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The Fading Importance of Physical Engagement in Retail Banking

A Snarketing post by Ron Shevlin, Director of Research at Cornerstone Advisors

Publicly arguing with friends might not be a great way to ensure they stay friends, but I’m going to take my chances.

I worked in the technology analyst business for a long time. I worked with, and got to meet, a lot of great analysts. There are none that I have more respect for than Bob Meara from Celent.

But a recent post on LinkedIn from Bob isn’t going to escape a little scrutiny here. The title of his post was The Enduring Importance of Physical Engagement in Retail Financial Services. In the article, Bob argues that:

In-person (physical) engagement will be of lasting importance in financial services for at least three reasons: 1) Most consumers rely on brick & mortar for commerce and will continue to do so; 2) Most retail deposits still take place at the branch; and 3) Most banks don’t offer a decent digital customer acquisition mechanism.

My take: You can’t see where you’re going by looking down at your shoes. Let’s examine each of the reasons Bob lists.

Most Consumers Rely on Brick & Mortar for Commerce and Will Continue to Do So

Really? Seems to me that brick and mortar for commerce is dying. Department stores like Macy’s are closing shops. Yes, Amazon is actually opening physical locations — to supplement and support their digital channels.

In addition, I’m a bit caught up with the phrase “and will continue to do so” in the sentence. Why will they continue to do so?

I hate to hearken back to 1979 (because I know so many of you weren’t even born then), but back then one might have been inclined to say “People rely on gas station attendants to pump gas for them, and will continue to do so.”

But that didn’t happen — gas stations went self-service, and guess what? People adjusted! And thanks to technological development, the process was faster. Granted, there are times when it’s pretty damn cold up here in Boston, and I would love for somebody to pump the gas for me. But I don’t rely on that.

Bob is making a mistake that I hear over and over again from people in banking: He’s confusing physical presence with the need to talk to someone. Just because a consumer might need to — or prefer to — talk to a person, it doesn’t mean they have to be in the same physical space to do so.

The problem has been that banks have done everything they can to prevent customers from talking to real human beings over the phone. The IVR is an evil evil technology (damn, that’s going to get me in trouble with IVR vendors).

In the 25 years that I’ve been living in the Boston area, I’ve been involved in a few automobile-related incidents requiring the involvement of my insurance company. I’ve never met my insurance agent in person. She could be sitting next to me at the moment, and I wouldn’t know who she was. But when I pick up the phone and call her and tell her my problem, the problem gets resolved.

I don’t need to see her in person to get the problem fixed. I don’t rely on brick and mortar for insurance-related services. And there’s no need for me — or most people — to continue to rely on brick and mortar for banking service.

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Most Retail Deposits Still Take Place at the Branch

I’m not so sure about this statement. Bob has a chart in his post (which I hope he doesn’t mind me republishing here) that shows that an overwhelming percentage deposits comes in through branches.

I have a little trouble believing this, because I would have guessed that the overwhelming majority of retail deposits comes in through direct deposit from consumers’ employers. That’s not really the branch.

In addition, I have two words to argue against the importance of the branch as it relates to deposits: ING Direct.

Before it was acquired by Capital One, ING Direct amassed $80 billion in deposits… and did so without a single branch.

Most Banks Don’t Offer a Decent Digital Customer Acquisition Mechanism

True dat.

But it’s not likely to be a true statement forever.

In Cornerstone Advisors annual survey of technology investment plans, digital account opening is one of the top three technologies (out of 38 technologies asked about) in terms of investment in new/replacement apps, or in terms of enhancement.

There is something else to consider here, though. While many banks might not have a good digital acquisition mechanism, don’t lull yourself into the belief that the branch experience is that great.

Eric Gagliano of MarketMatch told his story of a recent branch visit on the firm’s blog. According to Eric:

I’m in North Carolina, walking into about 30-40 branches for a new client and their competition to gauge the customer experience for each. On the very first shop of the day, I walked into a picturesque credit union branch. A nice woman greeted me as soon as I walked in, with the Southern hospitality you would expect from North Carolina. [I said], “I’d like to see what kind of checking accounts y’all have.”

At this point, Mrs. Southern Hospitality could have: 1) Shook my hand, introduced herself, asked my name, or 2) Asked me where I bank today and what kind of account I have; or 3) Asked me how I use my checking account … how many checks I write, what kind of balance I keep?

