Last week’s article on branch transformation generated more questions than usual with many bankers asking what an “optimized” branch network looks like in the omnichannel model. While we are not confident that most community banks can achieve that model and would be better off focusing on a mobile-first architecture, most banks are in the process of trying. In this article, we review what a new branch delivery portfolio might look like, looking at both the economics and engagement of each location tactic.
At present, we estimate that the average branch delivery channel operates at 50% capacity. This number is likely to go lower as more banking capabilities such as small business lending, commercial account opening and customer problem resolution move to mobile. As items and currency volume drop, banks will need to plan to either move to a mobile-first model or change their branch portfolio to include smaller, more flexible and more technology-enabled branches.
This will almost be mandated by the customer as many will choose to move to mobile for banking activity such as check imaging, wires, transfers, new account opening, and lending. As can be seen below, since 2013, banks are now less transaction and more advisory. Branches have currently shifted resources to opening new accounts. Unfortunately, most banks are just barely positive in their open-to-close ratio a matric that is projected to move against most community banks in the next couples of years due to the aging customer base.
As such, by next year, we predict the average branch will be losing more accounts than gaining. This trend will be driven by demographics, technology offerings from larger banks and rate offerings from online-only banks. This trend will force more banks to move to online and mobile account opening which will further decrease branch traffic and utilization.
At present, direct branch operating costs are just under $1mm per year largely driven by staffing. This is the single largest functional cost at a bank and screams for greater efficiency. Banks will need to get their efficiency ratios down to below 40% in order to compete with the scale of the national banks. As larger banks move more of their customers and transactions online, they will be able to offer better products and better service.
Part of the challenge now is that banks do not have enough flexibility in their current branch delivery channel in the face of lower traffic numbers. Fixed costs are too high relative to productivity and a bank’s ability to move staff around to handle demand is limited. The average branch currently has nine FTEs which is more suitable for a large flagship branch in a metro or suburban market.
The solution is to right-size locations to smaller average square footage and more automation such as interactive tellers, branch sales/customer analytics, interactive video, cash recyclers, and universal tellers. Further, some of these tactics, such as merchant lockers, mobile appointment creation, and interactive tellers will help balance the load and smooth peak times.
By incorporating the portfolio outline below, banks can reduce operating costs by 53% while increasing productivity.
It is important to note that all these processes outlined below not only currently exist but are in operation today.
Below are six bank location models, many of which have just been introduced in the last year.
The Six Models
Each model is designed to highlight signage and brand while supporting basic transactions at some level. In addition, education and advisory take a more prominent position.
Self-Service: The self-service branch will allow a secure location for interactive tellers while permitting branch sales staff to book appointments. This flexible structure will allow bankers to be more mobile and cover several locations at once.
Co-Tenancy: Proven by Capital One, the co-tenancy model has been adopted by many community banks with largely positive success. Reducing rent costs while increasing flexibility has been the hallmark of the product. During slow times, the location functions as a self-service location. During busy periods, bankers can come in to help with education, product advisory, problem solving and consultation.
A derivation of this is the “pop-up” branch innovated at PNC. These small, 200 sq. ft., locations can either be designed in a steel container and utilized for temporary locations such as in city parks during summertime or events, or can be built within underutilized retail spaces such as college campuses, sporting event venues, or shopping locations.
Further, what started out as usually a partnership with a grocery store or coffee shop, this co-tenancy concept has evolved into partnering with professionals such as accountants, lawyers, and business consultants as well as with office services companies such as shipping and technology firms. This model is endless and only limited to a bank’s creativity.
RM Production Offices: While many banks utilize loan production offices, this concept is still not utilized enough given the economics. Further, few national banks use deposit production offices. One aspect of the future of banking is to combine the two concepts and move employees closer to their homes and closer to the customer. Instead of housing sales employee within expensive retail branches, RM production offices can be moved to less expensive suburban locations.
Spreading staff around to standard offices and augmenting the office with an ITM will assist with transactions gives extended capabilities. Further, moving more consultations to webinars and video conferences allows product and industry specialists to cover a wider area and support the lower-staffed locations.
Wholesale Branches: Part of a branch’s expense is the staffing and security requirements of a retail location that is open to the public. By moving to lower cost industrial or non-retail space, banks can reduce cost while servicing their commercial customers. These “by appointment only” locations are located where small and mid-sized businesses cluster. Natural locations include office parks and retail centers such as large malls and airports. The deposit-rich focus of these locations makes them highly profitable given their lower operating cost structure. By separated commercial traffic from retail traffic, more resources are targeted at more profitable customers. The non-public aspect of the office allows for greater flexibility and when sales and operation staff are not on premise, they can easily go out to the field in order to be closer to the customer.
