Why Branch Building (Sometimes) Makes Sense

Why Branch Building (Sometimes) Makes Sense

The Italian cruise ship Costa Concordia capsized and sank after striking an underwater rock off Tuscany, in January 2012, resulting in 32 deaths. The ship, carrying 4,252 people, was on the first leg of a cruise around the Mediterranean Sea when the disaster struck. Did the captain of the Costa Concordia care about the average depth of the ocean when he ran his ship aground? Probably not. What he should have been more aware of was the depth under his keel while deviating from his planned route.

Industry reports (including many of Celent’s) make lots of “average depth of the ocean” observations. They are relevant and important – sometimes. In retail for example, there have been an abundance of headlines trumpeting the growth of digital commerce alongside struggling same-store sales at brick-and-mortar locations. Hence the store closings many say. But alongside these overall trends are localized bright spots. Dick’s Sporting Goods, for example, announced strong sales growth and plans to add 43 new stores this year. Considering the growth in digital commerce (average depth of the ocean), the move is nonsense. A more surgical analysis considering market-specific shopping trends tells a different story – and justifies the build.

In retail banking, everyone knows branch footfall has been in decline along with teller transaction volumes – and everyone knows why. Considering these (average depth of the ocean) observations, plans for new branch building is nonsense. More than one analyst and futurist has repeatedly taken this position. But as is usually the case, reality is more complex.

The branch boom in the US has been at the hands of large banks. A historic look at the number of bank branches by asset tier makes this clear. Celent published a report on the topic in 2013 that predicted a steep decline in branch density – something that is now underway.

Source: FDIC, Celent analysis

But, the decline will not be uniformly felt across the asset tiers. In a May 2017 survey of Celent’s Branch Transformation Research Panel, we found that a significant majority of smaller institutions (those with assets less than $10 billion) are planning to increase the number of operational branches over the next two years – just the opposite among larger banks.

Source: Celent Branch Transformation Research Panel, May 2017, n=39

Still not convinced that branch building sometimes makes sense? Kronos published its 2017 FMSI Teller Line Study. FMSI, acquired by Kronos in 2016, provides cloud-based workforce management (WFM) solutions to small banks and credit unions. One aspect of the value it provides clients is monthly benchmarking (since it hosts all the data for its clients). One noteworthy item in its 2017 study is the continuous measured decline in average monthly teller transaction volume from 1992 – 2012. More recently however, transaction volume trends have reversed. In both community banks and credit unions, the trends have been modestly upward  over the past several years.

Source: 2017 FMSI Teller Line Study

Never mind average ocean depth, many US community banks are navigating very different waters than the big banks – and they're planning to build branches. A recent Celent report goes into more detail. 

The Great Filter for Digital Challengers

The Great Filter for Digital Challengers

It seems like almost weekly I’m hearing something about a new challenger or digital-only bank brand.  The velocity of news is substantial, but despite years of hype, it seems this class of institution is still largely treading water.

It reminds me of The Fermi Paradox.

The paradox was originally posed as a question by the physicist Enrico Fermi about the apparent contradiction between the probability of life in the universe and the complete lack of evidence to support it. With so many supposed earth-like planets, why haven’t we been able to find success stories?

One of the proposed theories is the idea of a Great Filter in the evolution of life.  The theory goes that as life evolves it must overcome leaps in species advancement, one of which is a Great Filter that almost always stops its progress.

In the universe of banking there’s plenty of “new life,” specifically challenger banks looking to compete with traditional institutions (I won’t compare them to advanced species for obvious reasons). Despite major fanfare within the industry, however, these challengers have largely struggled to adapt and grow. Like life in the universe, could there be “great filter” keeping these new entrants from flourishing?  I’d say there are a few contenders.

Technology

What old technology lacks in flexibility it makes up for in stability.  It seems that for emerging providers, what’s made up for in flexibility is lost in stability. Simple, for example, has had its share of technical issues over the past couple of years. In late 2014, a systems upgrade lead to a number of glitches, including bill payment going down, online banking being inaccessible, and the safe-to-spend feature showing incorrect balances.  Some accounts were locked for more than 24 hours.  The transition process to BBVA also presented issues with integration.  Systems had to be rebuilt, and customers had issues with using debit cards, not being US citizens, and just recently, losing their accounts (Simple said it wasn’t able to transfer everyone before its relationship with The Bancorp Bank ended).

