Financial services is widely considered to become one of the most disrupted industries within the next 10 years (Rosenbaum, 2015). More specifically, according to many experts, the current retail bank location model will be obsolete in the near future. While this is a strong claim to make, multiple existing data and trends are supporting this conclusion. One of the major trends is a decline in use of retail branch locations and a corresponding massive closer of retail bank branches that has already started. Last year alone saw the biggest number of branch closures in US history according to FDIC data (Rosenbaum, 2015). US’s bank branch number, which at its peak used to be 95,000 branches is already down to 58,000 and experts like Jay Sidhu,chairman and CEO of Customers Bancorp, are estimating this number to further reduce down within the next 3-5 years.
The move from branch banking to banking online and via mobile devices has been driven by the constantly evolving technologies, branchless banks increasingly entering the market and consumer demands more convenience. One of the ways in which the changing technological landscape has impacted the banking model is through the booming of financial technology or fintech (Williams-Grut, 2015). The development of software and applications providing financial services has more venture capital investment going into it than there are investment going into traditional banking industry. Today, there are “8,000 such start-ups in the U.S.” and a total of 36 successful fintech operating globally (Grasshoff at al, 2013). Among there are ApplePay, Google Wallet and Moven, just to name a few. In fact, according to Brett King, the founder of Moven, “biggest banks in the world in 2025 will be technology companies” and the traditional model banks “will have a real problem” (Rosenbaum, 2015).
Aside from the disruptive technology there have been other branchless competitors on the market. In Canada these include Tangerine, PC and now EQ Bank. These players have from the start positioned themselves as branchless and convenient alternatives to the traditional banking. For example, although PC has small 1-2 teller-staffed locations, they are all placed within Loblaws and Superstore stores to emphasize convenience. EQ has more recently offered its customers a 3% saving account that they say they are able to provide because they have no “branches or costly overhead” (EQ Bank, n.d.)
Finally, the third reason driving the branchless baking trend is the changing demographic along with consumer demand. Already in 2011, 700 million global consumers have begun banking on their phone (Rosenbaum, 2015). According to a conservative estimate from PHD Ventures, by 2020 at least 66 percent of the global population will be online.This is an additional 3 billion global consumers (Rosenbaum, 2015). Millenials, who comprise a growing percent of the banking population and are the most tech savvy generation, demand faster service and distance banking and are readily adapting the practice of online and mobile banking. According to a study conducted by Accenture consulting company, 40% of Millenials would consider banking without a branch (Rosenbaum, 2015). Confirming this trend, Goldman Sachs reported that 33% of Millenials said they would not need a bank in 5 years (Rosenbaum, 2015).
With so much change underway, the traditional model retail banks such as TD Canada Trust and RBC Royal Bank in Canada need to adapt to be able to survive and compete in this modern environment. This is no longer a choice or a smart future-looking strategy, but a mere requirement they have to fulfill in order to be able to survival, compete and continue creating value for their customers. In order to transition to the new way of doing business, banks need to first tackle the broad issues of current geographical branch locations, online versus branch service offerings and upgrade of its current systems.
The current branch location model in North America and other developed economies has been inherited from the past, when geography used to be an important determinant of conducting business. A bank worked like any other retailer, in other words, if it had a convenient central location, it would be frequented by the customers. As a result, today busy city cores have multiple bank branches in close vicinity to one another, like 20 bank branches within 6 blocks on Madison Avenue, Manhattan. This translates into huge rental and property costs for the banks. For example, leasing the 20 Manhattan locations costs a bank about $30, 000 monthly (Rosenbaum, 2015). Closing some of these locations and concentrating on offering services online and via mobile would reduce these unnecessary costs and allow banks to be more efficient in their service strategy.
