Marketing's Role in the Evolving Branch

ABA Bank Marketing, September 2011 I by Gary D. Stein

The demise of the traditional brick-and mortar branch is again being predicted. The advent of ATMs elicited the first forecasts of branch obsolescence. During the late ‘90s tech boom, Internet banking supposedly signaled the end of branch banking. And still, throughout much of the last decade, the number of bank branches industrywide grew at a record pace.

Clearly, earlier prognostications of decline of the traditional branch proved erroneous. Will this Cassandra’s prophecy finally come to pass?

Undeniably, the viability of the traditional branch model is under assault. Excess liquidity, asset quality problems, and regulatory mandates have combined to change the earnings dynamics of retail banking. Many institutions are examining the branch network with an eye toward reducing expenses and boosting capital. Most important is the irrevocable shift in payments, i.e., the move to electronic payments and the corresponding decline in paper check volume has eliminated the need for many customers to ever visit a branch.

Last December, the Federal Reserve concluded that total U.S. check volumes dropped 7 percent annually from 2006 to 2009. This is a continuation of long-term adoption of paperless payments, such as debit cards, ACH, and online bill pay, as well as the development of tools, like personal financial management software, that have significantly increased the benefits of banking on the Web. Coupled with the increase in check truncation technologies, such as business remote deposit capture, consumer/mobile RDC, and envelope-less ATMs, and emerging electronic capabilities, such as prepaid cards, mobile banking and P2P, it is not surprising to see that teller transaction volumes are declining rapidly.

The branch’s staying power

Predictions of the demise of the branch appear to be premature, however. First, branches continue to generate the lion’s share of new account acquisitions for most banks. The online channel generates a fraction—roughly 10 percent—of new accounts at banks with fairly evolved online account opening capabilities, and while bank-at-work programs are helping to drive a lot of the new checking volume at many regional institutions, a number of these accounts are still ultimately opened within a branch.

Second, branches remain central to delivering an effective and distinctive customer experience. CapGemini’s Customer Experience Index assesses both customer satisfaction and a provider’s ability to address product, channel and life-cycle expectations of its customers. The firm’s research shows that, among U.S. customers, the branch remains the most favored and satisfying channel. This satisfaction is driven primarily by service quality, quality of advice and overall ease of use—not location.

Consequently, bankers looking to make changes to the branch channel should be mindful not to impair the branch’s ability to provide quality service. This concern takes on added significance when one considers the correlation between a positive customer experience and customer loyalty. Bain & Co. estimated that a loyal retail banking customer represents over $9,500 more in lifetime profitability to an institution compared to that from an unhappy customer. Most bankers intuitively understand these dynamics as the industry is increasingly undertaking efforts to improve customer experience. In fact, a late 2010 Temkin Group survey of bank executives found that 84 percent responded that customer experience initiatives would be a greater focus in 2011 than in the prior year.

Third, while visions of the future might entail fewer branches than most institutions maintain today, it is simply neither practical nor advisable for a number of banks to shrink the branch footprint drastically and quickly. Few community and even regional banks enjoy dominant market share positions in attractive metropolitan areas. Smaller banks that eliminate branches in strong markets are likely to do more harm than good over the next few years by reducing visibility and convenience. In addition, banks of all sizes have a limited capacity to absorb the financial impacts of and manage branch closures, divestitures and consolidations. These activities are resource intensive, and the repercussions of prematurely terminating a long-term lease or writing off intangible assets are frequently unpalatable.

The branch is in flux

And yet, adaptations must be made to the branch channel. Banks would be wise to adopt a multipronged approach to transforming existing branch networks that includes:

Redefining the role of the branch.
Reallocating branch resources to align with market opportunity.
Reformatting branch designs and staffing to facilitate the channel’s present-day purpose.
Re-engineering branch processes and leveraging technology to enable efficient operation and superior customer experience.
Re-energizing branch staff and managers to focus on the right activities and to execute effectively.

The role of the branch is in flux as transactional activity migrates from checks to electronic payments. Until recently, new customer growth was masking per-customer declines in branch transaction levels and helping to sustain teller window volumes. Fast forward to present day and such is no longer the case. In fact, Cornerstone Advisors reported that despite a 5 percent increase among surveyed institutions in the number of DDA accounts per bank branch from 2007 to 2010, teller transactions per account per branch decreased by over 24 percent over this same period. Likewise, CapGemini’s 2011 Retail Banking Voice of the Customer Survey indicates that customers anticipate branches to become less focused on financial transactions and more targeted toward relationship management, advisory services and problem resolution. Branches will remain a crucial source of core funding with likely greater focus on enrolling customers in value-added services, such as mobile banking, and cross-selling fee products, like investments, to help ensure customers are profitable.

Importantly, banks must accept the end of the “one-size-fits-all” branch model. Economics simply will not permit banks to maintain a network that is uniformly composed of large, full-service offices. Widely publicized new concepts such as Citibank’s highly automated Union Square “Smart Branch,” cannot support market expansion on a standalone basis as they are not staffed to cultivate new customers. Thus, look for banks to adopt a variety of office types that reflect local market needs and include smaller satellite offices, electronic banking centers, loan production offices, and in some cases, in-store branches, as well as pad-site, full-service network hubs.