Monzo (formerly Mondo) out of the UK had multiple issues inside of a week.  It had outages with its third party card processor, and then a few days later customers reported not being able to properly view their balances or display transactions.

Traditional financial institutions have long known that trust is an asset, whether it’s trust to keep money safe or trust to keep data secure.  Technology has been built around establishing reliability.  Challenger banks and neobanks may be opening themselves up to risks associated with applying concepts of agility to the complexities of banking, and this may be a strong enough filter for reaching critical mass.

Revenue

In addition to trying to provide an amazing customer experience, almost all challenger banks share the same commitment to fee transparency.  In recent years, many traditional banks have used fee income to supplant lower than usual net interest margins.  Fees have been (often rightly) perceived as punitive and opaque.

The quest for fee relief is admirable, but ultimately emerging challengers need to make money to fuel new investments. For some that’s been an issue. The neobank Moven, after struggling to find a significant core audience in the US or overseas, decided to pivot and start selling its underlying front-end technology to traditional banks, most notably TD Bank. Customers Bancorp recently put BankMobile up for sale, citing profitability concerns stemming from limitations on debit interchange once the bank’s assets exceeded $10 billion.  BBVA also recently reported a total of $89.5 million in goodwill impairment from the acquisition of Simple Bank in 2014.

Challenger banks are fully committed to reimagining financial services, but many haven’t yet reimagined the business model. Banks that are furthest along are the likes of Knab in the Netherlands and Fidor Bank in Germany (acquired by France’s BPCE Group) which have applied subscription-based pricing for consumers.  Similar to Netflix or Pandora, the idea is that consumers will pay for value.  What’s clear, however, is that the complexities of financial services require a scale of investment that presents a bigger barrier to entry than for other platform-based offerings (i.e. movies and music).  If consumers are paying for value, then the question is whether a challenger can persuade consumers that they’re receiving enough value to validate a subscription before it begins to hurt its financial viability.

Acquisition

When confronted with barriers to organic growth, some challengers have found it easier to be acquired. When BBVA bought Simple, CEO Josh Reich said that BBVA would provide them with the resources to grow faster.  Many took this as an admission that customer growth was slower than expected. When Fidor was purchased by the French banking group BPCE, the German bank said that the sale would “…allow Fidor to continue its international expansion…” as well as “…improving our overall financial sustainability.”

The question is: do challenger banks need traditional institutions? Well, they certainly need trust, and customers, and data, and  with the pressure to grow and invest in innovation, it’s obvious that the financial incentives of joining a large organization can be attractive.

Challenger institutions have been an important part of the banking ecosystem.  Most notably, they’ve moved the ball forward on what “good” looks like throughout the industry, better assimilating modern concepts of UX and UI design into their front-ends.  At the more extreme end, however, these challengers  were heralded as the white knights that would save consumers from pernicious traditional institutions with outdated technology.  So far that hasn’t been the case.

In the explanation of Fermi’s Paradox, humanity (or a challenger bank) is left with three possibilities, depending on where the Great Filter occurs: we're rare, we’re first, or we’re in trouble. Rare is the challenger that’s made it through the Great Filter.  First is the challenger within a pack of new institutions which has grown because of conditions that have only recently become favorable.  In trouble is the challenger that hasn’t yet reached the Great Filter.  There’s plenty of life in the banking universe, but it remains to be seen who will make first contact.

Banks aren’t Alone in their Omnichannel Unreadiness

Banks aren’t Alone in their Omnichannel Unreadiness

In December, Celent surveyed a panel of North American banks and credit unions to assess the current and likely future state of retail and business banking channel systems. The report is chock full of fascinating insights. Among them is a rather sobering self-assessment of banks' omnichannel delivery capability

A recent experience renting a car painfully demonstrated that banks aren’t the only ones that have a ways to go.

7:00 AM…

Me: Visited the company's website. Easily searched and located a car at a location very close to my home. Quickly booked the automobile and received an e-mail confirmation promptly. The web site displayed the location of all area locations and recommended this one based on its proximity to my known location. Reservation for 2:00 this afternoon. So far so good.

10:00 AM…

Enterprise called and left a voicemail indicating there were some “qualifying details” we would need to discuss prior to my 2:00 PM reservation.