For the banks looking to expand beyond North America and Europe or those already having presence in the developing world the branch geography is also an issue, but in a different way.Here, the branches are limited to the urban cores. This creates difficulty for the rural customers, as a result of lack of ways to commute to the branches. For example, 70% of those currently “unbanked” in Africa would have to spend their lifesavings to get to the nearest branch (Rosenbaum, 2015). Again, a unified bank strategy of having few central branches together with a comprehensive online services would resolve this issue, as smarthones are becoming increasingly prominent among both the urban and the rural population in the developing world. The urban customers could use branches when it is convenient and bank via mobile when on-the-go. The rural population, who cannot get to the bank, can fulfill their daily banking needs through mobile banking.
As banks are devising their retail banking strategy for the future, they should also consider instances of natural disasters, when branches are temporarily unavailable for the customers or customers cannot get to the branches. More recently, the world is becoming a turbulent place with natural disasters, like Hurricane Katrina and lesser, but still severe weather events, like the recent massive blizzard in the Northeast US, occurring more frequently. In case of Hurricane Katrina, branches were temporarily disabled by the flood and region’s residents were given out aid in a form of pre-paid bank cards that they were able to use in the functioning store locations.
So what should a bank’s branch strategy look like in the future? While the specifics will vary from country to country, the overall approach can be stated as follows. First, trim the number of locations, but increase the number of secure ATM machines for cash withdrawal purposes.These should be inexpensive automated terminals that can be conveniently and securely placed at malls and grocery stores. There should be just enough branches for customers to walk into on a rare occasion he or she needs to see a banking representative in person. Since now there will be fewer branches to walk-in-to, the banks should ensure these are conveniently positioned in the vicinity of public transportation or main intersections. Second, the branches should be spread out enough that customers in a large city like Toronto do not have to travel from one end of the city to another to visit a bank. For example, there could be a few branches in the city’s core, as well as each of the larger regions, such as Mississauga, Scarborough, Etobicoke, North York, etc. Thirdly, branches can fulfill a marketing purpose of promoting the bank’s brand. As the only outlets of bank’s physical presence, the branches need to be safe, secure, trust-worthy and friendly places where a customer can make contact with their bank. From a marketing stand-point, having consistent look and feel would help strengthen the brand image. The technological side of branches needs to be up-to-date as well, as it is one of the main components of the branch image.
Aside from property and leasing costs incurred by the banks, branch locations also result in high annual operating costs, such as staff, processing and utilities. While an obvious solution is to trim the size, operation and service offerings of their locations, banks have to ensure that in doing so they do not destroy the value that is being currently offered to their customers. According to the 2014 Canadian Retail Banking Customer Satisfaction Study, there are currently seven main components of retail location banking services, with the following customer satisfaction distribution assigned to them: products, personal service, self-service, facilities, communication (12% of overall satisfaction), financial advisor and problem resolution (8%). In their transition to the business model of the future, banks need to evaluate, which services need to stay at the branch and which will be conveniently offered online.
A sure way is to use the ample amount of customer data that banks have to gauge consumer banking preference. For example, CIBC has already transferred such relatively basic, day-to-day service like cheque deposit, online. The customers do not have to visit a physical location, but can now merely take a picture of their cheque that will be then deposited to their account. Other similarly simple services that can be transferred online would include: balance inquiry, paying bills, smaller amount fund transfers, credit card balance payment, etc. On the other hand, there are multi-step, security-intense services like a first time mortgage approval or a mutual funds investment that may necessitate an in-person interaction between a customer and a bank representative. These are the so-called “moments of truth” when customer experience will depend on the financial advice and so the bank, the customer or both may feel more comfortable with an in-person meeting.
What might the service offerings break-down of such future branch look like? Since the daily basic services will now be done online, branches can downsize from its many teller-level staff to a few knowledgeable Financial Services Representatives, who will be trained to address complicated inquiries, as well as help customers operate new type ATM machines. The purpose of these machines will be to act as the traditional withdrawal terminals as well as have the capability to be used for online banking. The aim will be to replace teller staff with these new ATM terminals. To ensure that customers are comfortable using these machines and help guard against troubleshooting issues, on-site FSRs can be trained to assist customers and walk first time users through the process.
