Our channel traffic projections indicate an 11% decline in branch transactions by 2015, as mobile surpasses it as a transactional channel. Meanwhile, branch sales are projected to remain flat across the next several years with online seeing rapid growth. Clearly, the branch’s role is due for change in order for it to remain an engine of revenue growth for the bank. The problem? Our members tell us that they have some idea of where the branch needs to go, but they have no idea how it will get there given that they are in so much flux.  As one member told us, “I feel like I have to manage the branch of the past, present, and future.”

Through member conversations and our research, we have isolated 5 key areas where banks will need to learn to innovate as they recast the role of the branch. If you are interested in learning more about our upcoming Branch Capability benchmarking in these 5 areas—please email Alex Pavel at apavel@executiveboard.com.

Change Capacity: Banks that are farther down the road of channel innovation say that there is no more important skill than having systems in place for managing through change. “Change is pain,” is what one member told us. Without the right skills in place to manage change transparently, banks will face a tough (and costly) road.

Talent: From across our membership, there is a movement toward rethinking what skills the branch will need, how to do more with fewer employees, and how to successfully manage incentives for new kinds of traffic and demands for collaboration.

Technology: “Technology is the hardest part”—that’s how one member put it. What to buy, when to invest, and how quickly to change are at the heart of branch transformation strategy. Perhaps most importantly, true staff transformation cannot happen without a simultaneous investment in technology.

Multichannel Integration: How will customers know when and why to visit the branch? And how will the branch work with an increasing dispersed set of channels and roles? At the center of multichannel integration for the branch will be reframing the role of the branch relative to the work done in other channels.

Space and Design: Branch networks and formats vary widely across markets, and to innovate successfully banks will need to think beyond their legacy models. The branch does not need to become a destination—rather, it needs to serve a clear set of opportunities and customer needs. To grow, banks will need to be creative in their thinking about how much branch it takes to hold market share, and how to calibrate “productivity” based on new branch models.

The Apple Store model is an almost inevitable aspiration for banks considering the future of the branch. After all, Apple’s stores are crowded, have an admirable combination of sales and service, and are staffed by fierce brand loyalists. As we observed in our profile of Apple stores, the brand strategy for stores is for customers to “test and learn”–with a smaller focus on pure sales. But how much of this model can be applied to banking?

We recently profiled the new concept stores launched by National Bank of Greece. As a market, Greece is facing an extreme version of what most mature markets are feeling: high liquidity with little demand for credit—meaning customers’ main needs are account servicing and financial education. NBG rolled out two concept stores to target these needs specifically. Rather than aligning them with traditional branches, they made them a component of their digital strategy. The branches focus on showcasing digital channel capabilities, hosting seminars on financial education, and helping customers with tech-related services. Like Apple, the new concept stores at NBG are physical representations of a digital brand. Our members can read the full case here.

Still, the Apple model has limitations: Can banks maintain market share with extremely low branch density? Even major cities are unlikely to have more than a couple Apple stores, while most banks still compete at the neighborhood-level. Apple offers a highly-coveted product. Is it realistic to expect a bank branch to energize customers in the same way? If Apple will be used as an example, banks will need to challenge many of the underlying assumptions about the role of the branch.

Over the coming months, CFC will continue to explore best practices for branch transformation—both in terms of physical space and new skills for staffing. If you would like to discuss this research further, please contact us as CFCresearch@executiveboard.com.

Time to Move Past This Kind of Thing in the Branch

Despite the fact that most customers interact with their banks primarily through digital channels, most banks still manage customer relationships through branch-centric models. The branch is where accounts are domiciled, where sales are recorded, and, accordingly, still treated as the seat of customer relationships.

But leading banks are observing customer channel usage and becoming more deliberate in their own channel strategies. We have recently profiled several banks changing the role of their branch staff to better meet the needs of digital customers and changing customer behaviors. Branch staff sit at the heart of digital channel success, and industry leaders are learning that:

1) Customers need the branch to teach them about channel capabilities: One bank we profiled learned that without branch buy-in, it’s investments in digital channels would be underused. Accordingly, the bank focuses on driving activity online through the branch. When customers open an account, branch staff are incented to educate them on digital channel capability.

