Bank branch evolution gathers pace
Economics and technology are conspiring to undermine the position of bank branches, which are evolving from their predominantly transactional roots to places where guidance can be offered for more complex business.
This is a global phenomenon, representing a dramatic turnaround in the fortunes of branches: in the US – an extreme example – there has been an increase in the overall number of bank branches of 280% since 1970, according to consultancy Celent. By comparison, the population of the US has grown just 52% during the same period.
Economically, many of the revenue streams that branches mainly captured, such as lending, are down, while the prolonged low-rate environment has made deposits less profitable.
In the US and much of Europe, the cost of maintaining a branch is rising faster than the revenues generated by that real estate, says Ben Deufel, senior research director for financial services at advisory firm Corporate Executive Board.
This is showing up banks’ over-reliance on branches for their revenues. “Financial institutions need to learn how to sell and service customers in the digital channels too,” says Celent. “This will require multi-channel innovation.”
However, branch outlays look like an inevitable cost of doing business because the price of not having a presence on the high street might be much higher.
The US Federal Reserve’s latest survey of consumer finance found that customers are still most likely to choose a bank according to what is available in their area, only then cross-referencing that with research into the bank’s online offering. This suggests a smaller high-street presence could lead to a declining market share.
Some banks are locked into long-term leases for branches, signed in the days before anybody conceived that such space could ever become redundant. In other cases, banks remain mindful of the minority of customers that do not wish to bank online.
As the physical embodiment of the bank’s brand, it is not clear that banks would want to give up their high-street presence even if they could. Branches give them the ability to interact with their customers more intimately than they can online, and mitigate security concerns for those harbouring such fears about online banking.
“Branches remain an integral part of how we serve customers and will continue to play a vital part in our future plans,” says David Nicholson, group director of Halifax Community Bank in the UK, part of Lloyds Banking Group.
“As new technology becomes available in branches, just as with any other channel, we will look to adopt and embrace this if it is viable and will benefit our customers,” he says, noting that customers’ on and offline experiences “are not mutually exclusive”.
The emphasis is on modernization and increased efficiency. The former one-size-fits-all model of bank branches, which looked essentially the same regardless of whether you were in a rural or urban location, is being replaced in favour of branches that are better suited to the specific business that customers are most likely to be looking for in that location, says Deufel.
For staff working in branches, this means the role is becoming less about transactions and more about guiding customers through purchase decisions and deeper service issues, Deufel says. Apple stores, where customers chat to experts and fiddle with gadgets, with purchasing a secondary consideration, is a useful analogy.
Branches can be reorganized to dedicate more space to the functions that are most popular in those locations, whether that is more meeting rooms for consultations, more teller windows for transactions or more smart ATM machines in busy branches. Branches can be smaller now many have no need for an on-site vault.
“Tellers are still needed but they need to be available outside traditional office hours,” says Anne Pace, a spokesperson for Bank of America (BofA) in the US. The bank is piloting express branches in Boston, New York and Atlanta, allowing its customers to talk to tellers via video ATMs from 7am until 10pm.
This is part of its “hub and spoke” strategy, with urban areas served by larger hub branches, with the express centres dotted around for convenience.
In the US, BofA has 7,000 specialists focusing on mortgages, small-business banking or investments.
“The key is to ensure, even if we do not have specialists in every location all the time, that all our customers have access to our specialists, either via call centres or video conference, or face-to-face by appointment,” says Pace.
Yet some closures are inevitable. In the US, Celent predicts there will be 30% to 40% fewer bank and credit union branches in 10 years. Cost reductions “will take the shape first of cost-reduction efforts and, later on, reductions in branch density”, says Bob Meara, senior banking analyst at Celent.
“EU banks have been quicker to reduce branch densities, but only after significant investments in in-branch self-service, something US banks are just now beginning to embrace,” he says.
Across Europe, Oliver Wyman predicts that by 2020 banks will have experienced a 48% decrease in branch service transactions, offset by a 74% increase in sales transactions performed via the internet.
This will lead to cost savings, realized by branch closures and delivery model changes, such as increased use of self-service, Oliver Wyman says. This process is under way in Europe but has barely begun in the US, it adds.
Innovation is not only being driven by the likes of BofA. “It is often easier for smaller institutions to make changes, so a lot of the innovations we are seeing in how branches are run are being driven by smaller players,” says Deufel.
For example, in the US, Coastal Federal Credit Union has replaced on-site tellers with video-teller machines. Where it will lead is still largely guesswork.
“In the past, banks have led demand,” says Deufel. “With ATMs and even online banking, we saw banks to some extent teaching their customers new ways they could engage. That has changed now and we see customer expectations for increasingly sophisticated technology systems leading, and banks struggling to keep up.”
Meara adds there have been “prodigious changes in consumer behaviour and preferences in just the past few years. Clearly, it is difficult to predict what the next few years will bring with such a high rate of change.”