Replacing human tellers with ATM machines may sound like a de-personalization of banking services. However, if done correctly, this move may in fact lead to a more personalized banking experience. According to Jim Miller, senior director of the banking practice at J.D. Power,“Banks need to balance the personal relationship customers have long expected with the increased desire of customers to conduct more of their business when, where and how they want using technology” (J.D. Power, 2014).For example, currently while a customer’s home branch may be familiar with his or her banking preferences, other multiple channels that a customer may use to bank will likely not be set up this way. At the same time, Millenians who are increasingly banking using online, phone and mobile are expecting a personalized experience, where all channels are familiar with their banking profile and preferences. Transitioning to a unified online system could provide this capability via a single screen that can be opened by a phone operator or an FSR at any branch to instantly familiarize themselves with a given customer’s profile.
Currently the software systems used to run bank branches are outdated with some dating as far back as 1970’s. Many of the bank processes are unnecessarily cumbersome and lengthy as a result of having to enter data field-by-field onto the “green screen” of the monochrome 80’s system. Additionally, a single product, such as mortgage loan may be processed using three separate systems: mortgage origination, approval and fulfillment. Navigating through and troubleshooting this archaic system is becoming harder, as the bank professionals, who are familiar with the way it works are aging and retiring. As a result hiring a contractor company to fix or upgrade any part of such system may cost the banks millions (Crosman, 2012).
Switching to offering online services can help banks save money and effort on modernizing the existing system. The added benefits of transitioning to the online platform is that banks will be able to compete with fintech companies and branchless banks on a more of an equal footing. This also means that in the future banks will be able to use such features as e-signatures, finger-tip and retina scans that cannot be built into the current outdated system. Such advanced methods of identity authentication will likely improve speed and service quality, increase customer satisfaction and reduce errors.
The minimum requirements that were enough for the banks to compete in the marketplace has changed. New disruptive technologies such as fintech startups and branchless banks are driving the change in the industry. The trend is supported by the evolving consumer preferences along with the changing demographics of a new young banking generation. These Millenials are technologically savvy bank users, who prefer to branchless and on-the-go banking. To compete in this new environment, banks would have to change the existing outdated branch model. Current costly and numerous branch locations use outdated systems that prevent banks from becoming more efficient. The two-fold strategy should involve trimming the current number of branches to a few locations strategically positioned to best service each area or geographic region. The basic daily banking services such as balance inquiry, paying bills and smaller money transfer should be all accessible through telephone, online and mobile banking. For customers needing assistance or in-person services these new type branches would have FSR-level staff, who will be able to address complex customer inquiries, give advice and assist with using ATM bank machines with an online banking capability. Money withdrawal would now be performed through an increased number of ATM machines that should be securely and conveniently positioned throughout the different geographic regions. This transition should save banks money that can be directed towards ensuring that new branch locations are state-of-the-art and provide consistently excellent customer experience, reinforcing the bank’s brand and providing easy, convenience and error-free banking.
Crosman, P. (2012). New wave of banks are upgrading core systems. American Banker. Retrieved from http://www.americanbanker.com/btn/25_10/new-wave-of-banks-are-upgrading-their-core-processing-systems-1052963-1.html?zkPrintable=1&nopagination=1
EQ Bank Is A Different Way To Bank. (n.d.). Retrieved from https://www.eqbank.ca/company/overview/company-profile
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J.D. Power, McGraw Hill Financial (2014). Updated J.D. Power Study Provides New Perspective on Key Drivers of Satisfaction for Canadian. Retrieved from http://canada.jdpower.com/sites/default/files/2014138%20CA%20Retail%20Banking-Rev2.pdf
Rosenbaum, E. (2015). Retail bank branch is doomed, and banks don’t know it. CNBC. Retrieved from http://www.cnbc.com/2015/06/02/retail-bank-branch-is-doomed-and-banks-dont-know-it.html
Williams-Grut, O. (2015). The 24 fintech ‘unicorns’ worth over $1 billion ranked by value. Business Insider UK: Finance, Retrieved from http://uk.businessinsider.com/the-25-fintech-unicorns-ranked-by-value-2015-7