With this info she could have taken all of their accounts and narrowed them down to ONE recommendation.

She did none of this. The very next words out of her mouth were about their checking account for folks age 55+!!! Trying not to sound too irate, I said, “Do I look 55?”

At this point, Mrs. Southern Hospitality could have gone in a million directions. But she didn’t take the hint. “But it comes with free checks,” she persists.

“But I’m NOT 55,” I lament.

For me, the shop was over right then.

We really have to stop assuming that just because the majority of account openings happen in branch it means the branch experience is better.

You Can’t See The Future If You’re Staring At Your Shoes

The statistics that Bob uses in his post may very well be true, and may reflect today’s reality. But to assert that today’s reality will be tomorrow’s reality isn’t a supportable assertion.

For the record, I’m not arguing that branches will die out. It’s a call each individual financial institution must make regarding the importance of physical presence in the context of their own business and delivery strategy.

But thanks to the ongoing development of technological capabilities, you’re going to have to do a lot better than rely on today’s behavior to assert that the importance of physical presence is enduring.

P.S. – Are we still friends, Bob? 🙂

Ron ShevlinRon Shevlin is Director of Research at Cornerstone Advisors. Get a copy of his best-selling book, Smarter Bank: Why Money Management is More Important Than Money Movement. And don't forget to follow him on Twitter at @rshevlin.

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Comments

  1. Ron, as we discussed after seeing this post, my concern is that bank President’s from 6,000 smaller banks across the country will see this as affirmation that investment in branches should continue and the consumer wants more of the same. This discounts the fact that JD Power showed that bank satisfaction is now driven by digital (not branch) satisfaction. It ignores that Novantas found that ‘convenience’ is now tied to ease of digital engagement than branch proximity. And it ignores that there are still more than 4,000 banks that don’t offer an option other than branch (I assume including ATM) deposits. Give consumers a choice and many more will opt to avoid the car trip and inconvenience of visiting a physical facility. I love the work done by Bob and Celent as well, but reinforcing an inefficient, outdated channel is not good business.

  2. Still friends, Ron!

    I believe we’re in agreement about where the puck is going here. Not only that, we probably agree (mostly) in our assessment of banks’ slowness in acting.

    But, too many pundits overstate the near-term importance of mobile IMO. Multiple sources still peg internet commerce, although growing nicely, to be well under 20% in many retail categories (excluding food, beverage, gasoline, etc.). In that context, banks are actually slightly ahead of many other retail categories.

    Like it or not, old habits die hard for many consumers. Large banks in particular serve the mass market. As such, they can’t rely on niche markets such as ING as you cite. They need to provide excellent service to the entirety of the markets they serve. That imperative, in my opinion, will indeed be enduring.

    At the same time, none of this excuses neglecting digital. Banks do so at their peril.

  3. Point-counter point-point…

    It seems all the ruckus is in regards to the long-term viability of the branch as a primary connection point of commerce between FIs and consumers. I submit the following:

    A recent Bain & Co. study of 137,000 consumers found that 90% of participants visited a branch in the last 3 months, including 86% of Millennials (25 to 34 years old). The same study revealed Millennials want to talk to someone because Mobile was inadequate and they are the most likely consumer to apply for and receive loans.

    Same study by Bain reported that Mobile Banking adoption is leveling off at 55% – growing from 52% a year earlier. And though digital can provide tremendous scale – digital has not closed the gap over the last decade to provide a sustainable revenue source i.e. loans for FIs to outpace the need for branches.

    Over 65% of consumer sales occur in a branch and over 72% occur with a human interaction according to an E&Y study. When it comes to the financial engine of FIs sales is loans – consumer (cars and homes) and commercial loans. Commercial loans are much larger than home loans, and we are at an all time high for commercial lending according a recent report by the Fed Reserve Bank of St Louis.

    TimeTrade reports that nearly 57% of consumers prefer the branch as their primary way to interact with their FI. A recent FiServ study said 44% prefer the branch. JD Power reports that 77% of all new accounts for FIs walk through the door of a branch (compared to 82% five years ago) – 19% through mobile (compared to 14% five years ago).

    Consumer-based banking has been primed for disruption for a decade but less than 3% of all community scaled branches have closed during that period. This is because for the community bank, consumer banking ain’t their customer. Credit Unions by nature serve the underserved and are all consumer – yet they are not closing branches either…the previous Bain study said that nearly 40% of consumers will switch FIs if their local branch closes. No wonder FIs don’t close branches.

