Banks that wish to retain their profitability into the future have two options – close all the branches and become a telephone/Internet bank or make some dramatic changes to the branch.
Introduction
ATMs and Telephone Banking have been a big success for both banks and consumers. However, in the past two years or so banks have rushed to be first with new channels – WAP, PDAs and even interactive TV.
What has been the take up of these new channels? Virtually nil. Most of these initiatives were instigated to gain publicity, to promote an image as a forward thinking high-tech bank and even to bolster a share price.
Forrester predicts that it will be 2007 before online access reaches 40%. In my opinion, unless there is a sea change in the consumer proposition, this 2007 estimate is optimistic. True, the telephone is a popular medium for service based banking and the Internet is a necessary "me too" with its devotees among around 20% of the population. However, despite all of the hyperbole that consumers would migrate in droves to new channels, the branch remains the most popular channel for consumers.
What has actually happened of course is that consumers have adopted the new channels, but have not stopped using the traditional ones. Consumers want to use whatever channel is appropriate and convenient for the type of transaction they are performing and their physical location - at home, in the office, on the move etc.
Branch is king, but the branch also accounts for a massive 80% of distribution costs. This white paper examines how the branch will need to change so as to reduce cost and increase margin.
Drivers for change
Multi-channel banking is here to stay. Branches are here to stay - for a while anyway. But they must change. There are two main drivers for change. Branches must get better at selling and do more of it and there must be a dramatic reduction in cost and efficiency.
Much branch IT is over 10 years old and many branch environments are even older. Because much of the focus over the past 10 years has been new channels, the branch has been neglected.
Driving cost out of the branch
Cost reduction will come from staff reductions and rationalizing IT. Staff account for 60% of the costs associated with branches. Savings in staff costs will from come from two initiatives. The first of these initiatives will be to extend the reach of self service. ATMs and cash machines are already accepted by the general public, but more must be done to move more of the service based transactions, such as bill payment and deposits to self service.
Most of the larger institutions have experimented with kiosks in the past and all of these experiments have failed to win over the consumer. Now, a new generation of kiosks and self service, enabled by new technologies and reductions in technology prices, is emerging. These new devices will be web based. Branch staff will need to be involved in helping to move appropriate customers to these new devices.
These new devices will have similar user interfaces to the Internet-based home banking applications. In this way, branch staff can get customers used to the idea of DIY and gradually these customers can be encouraged to use the Internet channel for low value transactions. This is also important in opening the opportunities for cross selling (see below).
Banks will have to revisit the opportunity of channel-based pricing, balancing this with incentives for customer use of self service. For example, a bank account that gives a favourable interest rate but limits "free" over counter transaction to say 3 per month.
The second cost reduction initiative is to move branch back office processes out of the branch and into regional processing centres, or for smaller institutions back to head office. Much of the back office activities are in the branch because 10 years ago there were no cost effective communications networks and appropriate solutions. However, broadband networks are now available and at a fraction of the cost that they were 10 years ago. Another aspect of this is that in the past, once an event has invoked a back office process, it was relatively difficult and time consuming to then communicate with the customer. Modern technologies, email and SMS makes these communications easier to arrange, thereby making these centralised "back office" procedures tenable.
So, it is cheaper, through economies of scale, to centralise these activities. A secondary benefit of reducing branch back office is that it will enable more office space and more staff to be devoted to servicing and selling. Currently, only around 60% of branch staff activity is directed towards customers. This could rise to around 80%.
Teller workstations will be web-based, thin client applications, networked to the regional processing centres. As well as reducing staff costs, this approach will also reduce IT management costs within the branches. The regional processing centres will also open up future opportunities for cost reductions through outsourcing, such as cash and cheque handling.
Improving branch margins by selling more
The tellers to sellers concept is not new. What is new is the approach.
With more office space liberated by reducing branch-based, back office operations, more space can be devoted to selling and fee-based advice services. The branch can become a more conducive environment for selling and a greater proportion of staff can be incentivised and devoted to sales.
Perhaps turning the branch into a Starbucks franchise is going too far, but at least some comfortable seating could be provided, together with some private areas where customers can spend some time exploring their financial options.
Take, as a comparison, the automotive retail industry. The places where we buy cars are plush and comfortable. However, when you take the car for service, frequently the service centre is not so smart. Unfortunately, many bank branches fit more into the service centre mould than that of the showroom.
Clearly there are demographic implications here and different styles maybe needed indifferent locations, but the emphasis is to turn the branch into a sales centre that also provides excellent service.
A new generation of sales applications needs to emerge. As with the service-based transactions, these sales applications will be "branch versions " of the sales application available to customers via the Internet. Where sales staff are involved in the engagement, the screen will be shared. The sales person guides the customer to use the application themselves.
The applications themselves must change. They must move away from the approach of "answer these 85 questions and I’ll tell you what gaps you have in your financial plan" to a modular-based fact find where customers get some reward in terms of information or illustration for each completed module.
A significant change in these sales applications will be to create an innovative style that encourages the customer to declare their needs and financial objectives and to generally open up the dialogue. These are sales and advice applications that the customer will be encouraged to "take home" with them, to experiment with and play out scenarios and then return to the branch for a consultation.
The branch as a major part of a multi-channel strategy
I have described above the need to provide customers (and staff) with a common view of sales and service applications across branch and Internet channels. The drivers being reduction in cost for application development and maintenance, consistency of user interface and as a way of overcoming barriers to self service.
However, there is more to multi-channel than presentation styles. It is also vital that customer information and contact information is available in the branch and across all channels in the branch. This is a key component of an integrated customer information system. This will enable the bank to deliver operational consistency across all channels. It will also provide branch staff with the results of customer analytical information to assist the sales and service process as well as providing these staff with the ability to enter updates to customer information and leads from face to face contacts.
The Bottom Line therefore is that banks that wish to retain their profitability into the future have two options – close all the branches and become a telephone/Internet bank like First Direct or make some dramatic changes to the branch.