Distorted Visions Of The Branch Of The Future

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An American Banker article titled Conestoga Takes Branch Video to the Next Level starts off by saying:

“Richard Elko excitedly describes the reinvention of consumer banking at Conestoga Bank, a path toward branches that more closely resemble small, virtualized pieces of the central office than separate outposts. “We wake up in the morning and say ‘what should a bank look like in today’s world?’ If Google or Apple had a bank, what would it look like?,” says the CEO of the $622 million Chester Springs, Pa.-based Conestoga.”

My take: I assume that what Mr. Elko is asking is “if Apple had a bank, what would its branches look like?” If I’m correct, that’s an easy question to answer. It would look like this:

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The focus on “how Google or Apple would run a bank” is misplaced. Apple sells technology products. Products that people can interact with, and that they like to interact with before buying them. I’m sure I’m not alone in my behavior: When I go to the mall with the wife and kids, they go into 50 different stores looking at clothing, shoes, and make up. I go to the Apple store and play with the products.

Show me the guy who goes to the mall and hangs out at the bank branch while the wife and kids are spending all his money, and I’ll show you a bank robber. (Casing the joint is probably a good use of time for a would-be bank robber, no?).

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I can’t imagine that Apple — if it owned or started a bank — would build bank branches that only provided banking services. I also can’t imagine that Apple would dedicate more than two or three square feet of its existing retail locations to banking services.

Recent reports suggest that Apple’s store employees earn about $12 per hour, on average, and generate $500k in sales per employee.

Good luck to Mr. Elko trying to replicate those numbers.

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Conestoga’s approach to the branch design challenge is “video and file transfer techniques to allow more robust video-enabled transactions, including the commencement of new credit and savings products; in effect adding video sales to earlier video teller services.”

I’ve made some rough estimates, and I’m not convinced the economics are favorable.

To build this model, I’m guessing that it’ll cost $500k to implement video-based services in a 25-branch bank.

Another key element of the model is the sales productivity of the branch. To make this estimate, I used the average number of retail checking accounts opened per branch (16.9) that Cornerstone Advisors came up with (and reported on Bankstocks.com). Cornerstone also found that accounts opened per branch in 2010 was down 10% from 2007.

The model contains a number of scenarios:

1. Scenario 1. In the first scenario, I assume that the implementation of video sales capabilities improves sales productivity by 10%, and I assume away the downward decline the account openings per branch. The five-year ROI of this scenario is 51%, with a 10-year payback period.

2. Scenario 2. In the second scenario, I add in the 3% downward trend in account openings with the assumption that that doesn’t represent a decline in sales effectiveness, but instead, a decline in the number of overall branch visits. This reduces the five-year ROI to 34%, with a 15-year payback period.

3. Scenario 3. In the third scenario, I upped the estimate for sales effectiveness improvement from 10% to 20%, and kept the 3% downward trend in overall branch visits. The five-year ROI improves to 83%, and reduces the payback period to 6 years.

4. Scenario 4. In the fourth scenario, I went back to the 10% effectiveness gain, but made an assumption that implementing video sales could help drive traffic into the branches, and introduced a 3% annual gain in monthly branch visits. The result: A five-year ROI of 67%, and a payback period of 7 years.

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Clearly, the ROI of this branch of the future vision is dependent on some rough estimates I’ve made here. If the cost of implementation is $250k instead of $500k, you can double the ROI numbers, and cut the payback period in half.

But there’s another element here that shouldn’t be overlooked: These estimates implicitly assume that any increase in branch sales effectiveness is entirely due to the implementation of video sales capabilities.

In other words, it assumes — in the language of economists — “all other things being equal.” But all “other things” are never equal. Banks will continue to advertise, and make investments in other marketing technologies and tactics will make it difficult to attribute the results of an increase in branch traffic and branch sales effectiveness to a single investment.

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Bottom line: Even if banks could get people back into bank branches, the increase in sales effectiveness needed to make the investment profitable is substantial.

The 5-year ROI estimates in my model just don’t cut it. (Feel free to shoot holes in my model — I know it’s based on some rough estimates).

But proponents of the vision that bank branches are going to metamorphose into high-tech sales centers — where consumers come in to discuss their financial lives with Max Headroom on a TV monitor — need to rethink that vision, or back up their visions with some economic reasoning.

In fact, it may be just as likely that the future role of the branch is strictly service — and not sales — related.  That the branch will be the place where people go to get the sticky problems fixed. 

What Apple (and car dealers, for that matter) teaches us is that when you have a product that people can touch — and want to touch — before buying, having physical locations that show off those products are good investments. Financial services are different.

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