10:30 AM…

I returned the call. The problem was that I reserved an intermediate size car and none were available – just large SUVs and 15-person passenger vans. That relevant information was not conveyed in my otherwise stellar digital experience with the brand.

  • Me: “What about other locations?” I asked.
  • Agent: “I can see what they have on the lot, but I don’t know the plans they have for them. Unfortunately, I can’t book for you. Feel free to call other locations yourself and see which ones may have an intermediate size car for you.”
  • Me: “You mean I have to dial for dollars around Greater Atlanta to find an intermediate size car? Your web site indicated availability and gave me a confirmation. What’s up?”
  • Agent: "Sorry, but that's a long story. Look, if you’re okay driving a large SUV, I can give it to you at an intermediate rate. Would that be okay?”
  • Me: “I think so. It’s not what I want, but I’ll take it.”
  • Agent: “Do you need a pick up also?”
  • Me: “Yes, please – just prior to 2:00 – thank you”

1:30 PM…

The phone rings again, it’s Enterprise. This time, it is the location calling, not the contact center.

  • Agent: “Sir, we have a problem with your rental reservation. We don’t have any intermediate size cars at this location.”
  • Me: “Yes, I know. I spoke with your colleague at 10:30 this morning. You agreed to rent me an SUV at an intermediate price and pick me up prior to 2:00.”
  • Agent: “Do you know who you spoke with?”
  • Me: “I’m sorry, no. I didn’t get his name”.
  • Agent: "Was it a man or a woman?"
  • Me: "It was a male colleague of yours, but I don't recall his name."
  • Agent: "Was he from this location?"
  • Me: "I don't know. By the way, why whould I care?"
  • Agent: "Well, I've been pretty much the only one working at this location all morning."
  • Me: "Thanks for sharing, but what does that have to do with my reservation?"
  • Agent: "I'm just trying to find out who you spoke with."
  • Me: "Why is that relevant? I have a reservation and we have an agreement – and it's almost 2:00."
  • Agent: "I dont think he was supposed to do that."
  • Me: "So, are you going to rent me a car, van, SUV or whatever for an intermediate rate or not?"
  • Agent: "Yes, sir, we'll do that.
  • Me: "Great – see you in a few minutes".

A few days later…

Atlanta traffic kept me from returning the rental during normal business hours. Handily, there are provisions for after-hours drop-off. The rental is processed the next business day and costomers receive a final receipt via e-mail.  That's the plan, anyway. It's been several days and no receipt. After calling the store, I was told the e-mail system has been down.

My bank looks very good about now.

Model Bank 2017: Small Business and Corporate Digital Innovation Themes

Model Bank 2017: Small Business and Corporate Digital Innovation Themes

This is the fifth article in a weekly series highlighting trends and themes from Celent’s Model Bank submission process. For more information on how the Model Bank Awards have evolved, see the first two pieces from Dan Latimore and Zil Bareisis. This particular article is focused on innovations in small business and corporate banking:  two critical market segments for financial institutions as they seek revenue growth and relevance in the evolving digital B2B marketplace. 

When evaluating this year’s Model Bank submissions that are targeted at small business and corporate clients, we identified a number of excellent initiatives in each of the five overall categories:

    Customer Experience

    Products

    Operations and Risk

    Legacy Transformation / IT Platform Innovations

    Emerging Innovation

For these two segments, the Model Bank award candidates come from Europe, North America, the Caribbean, Asia Pacific and the Middle East. Despite the wide geographic spread of the submissions we received, certain common themes became evident that are important to highlight, 

Enhancing client experience is paramount: Banks are intensely focused on how to deliver solutions to clients in ways that are convenient and easy to use in order to meet the emerging expectations of business users based on their consumer experiences with technology. Creating a consolidated point of access for all corporate banking services using portal technology that eliminates the need for multiple logins and security procedures was just one of the types of initiatives that were submitted.  Mobile and tablet access are becoming mainstream channels for employees of business and corporate clients to effectively manage their daily workload no matter where they might be located.

