It's the End of the Branch as We Know It

August 31, 2011 at 12:36 PM
Strong onions abound on the future of bank branches. Will branches be relevant 10 years from now? Will financial technology solutions be able to significantly disrupt the business of banking such that branches, at least as we know them today, become obsolete?
 
Or will branches remain important distribution channels for both business and consumer customers going forward?
 
Branches will remain relevant and important, but financial technology solutions are already changing the business of financial services and what happens in bank branches.  As transactions move increasingly out of the branch channel, bankers must rethink the role of the branch to keep the channel relevant in today's marketplace.  In light of changing customer behaviors, cost pressures, and revenue growth challenges, banks must make significant changes to their branch networks, further automating transaction processing, changing the skills sets of branch employees, and altering the physical designs of branch offices.
 
Teller transactions continue to decline at a rapid rate. In a recent comparative productivity survey conducted by Novantas across some 14,000 branches, teller transactions were down an average of 4.4% a year. Analysts expect the rate of decline in check deposits, in particular, to accelerate in coming years as more businesses and consumers adopt remote deposit technologies and electronic payments.
 
In addition, many rural parts of the U.S. continue to experience population declines as residents, young and old, move toward urban centers seeking employment, education, and even intellectual stimulation in retirement. Technology and marketplace dynamics are combining to make the traditional bank branch model, with its emphasis on transactions support and checking account acquisition, obsolete.
 
The viability of individual branches must be evaluated with an eye toward closing, consolidating, or downsizing offices that can no longer be cost-justified and offer little opportunity for future growth. Labor costs must also be redirected to more productivity activities, and labor-intensive activities that are outside the value chain should be targeted for automation (e.g. cash recyclers to eliminate the need for dual control) or eliminated (e.g. the many manual logs we still see being kept by branch staff). There remains a great deal of overcapacity in the system, especially given the expectation for a prolonged recessionary economic environment, continued consumer deleveraging, and weak business loan demand.
 
But don't count branches out just yet. As intermediation-based earnings, driven by anemic loan demand and a prolonged low rate environment, will remain weak for some time, most banks are under pressure to build new revenue streams and improve efficiencies. In both of these respects, branches can play vital roles. At most banks, however, big changes are needed to make this work.
 
There are three strategies that should be part of every retail bank business plan today:
 
Branch network rationalization. All branches are not, and should not, be created equal. Branches should be segmented by activity levels, opportunity within the market area served, and viability from a physical design/cost/visibility standpoint to inform action plans for every office. Facility upgrade, marketing, and training dollars should be targeted toward branches with high potential for future growth, while cost savings/minimization actions must be taken in offices with declining transaction volumes and limited growth potential. In every branch, plans for further automating routine transactions and labor intensive activities that add no value from a customer's standpoint are a must.
 
New staffing mandatesBig changes are underway at many banks already as branch-based employees become responsible for needs-based dialogue, proactive selling, and community involvement - and spend less time supporting transactions. Staffing models will vary by type of branch, but where opportunities exist for future growth, banks will seek to upgrade branch staff skills and arm these bankers with better customer insights. The 2011 J.D. Power Customer Service Champion, United Community Bank in Georgia, credits better training and improved customer information at the frontline with for its success.
 
Better branch designNot only do branches need to be designed so that they add value to the experience of customers who use them on a regular basis, but they also need to be designed to provide more compelling reasons to enter them in the first place. Banks at the leading edge of branch design are eliminating from view empty desks and customer service stations, creating more engaging experiences through the use of touch screen technologies, elevating the branch role as a community resource, incorporating financial education and information (instead of product brochures), further automating routine transaction delivery, and building more interesting, spaces that draw people in.
 
One of our bank clients has been working for months on plans to transform the branch channel and one key to success is the involvement of branch management early in the process. Experienced branch network managers bring valuable insights to the transformation process and must be engaged in the change effort for it to succeed.
 
The demise of the branch channel has long been predicted. It won't happen anytime soon, but branches, and what takes place inside them, must evolve to keep up with the times.
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