    It would seem that much of the ruckus is aimed at the Mega Banks who have closed about 10% of their branches in the last decade but there are still over 90,000 in circulation….that’s a lot of facilities. And one the nation’s largest bank just said they were opening 60 more…that’s double what they opened a year earlier.

    I have long felt that the case for the branch lies with the value the consumer places on the human interaction. That interaction at present drives lending which continues to be another human interaction. And lending leads to profit…which catches the eye of investors and capitalism is quite the human interaction.

    And until the market devalues Banks because of their branch network…banks will continue to use the asset that gives them the most value. A recent case study: Banking trading multiples are growing, not going down. Bank of NC just sold to Pinnacle for over 3 times book value. Also, Denovo Banking i.e. startups are starting to build.

    What if Bob is more right..than we think?

    A rising rate environment will only boost profits for FIs as loan demand remains good…and maybe FIs of all shapes and sizes start branching more. The value of it all is decided by the market. So we may see FinTech join in unison with FIs to support them and the branch.

  4. Branches are still an important channel for many reasons, but they may be significantly overvalued. For instance, while Bain does show people use branches, they also have a major study from last year that says that “digital delights, while branches disappoint.” Current branch networks must be rethought and reconfigured for the future. More importantly, digital delivery must get better. Globally, digital delivery of consumer loans can be done in 15 seconds via a mobile device. Mortgage loans can now be done without leaving home and some can be done with a phone. People already shop for 90%+ of their bank decisions using digital channels, yet more that 80% of banks require a branch visit to complete the opening of an account. Why? Let’s give consumers a choice and not force a branch visit.

  5. Thanks for all the comments.

    Bob: Thanks for taking this in stride (at least publicly). I totally agree that too many pundits overestimate the pace of consumer behavior change. But too many people fail to recognize that we can be “forced” into change (e.g., self service gas stations) and adapt pretty quickly.

    I recently published a report on the impact of Interactive Teller Machines. One of our going-in assumptions was that we’d find that FIs that had deployed ITMs would have encountered resistance from customers who didn’t like the technology or didn’t want to use it. Yet, not one of the FIs we interviewed found that to be the case. Their customers adapted, and moved on.

    That’s why I had the”allergic” reaction to the use of the word “enduring” in the title of your post. It’s not necessarily enduring. If the economics of keeping branches continues to deteriorate, banks will have to do something about it — just like gas stations did.

  6. Great article and I appreciate reading the comments.

    It is less about the fading importance of the branch and more about the changing importance of the branch. If the strategy is to morph the branch into a glorified Starbucks then it’s flawed strategy and thus fading. If the strategy however is to learn from other industries and leverage your strengths to inform the right physical strategy then it’s adaptive to market needs – so changing.

    Look at Amazon vs. Borders. Look at Best Buy vs. Amazon. Look at Autobytel vs. car dealerships.

    There will be digital disruption but if the brick and mortar strategy takes that into account it could truly be the secret sauce of the organizational strategy. We have to accept that anything that can be done more efficiently digitally – will be.
    That does not mean there is no place for the branch. Quite the contrary, I think the changing role of the branch makes it the ideal place to own a competitive advantage and manifest the brand.

    Amazon is now opening stores of their own – Seattle, Portland, and San Diego. These physical stores represent less of an opportunity to sell more stuff and more of an opportunity to connect with customers – on their terms, when THEY want it.

    So, I think for banking we need to do the work to understand how the branch network represents a meaningful value add for the customer and strategic competitive advantage for the organization. To me the low hanging fruit there is first mortgages and financial planning. Great opportunities to connect consumers with the brand.

  7. Everyone in the industry seems to have very strong opinions on the subject of branch relevancy. However, I assert that what consumers think is the only thing that matters here.

    To persuade me that branches are “dead,” I will need to see research that definitively concludes that:

    1. consumers don’t need, don’t like and don’t use branches anymore
    2. consumers don’t choose their banking provider based on branches
    3. banking providers don’t generate a significant portion of sales in branches
    4. banking providers are able to complete 100% of all loans and new accounts digitally

    Right now, all research that I see concludes the opposite.