Improving digital channels is not enough to succeed: The initiatives that demonstrate significant quantifiable benefits to banks and clients are those that address the inefficiencies in the way that bank employees interact with their clients but also involve the elimination of paper-intense, manual workflows both for the client and the bank. From the use of videoconferencing technology to access experts in trade finance for advisory services to the replacement of faxed instructions with digitally signed transactions initiated on mobile phones, banks are finding innovative ways to contribute to their own efficiency while also improving client productivity. Another critical element of the digitization of these processes is speed. Automation enables faster decisions (for example for credit approval) and this provides business with a superior service and the ability to manage their businesses rather than managing their banking relationships. These initiatives drive revenue growth and loyalty because the bank’s services provide quantifiable benefits to clients that are seeking to leverage technology advances in order to more effective manage their working capital.

Reinvention in Small Business Banking: I was struck by several of the initiatives that represent an entirely new way of thinking about how to enable entrepreneurs and small business owners to succeed. Rather than tweaking traditional banking solutions that are designed for consumers or larger businesses, several of the banks submitted initiatives that reflect an entirely different way of meeting the needs of small business clients. Recognizing that the needs of entrepreneurs and start-ups fall well beyond the services that a bank traditionally offers (i.e. credit, payments, cash management), a few innovative banks have attempted to reinvent business banking by offering a complete, integrated package that combines traditional banking activities with non-banking services that extend beyond even the adjacent types of solutions that banks typically make available through partnerships (e.g. payroll services). The goal of these packages is to offer a business owner every piece of business functionality and technology they would need to grow their business. What makes these solutions especially impactful is that they are designed from a business owner’s perspective and don’t reflect a bank-centric view of how the client should manage their business. 

I hope this brief description whets your appetite for more discussion on our award winners in small business and corporate banking at the 10th annual Innovation and Insight Day on April 4th in Boston. I look forward to seeing you there.

The Enduring Importance of Physical Engagement in Retail Financial Services

The Enduring Importance of Physical Engagement in Retail Financial Services

I take no issue with the growing importance being placed on digital in financial services. Indeed, it does not take extensive examination to see, in Wayne Gretzky’s words, “where the puck is going”. Digital needs to be a top technology priority among financial institutions – particularly in highly digitally-directed markets such as North America and Western Europe. But, that doesn’t mean physical engagement is unimportant. In my opinion, in-person (physical) engagement will be of lasting importance in financial services for at least three reasons:

1. Most consumers rely on brick and mortar for commerce and will continue to do so.

2. Most retail deposits still take place at the branch.

3. Most banks do not offer a decent digital customer acquisition mechanism

Most Consumers Rely on Brick and Mortar for Commerce

This week, comScore released its most recent measurement of digital commerce. It was truly exciting, with Q4 2016 m-commerce spending up 45% over 2015! But, even with that astonishing year-over-year growth, m-commerce constitutes just 21% of total e-commerce. And, with two decades of e-commerce, total digital commerce comprised just ten percent of total commerce in 2015. Plenty of consumers still like stores. * FRB Consumers and Mobile Financial Services 2011 – 2016, Percent of smartphone users with bank accounts
** US Department of Commerce, Internet Retailer, Excludes fuel, auto, restaurants and bars
***comScore

Digital is not equally important across segments. Books and music, for example, are highly digital. Not so much for food and beverage. I’m being simplistic for brevity, but the data suggests that most commerce will remain tied to the store experience – at least in part – for the foreseeable future. I don’t think financial services will be an exception.

Most Retail Deposits Still Take Place at the Branch

Banks are keen to migrate low-value branch transactions to self-service channels, and there is perhaps no better low-hanging fruit than check deposits. Yet, with a decade of remote deposit capture utilization behind us, a January 2017 survey of US financial institutions (n=269) clearly shows that the majority of retail deposit dollar volume still takes place in the branch. Like it or not, the branch remains a key transaction point for many consumers and small businesses. Sure, the trend lines support digital transaction growth (thank goodness), but we have a long way to go – farther than the hype would suggest.