Understanding market needs and composition is also paramount to optimizing branch placement. Even during economic booms, banks are wise to evaluate market attractiveness and branch performance to determine where resources can be reallocated—from poor performers in competitively undesirable markets to markets and branches that represent growth opportunities. Banks seeking to reduce branch channel expenses require a factual, data-based, objective methodology for measuring market potential and branch contribution as well as for identifying, confirming and prioritizing opportunities for performance improvement. While not all institutions will rate market attractiveness the same way, all will likely include measures of market size, growth, wealth and product use plus indicators of how market composition aligns with bank segment targeting efforts. In evaluating branch performance, banks should focus on direct measures of contribution, such as branch-based product sales and direct expense (resource consumption) figures. Other elements of branch profitability, such as net interest margin, often depend upon how customers are assigned to branches and may not to be indicative of the true ongoing contribution of a branch.

According to JD Power’s 2011 Retail Banking Study, branch appearance is the second most powerful key performance indicator of customer satisfaction, ranking just below problem prevention. Many banks have been reluctant to do away with or at least reduce the number of (often unmanned) teller windows for a long, long time, yet few things frustrate a customer more than enduring a long wait when it appears store capacity is underutilized. Given the aforementioned payment shift, reallocating space to support sales of advisory services and house applicable specialists makes sense. New designs should also incorporate more self-service stations that enable branch staff to explain and help customers embrace online banking and community exhibits or bulletin boards that promote the bank’s ties to the local market. More innovative ideas might include meeting space and office equipment for use by small-business customers.

The universal associate model

Pat Piper, executive vice president of retail banking, BOK Financial Corp. (assets: $24 billion), Tulsa, Okla., says his institution is careful to give the impression to customers that branch space is being efficiently utilized. Pat and his team have gone so far as to wall off and hide unused teller windows in cases where the space cannot be otherwise repurposed or sublet.

BOK and many others are also making changes to branch design and technology to enable the switch over to a universal associate model. In this approach, both tellers and platform are replaced by a single position that performs both sets of functions and enabling fewer customer handoffs, more dynamic staffing and ultimately, an overall reduction in head count. This model is most often facilitated by multipurpose work stations that allow personnel to move adeptly between transaction processing, service, and sales and feature cash recyclers, scanners for teller capture and other productivity-enhancing technologies.

Technology is playing an increasingly important role in branch transformation. For decades, many large banks held off on upgrading branch teller and platform systems because of the high cost of doing so. However, the expense of maintaining outdated systems combined with cost savings enabled by paper truncation/capture and related capabilities have more recently driven many institutions to move forward. Service automation technologies also streamline processing to enable branch associates to devote more time and attention to understanding and responding to customer needs. More powerful platforms help to structure the account opening experience to facilitate customer profiling and ensure more consistent sales and service execution. Importantly, not every branch process design must be technology-enabled. Wherever possible, frontline staff should be relieved of administrative and operational tasks, as customers derive no value from these activities. Periodic reviews often uncover logs that are maintained but not reviewed and other lingering, unnecessary exercises. Tasks that cannot be eliminated or streamlined should be reassigned to back office personnel.

An effective branch will always remain highly dependent upon staff execution. Even well-designed branch programs will be ineffective if implemented poorly. Well structured procedures, system prompts, and other tools help to ensure branch processes are executed as intended. A number of banks are increasingly focusing on staff development to ensure better execution. According to executive vice president Bob DeAngelis, Key Bank (assets: $89 billion), Cleveland, created a branch environment simulator and competency evaluator model to help distinguish branch staff candidates that will fit in well with the bank’s expectations for the role and thereby help to reduce staff turnover.

Other banks have renewed efforts to encourage their employees to maintain their personal accounts with the bank as a means of helping frontline staff to be more effective advocates and more comfortable with explaining new self-service technologies based on firsthand experience. As noted above, cultivating employee satisfaction is also critical to ensuring customer satisfaction, and satisfied employees also tend to deviate less from prescribed protocols and provide a more consistent experience. Finally, performance measurement is crucial to being able to spot and resolve improvement opportunities and monitor results of and refine implementation efforts.

The marketer’s role

Bank marketing departments should play a meaningful role in the transformation of the branch. Key responsibilities are likely to include:

Segmentation: Marketers must continue to identify and prioritize attractive customers and prospects to target, define segment needs, and paint a clear and actionable picture of how the branch channel will support addressing these needs.
Brand management and value proposition development: Marketers are responsible for defining the institution’s brand and must ensure that the branch reinforces the brand and its attributes. Examples may be fairly concrete, such as a community bulletin board or small-business productivity center, or more abstract, like a comprehensive branch design that provides for resident wealth management specialists to provide investment and other advisory services as part of a broader value proposition aimed at the mass affluent segment.
Satisfaction, experience, and loyalty measurement: Market research analysts should be helping retail executives to understand what drives satisfaction and loyalty of targeted segments to ensure successful promotion and execution across the branch delivery channel. Additionally, marketing must look at employees as a key customer segment and help to develop programs and devise products that cultivate employee banking and satisfaction.
Data management and insight development: Marketers tend to be stewards of market opportunity and customer relationship data, and both data sets are important to decisions related to the placement of specialty offices, branch network optimization and branch design in addition to identifying and prioritizing performance improvement opportunities.
Cross-channel program design and oversight: Marketing may be best positioned to drive development of multichannel sales and relationship management programs. As a channel-agnostic department, marketing often has the best perspective in the organization to evaluate the impact of customer touchpoints across all channels and devise customer communication strategies to support on-boarding, service activation, cross-sell and other key processes.

Branches will continue to play an integral role in the delivery of retail banking services for the foreseeable future, but the channel must make adaptations to respond to a new era of retail banking. All elements of an effective branch—its role, network placement and resource allocation, design and staffing, work processes and technology, and performance management—must be adapted to align with financial performance targets as well as rapidly evolving payment channel and customer behavioral trends, new regulations, and technology innovations. Bank marketing officers can and should play a key role in this transformation.