Why ‘Branch of the Future’ must be a Priority

Why ‘Branch of the Future’ must be a Priority
Bank Innovation published a piece written by Brett King this week entitled, Can we Stop Talking about the ‘Branch of the Future’? In the article, King cites the industry’s use of the “branch of the future” terminology as evidence of “one of the key hang-ups that banks have over changing distribution models”. In other words, an inordinate amount of effort expended to “save” an obsolete delivery model. He argues that pursuing a “branch of the future” strategy, banks avoid the real work of improving customer engagement via digital channels. I think that’s nonsense. These assertions may resonate with one heavily invested in Moven, a digital-only bank happily growing by serving a niche market. Most retail bankers know the world isn’t as simple as King asserts. The fact is, banks have more than one challenge ahead of them. Specifically: 1. Right-size the branch network. There are two important aspects to this imperative: first is to redesign the branch channel for its emerging purpose: selling and servicing, and away from its legacy — transactional delivery. The second is to reduce branch network costs (both densities and corresponding operating costs) to enable investment in digital channel development. 2. Learn how to sell and service using digital channels. Migrating low-value transactions to self-service channels is no longer adequate. Digital channels must become more self-sufficient. One important aspect involves learning how to engage customers virtually. In-person must no longer require a branch visit. 3. Catalyze growth in self-service channel usage. For the second mandate to have maximum effect, banks must influence digital channel usage. Branch transformation simply isn’t optional as King suggests. Far from it! Why is Branch Transformation Imperative? Many reasons, but two are central in my opinion: 1. Most banks serve a diverse customer base, with widely varying and continually changing engagement preferences. 2. While customers increasingly transact digitally, they PREFER to engage face-to-face. Celent separately surveyed US and Canadian consumers in the fall of 2013, finding similar results. Contrary to what some would have you believe, young adults do visit branches. Both surveys found a rather weak correlation between age and channel usage – except for the mobile channel, which displays a strong relationship between past-30 day usage and age. channel usage by age But, past 30-day usage is mostly about transactions, not necessarily engagement. The same two surveys asked respondents, “If you had an important topic you would like to discuss with a banker, how would you prefer to do so?” Responses to that question paint a very different picture – one that explains precisely why most banks derive the majority of their revenue from the branch network. Most consumers – regardless of age – prefer face-to-face interaction on important topics (at least for now). Interestingly, preference for online appointment booking was much stronger in Canada. Not surprizing, since several of the large Canadian banks have been offering (and advertising) the capability for nearly two years, while the same capability in the US is nascent. preferred engagement by age But that’s where the puck is. Where the puck is going is towards more widespread digital channel usage – and engagement – across age and income demographics. That’s why mobile channel development is the #1 retail channel priority in most North American banks. It should be. Those same banks, however, neglect the branch channel at their peril. Banks Aren’t Alone in This The Wall Street Journal published an excellent article this week that provides some much-needed perspective on the branch channel debate (Seriously, why is there still a debate?). Citing data from ShopperTrack, the article asserts a -5% CAGR in store traffic across a broad mix of retailers. Sound familiar? And, banks aren’t the only retailers enjoying the majority of sales from stores. According to the U.S. Census Bureau, online sales now make up about 6% of total retail sales and are growing at more than 15% per quarter. SIX percent! We can argue about the precision of this figure, but the reality is unavoidable – after two decades of digital commerce growth, in-store shopping still dominates. Why no debate about the “store of the future”? Probably because, unlike banks who have largely neglected the branch channel for a few decades, most stores continually invest in optimizing their retail delivery model. Moven can neglect the branch channel because it chose a delivery strategy that alienates the majority of consumers that value in-person engagement. That’s a fine strategy for a niche player. Mass market institutions don’t have that luxury.

Branch Transformation: Are Bank of America and Wells Fargo on the Right Track?