Most banks do not offer a digital account and loan origination mechanism

Even as banks would love to acquire more customers digitally, most aren’t well prepared to do so. Unlike most every other retailer on the planet, most banks initially invested in digital banking for transaction migration, not sales. That is changing, but not quickly. The mobile realm needs the most work. In a December 2016 survey of North American financial institutions, Celent found that large banks, those with assets of >US$50b, had made noteworthy progress in mobile customer acquisition capability since the previous survey two years ago. Smaller institutions lag considerably. For these reasons, branch channels are getting a make-over at a growing number of financial institutions, with the objective of improving channel efficiency and effectiveness – effectiveness with engagement, not just transactions. Celent is pleased to offer a Celent Model Bank award in 2017 for Branch Transformation. We’ll present the award on April 4 at our 2017 Innovation & Insight Day in Boston. In addition to presenting the award trophies to the winners, Celent analysts will be discussing broader trends we’ve seen across all nominations and will share our perspectives why we chose those particular initiatives as winners. Make sure you reserve your slot here while there are still spaces available!

Three Common Mistakes Banks Make

Three Common Mistakes Banks Make
In my work as a research analyst, I run into three particularly common mistakes. Banks aren’t the only ones that make these mistakes. I make them too and have to be vigilant to avoid them.
1. Failure to appreciate diversity of needs or preferences
2. Failure to appreciate the shrinking half-life of facts
3. Failure to skate to where the puck is going
Let’s look at each one briefly…

Failure to appreciate diversity of needs or preferences This is utterly common. You see it in headlines all the time. “Millennials this…”, “Small businesses that…”, Community banks are…”. The trap involves extrapolating limited data to an entire population. Two current examples illustrate: The Use of AI in Banking is About to Explode. Apart from confusing AI with predictive analytics (which is more broadly used), the article asserts “explosive” future adoption of AI right around the corner. I’ll just say that this assertion vastly overstates planned adoption of AI among North American banks based on recent Celent research. Bank on Changes. Among other things, this pleasant article states “Smaller community banks like Edison, which emphasize personal service, said they have no plans to scale back drive-through or other services at brick-and-mortar locations.” While referring to a small number of community banks interviewed for the article, it projects those results on the entire community bank population.

So, are community banks planning on maintaining their current brick-and-mortar services in their entirety – despite the growth in mobile banking utilization? Some are and some aren’t. the figure below displays results a very question posed in a December 2016 Celent survey of North American financial institutions. “Compared to your current branch count, how many branches do you expect your institution will operate five years from now?” The report is not yet published. The idea is simple: banks serve diverse markets and make a diversity of decisions as well. The diversity of expected response is glaring in this data! So as not to give away too much of the report’s contents, I refrain from graphing the results of that question by asset tier. Failure to Appreciate the Shrinking Half-Life of Facts Assertions abound about customers, what they do, want and value. Some data points supporting these assertions are dated. This is increasingly dangerous. Samuel Arbesman argues for a shrinking half-life of facts in his book, The Half-Life of Facts. Most substantive change takes a while to accomplish – particularly among large organizations. I think many banks are at risk by assuming the facts as they knew them at the beginning of a protracted initiative will remain after the initiative is finished. When it comes to mobile, for example, six months is a long time and a year is eternity.

Failure to Skate to Where the Puck is Going Even those of us who aren’t hockey fans are familiar with the famed Wayne Gretzky quote about skating to where the puck is going instead of where it has been. I saw this up close and personal as part of a research effort exploring the current and likely evolution of retail delivery channel technology. Omnichannel delivery clearly remains aspirational at most institutions (I’ll defend that assertion thoroughly in the upcoming report). Yet, even as most surveyed institutions concede the importance of omnichannel delivery, the significant majority are not yet meaningfully engaged in bringing it about. How could that be? Many banks – particularly those with below industry average mobile banking customer utilization – aren’t feeling the pain yet. They are skating to where the puck has been. When they do feel the pain, it will likely be the result of much damage already inflicted.

