Technology and the Future of Branch Banking

For those of us of a certain age, we can remember not necessarily fondly the days before there were ATMs and we actually walked inside banks to do all of our transactions.  While those days are long gone, along with the associated long lines, realities are that the physical offices of financial institutions in general and branch banks in particular are poised to undergo a transformation that is no less profound than the one ignited by the now ubiquitous presence of those ATMs. 

Branch banking in the not too distant future is going to be a very different customer experience. It will be much more reliant on technology to enable us to get done what we need to quickly, securely and accurately, than we now do.  We as customers and the banks themselves need to be prepared the next generation of how financial services are delivered and experienced

This transformation is the subject of a fascinating recent strategic whitepaper by Alcatel-Lucent (News - Alert), The bank branch of the future:  From transactions to interactions.  The intent in what will be a two-part series of articles on the whitepaper is to look at what is driving the overhaul of branch banking with a glimpse on what the future holds.  In the follow-up the recommendations on how to build such a futuristic branch office will be explored.

Conflicting trends driving dramatic change

Without going into great detail, those of us who live in the U.S. know the basics.  Thanks to the Internet, smart devices and apps, online has become our preferred way for us to do most of our banking.  We can look at our accounts, transfer funds, pay bills and even apply for loans of all types.  In short, banking has become very much a self-service affair. There are no longer “bankers’ hours”, and when we want help we click to call typically rather than visit the local branch. What this has meant to banks is that the massive investments they made in opening branch offices in terms of real estate, people and what is now legacy technology have become boat anchors on profits. 

In fact, the whitepaper provides the factual support for how the times are changing and rapidly.

• Many large banks have been rushing to close branches because they are very expensive to operate. In fact, a Cormack Securities report suggests that a 10 percent reduction in bank footprint (either closures or reduction in size) would yield an increase in earnings of around 2.7 percent.
• The economics of online and mobile transactions are compelling. A Financial Times (News - Alert) article calculates that a transaction executed at a branch is $4 per visit; at an ATM (“cash point”) a transaction is approximately 48 cents (around 1/8th the cost); an online or mobile application is around 4 cents (1/100th the cost).
• As payment technologies like mobile payments continue to move into mainstream use, the need for cash will decline, further limiting people’s need for bank branches. According to Bain & Company, most banks are seeing teller-based transactions decline at an annual rate of 10 percent–15 percent.
• As a result of all the factors above, the number of branches in the United States declined to 94,725 in 2014, the lowest since 2005.This is approximately a 5 percent decrease across five years. 

What this all adds up to is desirability of closing select branches, while enriching the customer experience in those that remain using an omnichannel approach that integrates seamlessly the physical and virtual worlds. 

While not a perfect analogy, as with most large enterprises which many physical retail locations and entertainment venues, the need to make the physical experience attractive has become paramount.  It is not only the way to increase customer loyalty, but also the vehicle for obtaining intimate permission to upsell or offer unique loyalty rewards.  If you have been in the branch of your local bank you may have already experienced the increased attention that going from transactions to interactions involves. 

The whitepaper also notes what may be a contradictory trend that research has revealed.

A McKinsey & Company (News - Alert) report reveals that 65 percent of customers interact with their bank through multiple channels.  Interestingly, the report also notes that customers who use mobile and online banking are 60 percent more likely to be active branch users than those who do not.

Digital and physical channels can synergize with each other, resulting in a rationale for branches

even in an increasingly digital world. Digital channels can be used to facilitate basic transactions that are not economically viable to conduct at the branch, while physical channels can be used to offer a unique, advice-driven customer experience for larger, more complex interactions. This customer-centric, relationship-based approach can increase value for the bank even with a smaller, less expensive footprint.

To achieve this goal, branches will need to be transformed with regards to appearance, service, strategy and technology. The future bank branch will shift the focus away from basic transactions to helping the customer make the right financial decisions.

Given these trends, what is a bank supposed to do looking ahead?

ALU points to six changes that have either been recently introduced at your local branch or are coming soon as they go omnichannel and integrate the heretofore silos of information that have created obstacles for optimizing the customer journey.  They include:

1. Mobile integration:  a customer who starts a transaction on one channel should be able to pick it up at another, including at the branch if they seek in-person assistance.
2. Advanced ATMs: including integration with personal devices and HD video with a customer service agent.
3. Touch screen displays:  to enhance the indoor experience.
4. Mobile staff: everyone will have a tablet to summon the resources or people they need in order to reduce resolution times.
5. Pop-up branches:  going where the customer goes, i.e., being there such as the trend already taking place of bank branches in super markets and other big box stores.
6. Data-driven branches:  leveraging the trust people have in their banks regarding personal information versus other institutions and changing the perception of branch employees from tellers and loan officers to financial advisors.

As studies are beginning to prove, irrespective of vertical market, companies that move to next generation technologies to create operational efficiencies while simultaneously enhancing the customer experience out-perform those who are technology laggards.  This is not technology acquisition for technology’s sake but rather with very specific intent that must be executed well because the consequences of poor execution in a real-time world can be catastrophic. 

As noted, in the second part of this series we shall see how banks get their branches from here to the future.