2) To empathize with and serve digitally-focused customers, branch staff need to use digital channels themselves. A large European bank we profiled observed that its customers rely on digital channels for most needs, and only used the branch for new account opening and problem resolution. But it also realized its branch staff hardly ever used non-branch channels for their own banking, and so suffered an education gap in digital channels. To fix this, it launched a campaign where branch staff were not allowed to bank at the branch themselves. The result: more empathic and knowledgeable conversations with customers about digital channels.

3) Branch staffing decisions must be made with a multichannel perspective—not according to legacy assumptions about branch staff sizes. A large regional bank in the United States realized that even though its branch traffic volumes were declining as volumes in other channels increased, branch staffing levels were not changing. The reason: branch managers were still hiring according to legacy staffing models, meaning that in every case of staff attrition, the position was almost automatically refilled. To correct this, the bank centralized branch staffing decisions, and requires branch managers to make the case for refilling vacant position through recent branch-level sales volumes.

For more on strategies for overcoming branch-centric sales and service models as these banks have done, please join our upcoming webinar series, “Crossing the Digital Divide.“

Our quarterly report on business conditions and expectations in Financial Services provides a network-enabled, 12-month outlook on key drivers of economic performance in financial services.

Most in the industry expect continued mixed trends, as modest revenue growth returns but cost pressures increase and capital expenditures decline.

Financial service (FS) executives’ sentiment: Executive sentiment regarding revenues in the coming year improved compared to last quarter, while expectations regarding cost pressures in the next 12 months remained similar. Overall executives expect relatively better operating margins in 2012.

Revenue growth and cost pressures: Sixty-three percent of executives expect their company’s revenue to increase in the next 12 months but only somewhat. Further 67% of executives expect cost pressures to increase, with nearly one-third indicating higher
or much higher cost pressures.

Growth indicators: More than one-half of the executives expect an increase in sales to both new and existing customers. Among executives, 46% expect fl at R&D investments and 40% expect higher M&A deals in the next 12 months. Further 44% of executives
expect lower discretionary IT capex. More than one-third, however, expect an increase in capex investment, and one-third expect a decline during the same period.

Traditional transactions are on the decline for banks around the world–even though for most, the overall volume of transactions is increasing. As the role of the branch changes from the centerpiece of distribution strategies to a component part, what can banks predict about its future form and purpose?

1. For the customer: Customer relationships are moving from a “convenience model” to an “activity-driven model.” Convenience required that banks pursue branch density, knowing that customers make decisions about their relationships primarily based on proximity to the branch. The new model of customer relationships will be structured around engaging with customers in their day to day lives, virtually—by timely, context-driven, product offers, refined money management tools and services, and interactive correspondence with “the branch” through virtual channels. Our recent work on product and service innovation looked at the proliferation of banking “activities” driven by technology.
2. Traffic and sales: The role of the branch itself for customers will become increasingly specified as it moves from being the central channel to one piece of the channel array. Most of our members report declining branch transactions, but increasing transactions overall. The transactions that will continue to be drawn to the branch will be new account sales, complex product sales, like mortgages, and some types of problem resolution. Meanwhile, we expect cross-selling to be driven by non-branch channels. See our recent work on customer channel preferences to understand how these trends are already emerging.
3. Contribution to overall distribution strategy: On the bank side, banks face the challenge of reshaping the purview of the branch. While the branch will have core strengths like those outlined above, it will also need to become a support mechanism for online and mobile channels—creating incentives for its staff to educate customers about online channel capabilities. While many banks are carrying branch networks that exceed demand, the more pressing issue is rightsizing and retraining staff to meet changing customer behavior. The need for traditional teller staff will see continued decline. Similarly, as cross-sales become more refined online, total sales from the branch will also decline. Accordingly, we expect increasingly lean staffing models, with many moving to generalist “universal bankers” supported by centralized product experts. See our recent work on right-sizing branch staffing through attrition and creating incentives for branch-supported online growth.

In 2007, The Council surveyed members on “what channels will best serve customers for purchasing products end-to-end?” for both 2007 (“today”, then) and in 5 years time (2012). Responses were unambiguous: a sharp decline in branch sales – from well over 80%, to just over 40% – and a sharp incline in on-line sales, from just under 10% to just short of 50%.

Here we are in 2012 and it is clear these projections were wildly optimistic. But today the stakes are higher: banks that do not enable non-branch sales will miss crucial opportunities for cost reductions and brand differentiation. The question is – why have on-line sales failed to realize their potential?