Megavendors and transaction banking: reinvesting in digital corporate banking

Megavendors and transaction banking: reinvesting in digital corporate banking
Earlier this month, Fiserv announced that it is acquiring Online Banking Solutions (OBS), a privately held provider of niche treasury management capabilities. OBS has seen a great deal of success in enabling community banks, credit unions and some regional banks with the digital capabilities needed to meet the emerging needs of more sophisticated business and corporate clients for treasury management services.  As a long-time observer and participant in this space, I think it is fair to say that most of the largest providers of financial services technology (megavendors) have underinvested in corporate banking, especially in modern, digital treasury solutions.  From a back-office processing perspective, Fiserv has a key collection of assets (e.g. PEP+, ARP/SMS) on which large banks in the US heavily depend to deliver their treasury management services.  The acquisition brings a suite of first-class front-office digital channel solutions to Fiserv that should allow it to be competitive in offering omnichannel solutions specifically designed for corporate treasury users and that consider the multitude of ways that corporates consume bank information and generate transactions. Celent believes that the winners in this space will have a broad transaction banking strategy that includes international services (cross border payments, foreign exchange, trade finance) bringing all commercial banking assets into a coherent go-forward strategy, if not a single organizational unit.  Partnerships to extend transaction banking functionality is a great step toward that end but they need to be well-defined and well-executed to benefit the providers’ clients.  In 2017, we think that other technology providers will follow suit and broaden their transaction banking solutions.  FIS has certainly made a mark with its 2015 acquisitions of SunGard and Clear2Pay.  Bringing these assets together and delivering on a next generation digital platform will be critical for FIS to meet the growing needs of corporate clients for global banking services.  Other providers of digital channel solutions such as ACI Worldwide, Bottomline Technologies, D+H, Q2 Software and others will be looking at these developments closely to understand the impact on their competitive positions. With the acquisition of OBS, there are no more niche providers of corporate digital channels left in North America.  Almost ten years after the great financial crisis when income from fee-based solutions was the salvation of the industry, reinvestment in the transaction banking business is finally happening.  

Chat Bots: Savior or Disintermediator?

Chat Bots: Savior or Disintermediator?

AI is becoming increasingly interesting to bankers.  Last year I wrote a blog about “Assistant as an App”, looking at how concierge apps like MaiKai and Penny are offering up AI-driven financial management services.  My colleague Dan Latimore also recently posted a blog on  AI and its impact.

The emergence of chat bots within popular messaging apps like Facebook Messenger, Slack, Kik, and WeChat similarly has the potential to shift how customers interact with financial institutions. Chat bots offer incredible scale at a pretty cheap price, making adoption potentially explosive. Facebook messenger, for example, has almost one billion active users per month. WhatsApp (soon to launch chat bots) has about the same.  These apps offer some extremely high engagement, and with app downloads decreasing, users are spending more time on fewer apps. According to Tech Crunch, 80% of the time spent on a mobile device is typically split between 3 to 5 apps

Chat bots give the bank the ability to automatically appear in almost all of the most used apps in the world.  The opportunity with digital assistants is immense, and given the nature of bank transactions, it’s not hard to imagine chat bots becoming a widely used engagement method.  Most of banking is heavily rules-based, so the processes are often standard.  Frequent banking requests are pretty straightforward (e.g. ‘send this person X amount of money’ or ‘transfer x amount from savings to checking’).  Bank-owned chat bots are also more built for purpose than some of the multi-purpose third-party products on the market, making the functional scope targetted. While chat bots are still very early days, it won't be long before these kinds of interactions are accessible and the norm. Bank of America already has one; many others have plans or pilots.

This video (skip to 7:30) shows what an advanced chat bot might be able to accomplish. The image below from the Chat Bot Magazine is another conceptual banking use case.  The possibilities are compelling. 

 

 

 

 

But while the opportunity with digital assistants is enormous, banks must be aware of how this affects their current ongoing digital strategy. For example, if chat bots overcome the hype and become a long lasting method for accessing financial services, then what effect will that have on traditional banking apps?  Will chat bots make it foolish to invest large sums of money in dedicated mobile apps? 

For all the promise this technology brings, banks need to be aware that this could be a step towards front-end disintermediation. The threat of tech companies (or other large retailers) stepping in to grab banking licenses and compete directly with incumbents was short lived.  The more realistic scenario was always relegating core banking functions to a utility on the backend of a slickly designed user interface created by a fintech startup.  The incumbents lose the engagement, even if they are facilitating the transactions.

Are chat bots a step towards front-end disintermediation, or are they an extension of the bank’s main app?  If you believe that chat bots are a stepping stone (or companion product) towards a world where the best UI is no UI, and where AI evolves to the point of offering significant functional value, then banks could be at risk.

This isn’t a call to hysteria by any means, nor am I calling chat bots wolves in sheep’s clothing, but banks need to be aware of the potential impact. As voice or message-based interactions become the norm, they will have an effect on a bank’s dedicated mobile app.  In this environment, the mobile app will need to evolve to become something different; non-transactional.

