Home – The Final (Branch) Frontier
In my last few blogs I talked about the strategies that banks are currently taking to compete in the 21st century. Let’s prophesize a little and discuss what could become the ultimate retail delivery strategy in the future.
Earlier in my career I was the Chief Financial Officer for a regional bank. As the CFO my main concerns were focused on the overall financial health of the bank. I used a couple of high level metrics to measure my performance, and the performance of the bank. The first measure was did the bank have sufficient capital, not only to meet regulatory requirements, but also to position itself for growth and as a cushion for unexpected downturns. The second criterion was Return on Average Assets. That is, was the management team effectively utilizing the banks assets to generate a significant return satisfying the investors as well as the regulators? A bank wants to maximize the percent of its assets that make money for the bank – earning assets. Conversely, it must minimize the percent of assets that don’t produce earnings – non-earning assets. A competent CFO will work with the management team to maximize the Return on Average Assets, thereby maximizing profits and increasing the banks equity or net worth. All this, of course, has to be balanced with providing an appropriate level of customer service consistent with the bank’s goals. So much for the accounting lesson, how does this relate to an optimized branch strategy?
Banks have always been looking for the most effective was to deliver their services. As early as thirty years ago, the branch was the only means for the bank to interact with their customers. When ATMs were introduced, banks saw them as a way for customers to do basic transactions, freeing up branch staff for the more complex transactions. Even though ATMs were expensive, banks were banking (pardon the pun) that ATMs would help them reduce their overall branch expense thereby freeing up assets for more productive use – and to a certain extent they were correct.
Banks have used the same logic for the newer channels such as contact centers, IVR, Internet, mobile banking and now remote video connections. Each of these new channels has, to a greater or lessor extent, taken the burden off the branch network and, at least in theory, reduces the need for cost intensive stand-alone branches.
So with all the channels in use, what will be the retail delivery strategy of the future? What will be the combination of channels that will deliver the greatest value to the customer while helping the bank with those two criteria I mentioned above – driving a healthy Return on Average Assets contributing to the the bank’s overall equity or net worth?
Just for a moment, put yourself in CEO’s or CFO’s shoes. All things being equal, what channels would you prefer your customer utilize? As a former CFO, my answer is simple. My c customers should utilize the Internet, home video and mobile channels. Why? Simply, these are “on-demand” channels where the customer assumes interface. This certainly helps maximize the bank’s use of its assets.
But let’s also look at it from the customer’s perspective. Branch traffic is declining as customer embrace alternative channels. Certainly there is, and will be for a considerable period of time, customers who need or prefer the branch. The reasons for this are well documented and there is no need to enumerate them here. However, it is equally well established that in some markets customers are eschewing the branch in such a way that some banks I’ve spoken with claim that Internet and mobile transactions account for 99% of all financial transactions. These banks also report health balance sheets (think net worth) and Income Statements (think Return on Average Assets) and, importantly, very satisfied customers.
So, given both of these perspectives, I believe that – eventually – the home, with its Internet, video and mobile phone capabilities, will become the ultimate delivery channel for most retail banks. Certainly branches will remain, becoming less transaction oriented and devoted more to those interactions requiring personalized and intensive service. However a “home-branch” strategy enables banks to reduce their fixed costs allowing not only for better bank profitability, but better rates on both savings and loans products, as well as anytime, anywhere convenient service to their customers. It may be that this “strategy” will evolve slowly but that it is the ultimate win/win for both the bank and their customers.