1. Banks continue to hope for a “return to normal” – Confronted with uncertainty, many institutions have fallen back on what they know – the branch, where they have most tried and tested experience selling – rather than try to build something new. Economic austerities inclined toward a less aggressive “run-the-bank” versus “change-the-bank” split, notwithstanding the potential cost savings associated with the latter. As sales growth flattened, increasing productivity in the branch appears a faster path to growth than improving the online sales experience.
2. The branch is viewed as the home of customer relationships– Many senior executives remain unconvinced they can effectively manage relationships through non branch channels. Indeed, the Council’s data does suggest that customers who use technology-only tend to feel less committed to their banks. Accordingly, serious concerns remain around on-line relationships becoming too transactional, losing the depth otherwise assured by in-person interactions. As a result, banks must focus on creating a unique experience online.
3. Banks are not teaching their customers how to do business – CFC data shows that as many as 30% of customers have no experience doing even basic tasks online, and another 20% only use to the web to access products they already own. The banks that have been most effective at increasing online sales and activity do so by investing in customer education around web functionality.
4. Internal accounting still over-estimates the contribution of the branch, while not putting enough pressure on the web – As a general rule, remote channels receive scant recognition for the sales they aid, and no domiciling of the account openings they actually record. Such systematically biased branch-centric accounting precludes an objective, fact-based conversation around right-sizing branch networks. It is difficult to build a business case for the online channel if it always appears unprofitable next to the branch. Without firm revenue goals for itself, the web will continue to lack urgency.
5. Bank websites are not offering the right kind of help – The web is the dominant channel for research, but bank sites are not giving prospective consumers enough help when it comes to researching products on-line. By failing to provide the content and functionality to support customers throughout the entire purchase journey, customers are encouraged to go elsewhere for information – such as various off-domain social media sites. In other words, the service to sales process so crucial to the branch barely exists on bank websites. As CFC survey data shows, customers who rely on digital channels rate their banks poorly in key service indicators–like guidance during the sales process, ease of communication, and access to knowledgeable staff.

For further background on building a more compelling on-line offering, members can access  The Future of Internet Sales and previous blogs on personalizing the on-line experience and managing channels from cost to profit.

Even as branch traffic volumes decline, banks struggle to implement new systems and models for staffing. For many, despite the fact that most customers bank through multiple channels, the branch is still considered the hub of the customer relationship. The result is a branch network that is staffed for customer behaviors that no longer exist.

Complicating the situation, even when banks want to reduce staffing, such reductions can harm customer relationships, weaken the bank’s stature in the community, and can convey the wrong message about overall financial health.

CFC recently profiled a regional United States bank that has created a model for using attrition to right-size their branch staffing. After staff attrition, rehiring decisions must pass through rigorous review of branch productivity, traffic volumes, and overall trends across channels. The new model requires three key components:

1) Centralized staffing decisions: Branch staffing decisions were centralized to ensure that they reflect the reality of customer activities across the distribution network. While branch transactions are declining, transactions for the bank as a whole are on the rise.

2) Using extensive branch transaction data to assess teller needs: The bank worked to create an objective framework for staffing decisions. For tellers, they rely on copious data about transactions in the branch and teller time-spend in order to determine minimum staffing requirements.

3) Using recent productivity levels as a guide for sales staff: Sales performance on a branch level is notoriously difficult to measure because of the uncertainty around number actual sales opportunities. To determine appropriate sales staff levels, the bank created a model the focuses on productivity over the past month and the number of staff required to match that productivity going forward.

For more detail on this tactic, and examples of the models the bank created, our members can download the complete case.

Related Posts:

The Role of the Branch in Online Growth

Branch Staff Skills in a Multi-Channel World

Social Media-Supported Branch Banking

The Poverty of Branch-Centric Accounting

Despite rapid channel proliferation (and expense growth), most transactions still happen in the branch—even when other channels can serve customer needs better. As cost pressures build, encouraging better use of non-branch channels will become a business mandate. But many customers will not readily embrace this change. Some may actively protest. However, as our recent channel preference analysis reveals, three barriers stand in the way of migrating transactions and relationships to multichannel models.

