The economic impact of the coronavirus pandemic increasingly is expected to be huge, and long-lasting. Mark Zandi, chief economist at Moody’s Analytics described it this way in an interview with Vox, March 23:
“This is an economic tsunami. Social distancing is economic distancing. We are telling people to cease going to stores, to restaurants, to workplaces. We are insisting they stop supplying their labor, making their goods. To slow a pandemic, we are forcing a recession, perhaps a depression.” The intensity and length, he said, all depends upon how quickly the spread of the virus is stopped.
Pretty scary stuff on many fronts, but for this article, let’s look ahead to the likely impact on banks and credit unions. We may not be able to do much to change the course of the virus, but we can prepare to make changes for life on the other side of this pandemic.
Three COVID-19 Impacts on Retail Banking’s Future
The first impact is that those consumers who were reluctant to adopt the use of digital channels are being forced to do so now in order to limit face-to-face interactions in the branch. J.D. Power’s banking study last year showed that about two-thirds (67%) of consumers still rely on the teller line, with 54% deemed branch “dependent.” Those numbers will decline.
The second impact will be a growing emphasis on preserving capital and cash. New deposit gathering will sharply decline due to high unemployment. Fewer people will be moving or making large purchases, so home purchases and auto financing will stall. The Federal Reserve’s rate cuts have tightly squeezed margins. All of which means expense reduction will be a primary focus, and with branches seeing far less traffic, branch closures will rise.
“Expense reduction will be a primary focus, and with branches seeing far less traffic, branch closures will rise.”
— Jon Voorhees, Peak Performance Consulting Group
In addition, banks and credit unions must accelerate plans to substantially improve the efficiency of their remaining branches including a migration to universal banking, use of cash recyclers and other efficiency plays.
The likely third impact will be that many banks and credit unions will seek out mergers to survive. In-market mergers create increased efficiencies and facilitate the closure of redundant branches.
8 Branch-Related Issues to Consider
Let’s think about what other possible changes the three impacts just described could bring for branch banking, keeping in mind that most consumers still want face-to-face advice when needed.
1. Consolidated traffic. Less branch traffic may be offset by fewer branches, so the remaining branches will still need teller lines. If enough branches close, the remaining branches may be able to re-open more closed windows.
But should all teller windows be manned in person, or is now the time to add interactive teller machines (ITMs) for remote access to tellers? Consumers will likely be more receptive to these video-enabled services in-branch than they were previously. In my experience, ITMs only made sense in the drive-up lanes and they still do in that deployment. In-branch deployment of ITMs rarely met the expected usage levels or cost savings, but we’re in a different world now.
2. Greater use of TCRs. As mentioned, banks and credit unions will still need some onsite tellers for certain transactions. Research shows that teller cash recyclers reduce cash handling by 90%, yet only 30% of U.S. branches have deployed them so far. Greater use would seem to be a logical psychological play for branch staff at minimum, given the concern over cash as a means to transmit the coronavirus.
3. Drive-up resurgence? In the last ten years there has been an effort to close manned drive-up lanes. The COVID-19 pandemic has reversed that trend for the moment. Going forward will manned drive-up lanes, in combination with inside ITMs be the future of teller transactions?
One concern is what the impact of that sort of arrangement might be on cross-selling or referrals for new accounts. Also, this approach might work in suburban and more rural areas, but not in urban areas where drive-ups are rare.
4. Increased use of universal bankers. Branch staff needs to be able to provide all services for flexibility, so the movement to true universal bankers is likely to accelerate. Switching to a universal banker structure involves more than just changing their job titles, however. In my experience, universal banker rollouts have failed due to lack of ongoing oversight, tracking and training. But done properly, having every staff member able to perform all transactions creates maximum flexibility.
5. Branches as advice centers. The need for advice or account services will increase as more customers need help charting a new path forward financially in a post-pandemic world. The role of the branch has already been shifting more to an advice center in the last few years and that trend will accelerate.
This raises various questions relating to staff, training, technology and even the facility — i.e. What’s the right layout for advisory and account servicing? Offices, cubicles, desks?
6. ATM questions. ATM usage likely will continue to increase in the short-term as consumers try to minimize face-to-face interactions, but what happens longer-term? Are we accelerating toward a cashless society, or at least minimizing cash usage? If that’s the case does that impact the need for ATMs?
Possibly, but the need for remote or offsite branded ATMs could also increase. Here’s why: As the number of branches decline more sharply after the pandemic, banks and credit unions still need to cover their markets. A well-sited deposit-taking ATM can fulfill that role. They cost about 10% of the cost of a branch to deploy and only 5% of a branch to operate. You can have more local touchpoints at a lower average cost to operate.
7. Digital investments must continue. Although much investment has already been made in digital banking capabilities, this will need to increase further as investments in physical networks decline. e-Channels must be able to meet customer demand.
8. Small business, a thorny issue. Cash intensive businesses pose a difficult challenge in a world of fewer branches. Will they require dedicated small business or commercial windows? These customers can be very profitable and hard to land so banks and credit unions need to determine now what will be required to help them in the post-pandemic world.