavior. On critical questions about channel usage ­– branch, versus ATM, versus phone, versus online – few banks can construct customer behavioral histories sufficient to make meaningful decisions about distinctive customer treatments and offers. As channel behaviors become more of a defining factor for various customer segments, retail banks will need an advanced ability to look at customers through this lens.

Rather than having various business silos tug at the edges of the virtual-domiciled customer base, this important retail customer segment should receive dedicated management attention. This will provide a focus for marketing and sales, products and pricing, and infrastructure investment – without the disruptive effect of a wholesale reorganization of the retail bank.

Mr. Spitler and Mr. Kaytes are managing partners at Novantas LLC, a management consultancy headquartered in New York City. Mr. Spitler can be reached at [email protected] and Mr. Kaytes at [email protected].