1) Inexperience: Customers have not been effectively educated on their options. As the above graphic shows, over 30% of customers have no experience performing basic banking tasks outside the branch. Increasing education and experience is the quickest and least expensive path to migration and more efficient use of channels. As one of our recent case studies shows, customer education through the branch is central to driving activity and transactions online.

2) Inequality: The quality of online offerings still lags the branch: Many banks are focused on simply replicating and accelerating branch capabilities through non-branch channels. Instead, banks need to focus on creating compelling experiences based on the unique strengths of the web.  Until remote channels can deliver more compelling emotional resonance with customers, banks will not see sustained growth in that direction.

3) Indifference: In some cases, personal preference will trump qualitative assessment (or, my grandmother will never bank online): Personal preference is a good news-bad news situation for banks. The bad news is that some customers, no matter how high the quality of non-branch channels or how extensive the education around their capabilities, will never leave the branch. Further bad news is that these customers are likely not to be very profitable. The good news: in our survey, this group constitutes only about 10% of respondents.

For more on the results of our channel preference survey and how customers are making channel decisions, members can download our recent study, “Channel Strategy: Replacing Consistency with Quality.”

In their aim to give customers the convenience to transact and purchase where they wish, banks have successfully expanded functional capabilities to additional channels.  Indeed most customers see little difference between the branch and online channels for key banking tasks, and many customers have migrated away from the branch.

But this migration has happened without replacing the emotional connection that existed in a branch-centric world, causing customers to lose engagement.  As a recent CFC customer experience survey shows:

• Only 42% of web and mobile customers report that staff can offer capable and knowledgeable help (compared to 61% of branch customers)
• Only 36% of web and mobile customers believe that advice and guidance on product purchases is strong (compared to 50% of branch customers)
• Only 37% of web and mobile customers state that their bank shows willingness to accept feedback and resolve issues (compared to 49% of branch customers)

The most troubling finding? Customers drawn to remote channels come from the most attractive segments—young, educated, high income individuals who proactively manage their finances.

CFC’s current work focuses on how to manage customer relationships outside the branch–from understanding customer channel preferences, to designing powerful remote experiences, to building products that capture attention and increase activity.

On March 21, 2011, we will host an Executive Roundtable in Los Angeles, California focused on helping our members build compelling non-branch experiences. For more information on this meeting, please contact cfcresearch@executiveboard.com.

At a time when banks can least afford to lose key customers, a growing field of non-bank financial service providers is redefining customer experience. What threat do disruptive innovators pose to banks—and more importantly, what can banks learn from new models?

In CFC’s recent customer channel preferences survey, a stark trend emerges: as customers move toward non-branch channels, engagement declines. Tech-focused customers perceive their bank as less able to provide product guidance, hard to communicate with, lacking knowledgeable staff, and not sufficiently concerned about customer well-being. In short, many banks are not connecting emotionally with tech-based customers.

Through tech-based offerings, new entrants into financial services are targeting disengaged customers by re-imagining core areas of customer experience. For an in-depth look at the following emerging models, please join our webinar next week (for U.S. and Europe) and February 1 (for Asia Pacific):

1) Superior transactional experience of highly-focused products. Banks focus on transactional products as the foundation of customer relationships—they are the bridge to share of wallet. Innovators like Simple, or Perkstreet, focus on pure play models, devoting their energy to superior experience on a highly-focused product.

2) Self-directed guidance. Bank credibility relies on in-house expertise and the ability to provide personal advice on complex products. Understanding that most tech-focused customers prefer self-service, innovators are creating sleek, easy to use platforms that combine product guidance for complex products—like long-term investments—with customer control.

3) Lifestyle as acquisition driver. Branch density has long been the main strategy for gaining new customers, but for tech-focused customers, financial lifestyle is an emerging draw. Innovators are betting that the “debanked segment”—customers who are unsatisfied with traditional banking relationships and want an alternative—will be attracted by transparent, easy to use, tech-only models that fit into their day to day activities.

4) The interchange of customer information. Payment instruments are designed for ease—whether a debit card or mobile wallet, banks treat ease of the payment itself as core to the customer experience (and thrive on the revenue they provide). Innovators, however, are trading on information, and betting that being able to provide important information to the customer about account balances or coupons just before a purchase, or recommended products just after a purchase, will create a powerful integration with the customer’s life.

For more on these trends and an in depth look at the lessons banks can learn about customer experience from new models, please join our upcoming webinar.