Branch Transformation: Are Bank of America and Wells Fargo on the Right Track?
In a word, yes – and not a moment too soon. As thousands gather for Money 2020 in Las Vegas this week giving ear to a bevy of start-ups promising mobile payments nirvana, a small but growing number of retail banks are addressing those same consumer dynamics with much needed right-sizing of their branch networks. Celent has long asserted the need for a do-over of the traditional branch operating model that served the industry well for so many years and recently argued that a significant winnowing of US branch densities (among other things) will result over the next decade. The challenge for retail banks (and it’s a big one) is that while consumers are increasingly choosing to transact digitally, they engage banks in-person. This was seen clearly in recent Celent consumer research and the resulting report. Will this dichotomy persist? At least for a while and to varying degrees depending on one’s target market. The implications are profound. While most revenues are tied to the branch network (artificially in some cases) foot traffic is in steep decline. Celent identifies a triumvirate of multichannel imperatives arising from the growth in digitally directed consumers. Specifically 1. Right-size the branch network. Most branch networks were designed for a different consumer in a different era. They need to operate more efficiently and effectively. Celent has published extensively on this topic. 2. Learn how to sell in the digital channels. This is new territory for most banks. It starts with embracing digital channels as a key opportunity for customer engagement, rather than merely a vehicle for low-cost transactions. 3. Catalyze growth in self-service usage. This too requires new digital channel capabilities along with well-coordinated efforts to communicate those capabilities and why they’re relevant to consumers in order to maximize enrolment and usage. That a branch channel right-sizing is necessary is hardly debatable. How this right-sizing gets done is the subject of much debate. The Bank of America and Wells Fargo initiatives show similarities: • Both combine transaction automation with fewer, more highly trained “universal bankers”. • Both offer extended hours for most routine transactions. • Both are considerably smaller and less expensive than traditional branches.

But the approach to service differs considerably between the two models. Bank of America deploys ATMs with Teller Assist in its new Express Centers. Tellers still exist in Bank of America’s model, but they are located centrally and engage customers via real-time video. During business hours, tablet equipped staff can also assist. After hours, it’s all video. Wells prefers all customer interactions to be with in-person branch staff in its Neighborhood Stores. Branch Oct 2013 There’s no silver bullet when it comes to branch transformation. There will likely be a variety of design within banks and among banks. Both initiatives appear to be “test and learn” approaches, and may evolve as both banks gain experience. That’s exactly how it should be done in my opinion.

What do you think?

The Importance of Branch Staff Ownership in Technology Initiatives: Learning from Alamo

The Importance of Branch Staff Ownership in Technology Initiatives: Learning from Alamo
A growing number of banks are embarking on branch transformation initiatives. This is important work that is long overdue. In researching the topic of video banking for the recently published report Video Banking: Lights, Camera, Transaction?, I had the pleasure of interviewing a number of banks and credit unions in various stages of implementation. While there was fascinating variety in why and how video banking was pursued among these financial institutions, two important pieces of wisdom emerged.  1. If you Build it, they won’t come – consumers are a fickle lot, and old habits die hard. Even the most elegant initiative is destined to fail without a purposeful and well-executed plan to enrol customers in the new way of things. One credit union deploying personal teller machines (PTMs) in drive-through lanes stationed employees outside the branch to explain the PTMs to approaching members, encourage their use and answer questions. They did this for several weeks. Later lobby deployments used a similar approach. People often need encouragement to try new things.  2. None of this happens without branch-level ownership.  Several banks and credit unions enjoying successful initiatives spoke of the importance of a sound change management plan – one that inspires ownership broadly throughout the organization. As Stephen Covey asserts in his best-selling Seven Habits of Highly Effective People, without involvement, there is no ownership. With this in mind several early adopters of video banking devised a variety of ways to inspire involvement in the new initiatives:
  • Distributed customer testimonials solicited during an early pilot
  • Organized an internal Q&A web presence so the curious (as well as the detractors) could get questions answered
  • Sponsored happy hours (after close of business) in newly reconfigured branches. Employees working in traditional branches were invited so they could see things up close and personal and ask questions. One credit union spoke about how transformative this one effort was; how many entered sceptical and critical, but left thinking the new branch was pretty cool.
The end result of several of these efforts was an excited and energetic team at the branch level. And it was the enthusiasm of the frontline staff perhaps more so than the technology that led to successful initiatives. Alamo As an example of how not do launch new initiatives, consider Alamo. It installed self-service kiosks in most of its airport rental locations, with the objective of better serving customers as well as doing so at lower costs (sound familiar?). While I can’t comment on the results broadly, I did see them in action a short while ago while traveling through Boston Logan airport. It was early on a Saturday afternoon. The place was packed, with a queue of 15 to 20 waiting in line for counter service. Meanwhile the three kiosks had no activity. I was tempted to try the kiosks, but was fascinated by their lack of use. I decided to wait in line so I could chat with the Alamo staff. Perhaps I could learn why no one was using the kiosks.
Alamo offers self-service kiosks that nobody uses

Alamo offers self-service kiosks that nobody uses

  After a wait of roughly 15 minutes, I was well-served by a pleasant and knowledgeable Alamo associate. Moreover, I enjoyed personalized assistance finding my car and loading our oversized luggage (we took our tandem bicycle with us on vacation). The self-service kiosk mystery was also speedily solved with one simple question posed to the Alamo associate. “Hey, how come no one uses those self-service kiosks over there? The place is packed, yet everyone seems content to wait in line to see you.”  His thick Boston accented response was telling. “Yea, corporate installed those a while ago. I guess they work all right, but no one seems to use them.” Four Alamo staff worked busily behind the counter that day. If one of them had stepped out from behind the counter to introduce the long line of customers to the new self-service kiosks, it could have been a very different Saturday for its customers. That would have required branch-level ownership.