  8. Banking can open all new accounts and generate loans digitally today. The problem is most banks have not provided this option. I don’t think anyone is arguing that branches are dead or that the consumers don’t want branches. The challenge is that banks have yet to provide decent digital alternatives even though those alternatives are possible to provide and better in some cases. Branch transformation is needed and there are great examples in the marketplace. We just need to be careful when we look at research that indicates that consumers would rather have branches than digital alternatives. Branches will not die. Their role will continue to evolve.

  9. Occam’s razor would point toward people just like simply going to their bank branch still. We can cite study after study explaining one theory over another, but the numbers are showing significant overall traffic in many branches still. Like Bob states, like it or not.

  10. Ron Shevlin says:

    I went to my bank’s branch yesterday. Needed advice on applying for a mortgage? No. Needed help making sophisticated investment decisions? No. Opening a checking account which required a signature. No.

    My daughter had coins she wanted to cash in, and since I was going to be at the post office, which is next door to my bank’s branch, I said I would do it.

    I was the youngest person on line.

    The woman behind me had a check in her hand, and the branch manager came up to her and offered to help her deposit the check in the ATM. “No thanks,” she said. He then asked if he could show her the mobile app which would enable her to take a picture of the check so she wouldn’t have to drive down to the branch. “No thank you, I’m not ready for that,” she replied.

    The guy in front of me was there to visit his safety deposit. So there’s ONE “enduring” reason for a branch. Ridiculous that he had to wait in the teller line for that.

    Nowhere in my post did I say that branches “are” dead, so any comment implying that is wrong. I’m simply trying to counter Bob Meara’s post that branches have “enduring” appeal.

    It’s not enduring. If every bank in the US decided to close all of their branches within the next five years, guess what would happen? Consumers and banks would adapt. Physical, face-to-face engagement might be nice, and might be preferred by some people — but that convenience and preference is fading. Slowly (because of demographics), but fading.

  11. The opinions about the relevancy of branches span a continuum that ranges from “they are useless and dead” to “they are absolutely essential.” Unfortunately, people reading material examining the relevancy of branches often fail to appreciate any nuance, and interpret the material as support for one extreme or the other — “dead” or “essential.” Whenever the subject comes up, most readers need to be reminded that neither extreme is true.

    On the transactional side, until the financial system eliminates all physical instruments — cash, coins and checks — there will continue to be a role for physical locations. There may be other reasons as well, but this is a biggie.

    On the sales and service side, it’s very unclear at this point whether financial consumers will or won’t need/prefer face-to-face human interaction 10-30 years down the road.

    Some people in the industry assert that that they know with 100% clarity and conviction what will happen to branches in the future. No one really knows for certain — no more so that someone can predict what the Dow Jones Industrial Average will be 10-30 years from now.

  12. What if I argued that the importance of face-to-face engagement could be both enduring and eroding? IMO, it is not about longevity, but degree.

  13. Chris Yaldezian says:

    It should also be kept in mind that F2F banking it not only accomplished in a branch (a store setting) but by a banker going to see the customer, in the client’s setting. Face to face is sometimes necessary, as are branches. But much more of the day to day transactional banking requirements are nicely met with digital technologies: ATM, Mobile and Online. Such that the bottom line is that fewer, not more, branches will be required in the future and fewer not more banks are required.

  14. I’m CMO of a small (3 branch) community bank in Michigan. After surviving the near demise of the rust belt we decided to take inventory of our processes. Here’s what we knew: our deposits continued to grow throughout the recession, our foot traffic declined dramatically and our footprint was widening due to our mobile app yet our business model was developed around our branch locations. We hired an outside consultant and actually asked our customers what they wanted. Did they ask for more branches? NO but they did not suggest we close the ones we have. What they asked for was a more robust online banking application that would include “real time” and a website that was more interactive and responsive. Armed with that information, we took our online banking “real time” and we are in the process of rebuilding our website and will continue to update our technology. Our customers want to bank with people they know. But remember, most people have more than one financial relationship–for example when I need international services I go to Bank of the Internet. Nobody has 100% of the pie unless you’re Wells Fargo…

  15. I think the nature of the human connection will change.
    Banking used to require a face-to-face meeting for both transactions and advice needs, but with technological change (i.e. the move towards cashless), this is less a factor today (except for legacy clients who will never adapt to online/mobile).

    However, I don’t think anyone (millennials or otherwise) is ready to get their personal financial advice from purely online sources – money is an emotional topic, and we will still gravitate towards a channel that can understand our aspirations, fears and worries.

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