The way that we use banks has changed beyond recognition. As internet and mobile banking usage has surged ahead, the number of people visiting traditional branches has also fallen significantly. Simon Cadbury explains what the branch can learn from digital
"Do you know what our busiest bank branch is in the UK? It’s our mobile app on the 7.15am train to Paddington."- Ross McEwan, Chief Executive of RBS Group: We now spend about 2 hours per day using our mobile phones, and about 31 hours per month browsing the web from our laptops and desktops. The rise of the internet and the convenience of mobile computing are driving a sea change in how, when, and how often we interact with retailers, utilities and other services.
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The way that we use banks has changed beyond recognition; 85% of Tesco Bank’s transactions are conducted online and 72% of HSBC’s customer interactions now take place over the internet or on the phone. The number of smartphone banking users in the US has risen to 87m and some 53% of the US population will bank digitally at least once a month this year.
As internet and mobile banking usage has surged ahead, the number of people visiting traditional branches has also fallen significantly.
"[Mobile banking] has completely altered the way our customers bank with us"- Jason Yetton, head of retail and business banking, Westpac.
The proportion of transactions taking place in NatWest and RBS branches has fallen from 25% to 10% in just four years, whilst footfall at HSBC branches has fallen by 30% in five years.
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By GlobalDataSome banks are even preparing for a future without branches:
"The direction of travel is absolutely clear … Opening branches now would be like BT putting phone kiosks back on the high street"
– Anthony Thomson, founder of challenger bank Atom
For Thomson and others, however, it’s not just a matter of going online to meet customer demand – it’s about delivering better value by cutting out the significant costs associated with maintaining branches.
The challenge to branches comes not just from disruptive digital technology but also from their operating costs and mode of operation.?
The profitability challenge
"Until now branches have been expensive but highly efficient billboards"- Peter Carroll of Oliver Wyman
When it comes to banking, a branch network is the biggest of big-ticket items – for major retail banks the cost of maintaining a branch network can easily account for 40-60% of their total operating costs.
According to Tower Group, branch transactions are about 40 times more expensive than those conducted online:
"…those who rarely use the branch network are going to start asking why they are expected to pay for it."
– Anthony Thomson, founder of challenger bank Atom
Branches usually occupy a prominent and expensive corner in most towns and even the smallest will usually have at least four people on site at all times for security reasons, even though three of them may have nothing much to do.
Since the financial crisis the profitability of retail banking has plummeted:
– The fees that banks can charge have been slashed
– Capital requirements have increased substantially
– Lending margins have slumped because of low interest rates
As a result, about 15% of the current branch network is unprofitable and, according to McKinsey, European retail banks are currently losing money on about half of their customer accounts.
No wonder, then, that branch closures have become a regular feature of the news. In 2014 alone Barclays announced its intention to close 25% of its 1600 branches and Lloyds 200 of its own.
With all this pressure on the branch network it’s easy to question its future, but branches still matter to both banks and customers.
Why branches still matter
"… that location is where you think your money is."
– John Stumpf, Chief Executive of Wells Fargo
Despite the reduction in branch numbers and the shift from high street to digital banking, the UK branch network still supports 67m transactions every week.
According to Accenture, the number of customers going into a branch at least once a month has risen from 45% in 2012 to 52% in 2014, with the most pronounced increase occurring amongst the 18 to 24 year old ‘digital natives’ – 54% of whom said they visit their branch every month. It seems that even our most digitally savvy generation need what Accenture describe as "face-to-face contact, advice, and reassurance as they start their life’s financial journey."
The importance of branches also varies according to activity – the internet is king for research, but when it’s time to apply for a mortgage or loan about 50% of customers prefer their branch over other channels:
And it’s not just the big things; two thirds of customers making deposits still prefer to do so over the counter rather than through a self-serve machine.
It seems that whereas branches may not be a daily necessity, they are the banking channel that almost nobody can do without and only 5% of people claim never to use them.
Importantly, customers also use branches for non-transactional activities, such as changing their details or asking about products and services that offer greater opportunities for advice or to interact with the bank.
This clear preference for performing different banking tasks across different channels suggests that, while an all-digital bank might be right for some, there are also significant opportunities for banks that can operate effectively across every channel.
The challenge is – how should branches adapt to their new role? There are two complementary visions for future branches.
Branches as self-service hubs
"Technology developments will change the way a bank branch is designed. Anything you currently do over a counter will be automated" -John Ennis, VP of UK and Ireland, Diebold.
The clear imperatives for multi-channel banks are to reduce the cost of their branch networks and drive the adoption of on-screen services, not just on computers, tablets, and mobiles, but also inside branches themselves.
This is likely to lead to a new kind of ‘express’ self-service facility that’s smaller, less costly to fit, faster to break even, and dominated by screens.