Chatbots will only further fragment the customer journey, requiring an even clearer understanding of how consumers are choosing to handle their finances and make transactions. Banks need to start thinking about how chat bots and AI fit into a long-term digital channels strategy, one that doesn’t handcuff the institution into a no-win proposition of competitive disadvantage versus wilful disruption.

Will Banks Eventually Lead in Retail Digital Sales Growth?

Will Banks Eventually Lead in Retail Digital Sales Growth?

I subscribe to Marcus & Milichap’s research blog. Getting my head out of banking from time to time is refreshing and provides useful perspective. A recent blog post commented on the changing make up of commercial property construction as a result of the continued growth in digital commerce. The completion rate of new construction (measured in millions of square feet) has been roughly a third of its pre-2008 boom. Dramatic indeed!

No big mystery, however. As retailers close stores (Macy’s is a recent example), property developers must re-adjust their development to sustain revenue growth. As large merchants exit, they’re being replaced with smaller service providers – restaurants, medical practices, financial planners and grocery stores – mostly services that are less likely to migrate online. Digital plays a role in my healthcare, for example, but I’m still going to see the doctor next week for an annual physical. It helps to do that indoors.

That got me thinking. Three years ago, Celent predicted a steep decline in US branch density based on an analysis of branch dynamics in other developed markets and changes in store densities in other retail categories. In part, we argued that reductions in store densities have been non-uniform across retail categories for a reason. In the final analysis, as commerce becomes more digital, fewer brick and mortar stores will be needed to fulfill the same level of demand. We argued that two variables play an important role: the susceptibility to digital self-service and the degree of product differentiation. Arguably, retail banking is highly susceptible. Loan rates are easily compared online, but you may want to try on a new pair of pants before buying.

Danger Zone for RetailSo, why is the reduction in US branch density occurring more slowly than other retail categories? In part, because industrywide retail banking sales mix lags other retail categories in its migration to digital. How do we know this? Through June 2016, digital commerce accounted for 13% of all US core retail sales. How does that compare to retail banking? According to a survey of Celent’s Branch Transformation and Digital Banking research panels, US banks and credit unions lag considerably, with roughly 90% of sales occurring in the branch or contact center.

sales channel mix

Here’s one reason I think this is so (see below).

shopbuyuse

Banks have invested heavily in migrating transactions to self-service (the “use” part of financial services) with polished transactional capabilities in the digital channel, but have paid comparatively less attention to making shopping for and buying financial services digitally frictionless. That’s now a high priority for a rapidly growing number of institutions at present. Good thing!

As banks do so, they will be rewarded with rapidly growing digital sales. In the past 12-months ending in June, total non-store retailer sales grew 14.2% YOY according to the U.S. Census Bureau and Marcus & Millichap Research Services.  Over the same time period Bank of America’s digital sales grew 12% YOY, representing 18% of total sales according to its July financial results presentation.

So, will banks eventually lead in retail digital sales growth? Absolutely – Bank of America is already there!

Taking the ‘Madness’ out of Customer Onboarding

Taking the ‘Madness’ out of Customer Onboarding

Earlier this year, I had the pleasure of moderating a panel discussion on the topic of omnichannel customer onboarding sponsored by Kofax. It was a heavyweight panel, including:

  • Jim Marous, Co-Publisher/Author, The Financial Brand
  • JP Nicols, Director, Next Bank
  • Brant Clark, Sr. Director, Mobile Solutions, Kofax, Inc.

March Madness

Kofax is making a recording of this informative panel here.

It’s worth a listen. Why?

Customer acquisition is obviously important because it is a prerequisite to top line sales growth. Offering a low-friction digital capability is increasingly important because customers are becoming increasingly digitally-driven. Omnichannel customer acquisition matters because multiple channels – digital channels in particular – are influencing consumer’s choice of banking relationship. Banks therefore need to close the deal whenever and wherever customers make the decision to onboard. To do otherwise is inconvenient for potentially profitable prospects, and disadvantageous for institutions wanting them as customers.

The problem is, omnichannel customer acquisition remains largely aspirational for most North American financial institutions.

I’m looking forward to sharing two forthcoming research reports devoted to this important topic in the coming weeks.