No “Big Bangs” in Branch Transformation

No “Big Bangs” in Branch Transformation
Glen Fosella wrote a good piece for Bank Systems & Technology this week, where he suggests: “While many banks are rethinking their long-term strategy for expensive branch networks, there are steps banks can take now to reduce costs and inefficiencies in the branch while providing a better customer experience.” We couldn’t agree more. Like it or not, banking (along with every other retail segment) must adapt to address seismic changes in consumer preferences and usage of digital channels. The trends are real, inexorable and accelerating. The trends are also global, with Nordic countries well ahead of North America in terms of internet usage, digital banking usage and right-sizing of the branch channel. For example, ABN AMRO saw more customer mobile banking logins than internet banking logins in early 2012. The Mobile banking channel now represents over 60% of all customer non-branch interactions. It currently operates 400 bank branches in the Netherlands. It once operated over 800. The branch channel needs to be more effective and efficient. But, what exactly is the “branch of the future”? Celent sees a marvellous variety of operating models and physical designs being deployed, but no one gets there in one “big bang”. To Glen’s point, while banks develop their long-term omnichannel delivery plans, there are great benefits to making incremental changes to the network NOW. In fact, Celent finds that approach largely common among banks with highly evolved branch infrastructures. The figure below shows the journey taken by a large number of banks globally. Baby Steps Gradually, most bank branches will look and operate very differently than most do now. But, getting there is difficult, expensive and risky. In our opinion, wise banks get there through a series of measured steps, while testing and learning as they go. But, do get going!

From Libraries to Bank Branches

From Libraries to Bank Branches
Technology can clearly be an input used to transform traditional industries. Banking has plenty of tradition, and has already experienced plenty of change. What can banks learn from other industries that have successfully gone through a transformation process? Cushing Academy, a Massachusetts boarding school, has successfully transformed its library (read about it here and here). Gone is the old, sparsely populated library. In its place is a popular and modern digital library / cafe, complete with TVs and a $12,000 espresso machine. This example was recently brought to my attention by a bank client (and Cushing Academy alumnus). There is clearly a lot we can take away from this example. It’s a fine mix of technology and tradition, in a model that increases engagement. The bank branch, like the library is far from dead – it does however need to be reinvented in order to service clients effectively. Bob Meara has blogged and written about branch banking, I encourage you to take a look. What do you think of the Cushing Academy example? What can banks learn from it?

Branch Transformation: The Line Extension Approach

Branch Transformation: The Line Extension Approach
Celent recently published a detailed case study on Easy by RHB, a leading retail bank in Malaysia seeking to grow market share in the large but under-banked Malaysian mass market. Celent was so impressed with its initiative that it awarded RHB Bank the Celent Model Bank of the Year award for 2012. Ernst & young said this in its recently Global Consumer Banking Survey 2012: “Banks are competing for the business and loyalty of increasingly demanding customers. In response, different models are emerging to serve different customer needs. Some are based on low-cost competition, some on high-touch service and some on accessibility. Large, full-service banks need to defend market share against specialist competitors focusing on particular products or customer segments, as well as new entrants in the payments space. At the same time, full-service banks need to retain the ability to meet a huge range of customer needs.” In this context, I assert there is not a credible argument to be made for the status quo in retail branch banking. Financial institutions simply must evolve their branch networks into more efficient and effective delivery channels – alongside carefully and fully integrating other delivery channels. Doing so, however, is perilously difficult for many banks – particularly full-service financial institutions. There are both perceived and real risks associated with massive branch transformation initiatives – alienating profitable customers that liked things the old way. Thus, to balance the imperative for branch transformation alongside the risk of customer attrition, many banks are moving at a glacial pace. This won’t work either. Therein lies the brilliance of the RHB initiative. Rather than transforming RHB branches to profitably serve the Malaysian mass market (and risk messing up its profitable mass affluent business), RHB launched a new brand, a line extension of its RHB parent. The new brand, Easy by RHB, was launched using an entirely new retail delivery model and a portfolio of four ultra low-cost retail outlet designs. Easy by RHB is: • A stellar branch transformation success story • A new consumer brand (a line extension to RHB) • Simplified products to make them easy to sell and deliver • An entirely new organization – younger, empowered, compensated, and a different culture within RHB (bold, ambitious). • A fully-automated retail delivery model interfacing to RHB’s legacy systems (biometrics, cash recycling, paperless origination, automated underwriting, instant-issue cards, instant disbursement). The figure below shows Easy’s four different retail outlet designs. easy-portfolio In its first two years (through 2011) RHB deployed 235 Easy outlets, taking its retail footprint from a distant #5 to market leadership. Over the period, total RHB customer deposits have grown by more than 50% and assets by 45%. And it has done so with a portfolio of retail outlets that cost, on average, about a tenth of what a traditional branch costs to build and operate. This would have likely been nearly impossible if attempted using existing RHB branches and the legacy RHB brand. Line extensions are common in consumer packaged goods (e.g., Tide with Bleach, Charmin Ultra, Bounty Basic). Line extensions can also be found among restaurants seeking to expand into smaller, faster dining environments such as airport and shopping mall food courts. Pizza Hut express is one such example. Why not with retail financial institutions? Branch transformation has always been about more than just technology. In our view, the line extension approach can be an attractive strategy that deserves a close look. Readers may download an excerpt of the Celent report, Model Bank 2012: Case studies of Effective use of Technology in Banking, June 2012 by clicking here. The excerpt features an abbreviated case study of Easy by RHB.