Self-service branches can occupy smaller spaces, require fewer staff, and could reduce costs significantly. NAB and Westpac have already embraced this trend with new branches that are 25% smaller than the previous generation.
"As early as next year, you could see one of the major high street banks buying a convenience store location and fitting it out with ATMs…" – Martin Shires of banking technology firm NCR.
Branches that depend on self-service digital technology will need to cooperate closely with the other digital channels, particularly mobile, to maximise their effectiveness.
Biometric authentication could usher in an era of even faster, frictionless, self-service, including card-free ATMs, pre-approved offers, and pre-filled applications.
According to McKinsey, technology translates directly into cost reductions and yet European retail banks are investing too little in digital – just 0.5% of their total spending – and have only digitised 20 to 40% of the customer experience. By better leveraging the digital shift they could realise improvements in EBITDA of more than 40% over 5 years.
At Intelligent Environments, we believe that two of the most frequent reasons to visit a branch – paying in cheques and making cash withdrawals – could be eradicated within two years.
Some cheques will no longer need to be written at all, thanks to the proliferation of person-to-person payment services like PayM. Those customers who do still need cheques will be able to pay them in with a simple photograph taken from within their banking app.
Equally, it won’t be long before a customer can simply request, via their app, a large cash withdrawal, and simply collect it from the nearest ATM.
If the potential for moving transactional banking to digital platforms is realised, banks can focus face-to-face banking on adding value.
Branches as sales and support hubs
"Banks don’t have to sell or tear down physical branches … A much better approach is to shift bank thinking away from ‘order filling’ to customer-value creation."- W. Michael Scott, CEO of Alpharetta.
With transactional activity increasingly being done online or via self-service facilities, banks will be able to reduce their headcount and focus staff on activities that create value.
JP Morgan Chase expects that the branch of the future will have 40% fewer staff, and that half of the remaining staff will be in sales-driven positions.
Branches, or at least those that specialise in sales, will increasingly follow other high street retailers in positioning their staff as trusted subject matter experts rather than tellers and cashiers.
Barclays already has 7,000 ‘Digital Eagles’ helping customers to get online. This initiative helps to catalyse the transition to digital while reinforcing the value that branches and knowledgeable staff can deliver.
Branch employees are also less likely to be deskbound in the future: "When you go to a bank and you have a meeting with someone you end up talking to the back of their monitor. Wouldn’t it be nice to talk to someone just holding a tablet?" -Shaygan Kheradpir, CEO, Juniper Networks
Barclays have equipped some staff with iPads, helping them to get truly face-to-face with customers whilst decreasing the time it takes to open a new account from 60 minutes online to just 3 minutes in-branch.
Nationwide have taken the idea of freeing staff from their desks a step further by making virtual mortgage advisors available to remote branches via video conferencing facilities.
Barclays and Nationwide hint at a future where banks can leverage joined-up, multi-channel banking to reduce costs and improve service.
The future is multi-channel banking
"RBS and NatWest will retain one of the largest UK branch networks for a long time yet … Eight out of 10 customers will be within a three mile radius of a branch." – Brian Holland, Head of Points of Presence, RBS and NatWest.
Although the number of transactions conducted inside bank branches is falling, the total number of interactions between banks and customers is increasing at a far higher rate.
This chart shows how the volume of overall transactions at National Australia Bank increased 50% over a decade and is continuing to do so; Barclays reports that its mobile app users now log in a staggering 24 times a month.
For every 100 branch visits, JP Morgan Chase now sees 92 visits to an ATM, 76 online interactions, and 55 mobile interactions[11]. In the last five years their teller transactions declined by 4% while digital logins increased by 28%.
Some customers will be happy to go without branches, and banks that don’t offer branches will be able to run leaner operations at much lower costs.
The best all-round customer experience, and perhaps the best life-long banking experience, will most likely come from those banks that can best understand their customers’ behaviour and tailor a variety of physical and online channels around it.
In its white paper on the bank branch of the future, Microsoft concludes that banking channels are no longer siloed, but mutually reinforcing.
Once users and banks have adjusted to the multi-channel model, different channels will typically support different types of interaction.
The mobile channel exists to support an entirely new form of ‘snacking’ behaviour.
And if mobile banking is snacking, then the online channel, where so much of the normal weekly and monthly activity (such as managing budgets) is migrating, becomes the equivalent of a square meal.
In future the branch will be reserved for financial fine dining; special occasions where customers will expect a personal service and expert advice for critical decisions.
Without doubt branches will change but, rather than playing a diminishing role, a modern, fit for purpose branch network complemented by a comprehensive digital portfolio can become an influential nexus where all banking channels converge.