Automated and Flagship Branches: These locations look similar to the traditional branch but with more automation in the form of ITMs, cash recyclers, universal bankers, video, sales/data platforms, customer educational areas, and relationship managers.
The universal teller model and tablet sales modules: As more transactions move online and mobile, tellers will experience less traffic and be the first line of offense to help with customer issues, answer product questions and to open accounts. This will be the predominate model going forward. Universal tellers will be equipped with tablets that allow them the ability to roam the branch, see location performance metrics and to get alerts as to which customers are on-premise (at the ITMs, etc.). In addition to alerts, bankers will be advised as to potential account problems and for next-best product recommendations. This real-time data and predictive analytics have helped some banks increase in branch conversion ratios by 400%.
In addition to customer information, universal tellers will assist with account openings and training. Some banks have the process down to a five minute opening time for new customers and a two minute opening time for existing customers. Once the accounts are open, bankers can assist the customer with mobile, online and ITM training to help increase use.
To assist with account opening, universal teller tablets will have the ability to capture biometric information for account authentication and be able to print both debit/credit cards during account opening.
Interactive teller machines: Virtual tellers that help with both branch overflow and remote transactional banking. Handles full online/mobile banking capabilities as well as standard ATM functions but with the benefit of having video connection to a human universal banker and/or product specialist for support. In addition, ITMs have national ID/passport reader and bio-authentication capabilities for identity verification and identity products. By going through a recorded or live help tutorial, the ITMs can asset in self-service account opening.
Interactive Video Walls: To help customer engagement, interactive video walls will recognize customers by their cell phone’s MAC address or by facial recognition and greet the customer by name as they enter the location. Once, in, depending on traffic, the wall can leverage the bank’s data to graphically suggest the next-best-product or to help with product information. For example, the wall might suggest the small business owner move up to a larger remote deposit scanner due to their increased volume, might recommend real estate financing for a new warehouse facility in partnership with a commercial real estate broker or might show some ideas on robotics equipment financing. If the customer wants to learn more, by tapping a virtual button, a banker is alerted to make contact and to follow up. The name, background and contact information are also displayed to the customer.
Merchant Lockers: One high-value activity in a branch that causes workflow problems are small merchant transfers of checks and currency. In order to better load balance, banks will use automated locker systems where a merchant’s currency bundle is pre-staged. After setting up the transfer online or via mobile, the merchant gets assigned a time window and a locker number. The merchant, at his or her convenience, then goes to their assigned locker in the lobby and drops off their deposit slip (already inputted online) and deposit bundle. The merchant then removes their processed cash for the next day/week in the requested/suggested denominations. The lockers leverage a branch’s cash recyclers while saving the time required for a merchant deposit. For the bank, branch staff can process merchant business at slow times to load balance the work.
VIP Areas, Specialty Support and Video Conferencing: Production officers and flagship branches will have well-appointed areas for high-net-worth customers and businesses to receive support and advisory services. These VIP Areas will be equipped with video conferencing capabilities that connect RM Production Offices and Flagship branches in order to extend support and advisory services to handle such specialty advice as ESOP creation, 1031 exchanges, M&A, treasury management, wealth, trust, mortgage and other horizontal specialties that are germane to multiple industries and households. In addition, industry banking experts can also be leveraged to also bring specific knowledge to targeted commercial customer segments.
In this manner, product and industry specialists can cover a wide geographical area efficiently and can support local relationship management.
Branch Transformation Planning Checklist
Your digital efforts shouldn’t be an add-on component to your existing banking model. The move to mobile and the increase in financial technology demands the rethinking and redesign of current delivery methods.
To survive, every bank needs to work with their core provider, IT department, marketing, and product managers to lay the groundwork for a digital bank. Banks need to create a roadmap to move at least 80% of their customers to digital channels to get into a position to close and redesign branches without fear of material customer loss. Then, banks need to have a five to ten-year plan how to right-size their physical delivery channel.
Banks that don’t plan on moving more customers to digital will likely be stuck with overcapacity in their branches, low product-per-customer ratios, and low engagement. These banks will struggle to move their efficiency ratio below 70% and will find that they cannot be competitive with the speed, pricing, and fees of a bank that can operate at half their cost.
Worse than that, banks that do not move to digital platforms will lack the data needed to deliver exceptional service in the future. Our current physical branch structure is largely reactive to the customer. That is, the customer usually has to come into a branch to initiate a transaction. This is an antiquated model. The location portfolio of the future will be able to leverage customer data, while still providing human interaction at the point of the sales process where it is needed the most. The result is infrastructure that operates at a higher capacity, has a lower cost, greater engagement and one that is focused on the customer’s desires. Banks that can execute on this plan will gain a huge strategic advantage compared with other banks that are stuck with relatively large inefficient branch networks.
Submitted by Chris Nichols on October 01, 2018