The Coming World of Smaller Banks

The Coming World of Smaller Banks
Frank Partnoy wrote a fascinating opinion piece in Financial Times last week about the coming world of smaller banks. The article has prompted no small amount of commentary. I felt obliged to add my own two cents here. In his article, Mr. Partnoy muses, “How many people does it take to operate a modern bank and how much should such a bank’s shares be worth?”, and suggests that improvements in technology will drive down the number of FTEs needed to provide banking services. No kidding! Other blogs suggest that getting smaller is all about shedding the branch network and its associated cost structure, then life would be wonderful for banks. Experience with branch closures suggests a good amount of customers would be lost along with those branches in the vast majority of cases. Branch networks need rationalizing. The industry simply doesn’t need them all. But, trimming the branch ranks won’t solve bank’s profit woes alone. Others insist it’s about a larger issue, that of banks’ slowness to invest in labor saving technology. Indeed, examples of inefficient legacy systems abound in financial services. Celent will soon publish a paper comparing efficiency ratios between banks and credit unions. It may be no surprise to suggest a major factor in the comparatively favorable efficiency ratios of credit unions is a function of their considerably greater use of technology. But, I don’t think that tells the whole story either. I think there is another element at work that helps explain credit unions, PayPal, Google, FaceBook and their relatively high efficiency when compared to banks. In my research among financial institutions with highly evolved branch networks, I observed extraordinary diversity among approaches alongside some common elements. Interestingly, the common elements weren’t all about technology usage. Instead they were cultural. In my view, it may take some significant cultural changes for banks to thrive going forward. Here’s a sampling of common elements among financial institutions with highly evolved branch networks:
  • Exceptionalism. The most obvious trait among management of highly evolved branch networks is that their hearts are involved. More than a business strategy or IT project, these financial institutions are on a mission to out perform. With a bit of swagger, even branch managers would greet this humble Celent analyst with stories of customer delight. They are different—and they know it.
  • A long-term vision. The most understandable cultural element involved a long-term vision for the branch as well as its role among an increasingly multichannel environment. Most financial institutions’ planning horizons are relatively short. FIs with highly evolved branch networks tended to think longer-term by definition, given the size and complexity of branch evolution.
  • Courage. Beyond having a long-term vision, these financial institutions had courage to invest significantly while assuming financial and operational risk. In a large number of cases, elements of branch channel evolution were planned and executed without a tidy, comfortable business case. A certain amount of courage was necessary to proceed.
  • Culture of continual improvement. Branch channel evolution is a journey, not a destination. Highly evolved financial institutions got that way through an often lengthy series of incremental improvements. Some work, and others don’t. These leaders inspire a culture of continual improvement and are willing to fail along the way if it ultimately produces a superior result.
  • Affirmation and employee empowerment. Several senior managers cited the need to eliminate barriers to customer service. Branch staff need to have all the tools possible to serve customers. One way to do this is to empower branch staff to make more decisions. This approach carries risk and invites mistakes. A culture of affirmation is one way to help staff step out of their comfort zones. At Metro Bank, for example, branch staff have been known to invite customers to have coffee on them at a shop next door if the branch gets crowded. On occasion, they’ve even bought customers lunch. Could this get abused? Sure, but Metro Bank staff is too busy delighting astonished customers. In response, management affirms this kind of spending because it engenders high levels of customer satisfaction.
Does this sound like your financial institution?