Have consumers’ attitudes towards retail banking channels really changed as much as some bankers have come to believe?
And, what should banks and credit unions be doing to best serve consumers overall, while containing costs, going forward?
The accepted gospel in the industry is that the pandemic permanently changed consumers’ banking preferences. People who would never have touched mobile banking, the belief holds, had to try digital channels due to Covid’s impact on branch visits. Having been forced to try them out, they found they loved them — or so holds the theory.
But what if that wasn’t quite what really happened?
Digital Foundation Isn't So Firm:
McKinsey found that the 'love affair' with digital isn't quite so pat. The firm's research indicates that willingness to use mobile banking far exceeded both consumer preference and actual use of that channel.
In North America, McKinsey found that while 74% of consumers are willing to use mobile, only 36% — less than half — say they prefer mobile over branches. 52% actually use mobile when it comes down to it. Similar results were seen in Western Europe and Central Europe.
One key fact makes the issue more important than simply supporting one or the other camp in the neverending branch versus digital debate:
McKinsey found that retail banking sales fell by 10% in 2021. This reflected the falloff in branch activity and the fact that “growth in digital channels did not fully make up the difference,” McKinsey analysts wrote in “Best of Both Worlds: Balancing Digital and Physical Channels in Retail Banking.” The analysts add: “Note that overall, the widely discussed increase in digital sales as a percentage of total sales owed more to branch declines than to actual digital gains.”
This has serious ramifications when many banking leaders think the smart move is to continue shrinking branch networks.
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“While banks continue to downsize physical channels, the long-term role of branches remains uncertain,” according to McKinsey. Across North America, Western Europe and Central Europe, branch activity in general rose by 20% in 2021, suggesting that branches remain important.
For many institutions the solution has been to lean into the idea of omnichannel banking — the idea being that you can do anything in every channel, and even jump back and forth if you like.
But McKinsey suggests that over the long term banking institutions should reconsider the role of mobile and online channels versus branches. The idea is to use them differently and to eventually persuade customers that this will be to their own benefit.
“The winners in the industry have accomplished a much greater sharpening of their visions for what gets done in which channel, and they are driving towards that,” says Zubin Taraporevala, Senior Partner at McKinsey. “This is versus the common practice of ‘I provide everything everywhere, and let’s see who uses it’.”
Banks’ Omnichannel Thinking Needs a Tuneup
“Omnichannel” remains one of those banking terms that not only has evolved over a decade or so of use, but which also means different things to different bankers. In a related vein, the term “phygital” — delivering banking through a blend of physical and digital — is also at play here.
“One of the things we’re getting at is that the purpose of branch networks needs to change,” says David Tan, Partner and Managing Director, at Finalta by McKinsey, during a joint interview with Taraporevala by The Financial Brand. (The company specializes in competitive benchmarking research.)
The report’s authors, also including Sergey Khon and Ahmed Nizam, make this point: “While each institution must arrive at a unique model for physical channels, a common theme has emerged: the inversion of the distribution pyramid. Branches and call centers no longer dominate as the catchall channels fulfilling customer needs, leaving digital to fulfill a subset of activities for a subset of customers.”
However, that usage and those subsets, are growing. “For an increasingly mainstream cohort,” the report states, “mobile has become the go-to, with physical channels becoming brand ambassadors focused on truly complex, empathy-centric situations.”
“You generally don’t go to a retail store for servicing,” says Taraporevala. He says that someone with uncooperative digital tech might go to the in-store desk of the Geek Squad at Best Buy or to an Apple Store. “But by and large you don’t, and to the extent that service continues to move to banks’ mobile apps there may be more analogies in banking of the brilliant experiences you can have in stores.”
The consultants say it’s important to understand why some customers still like branches. It’s often not tech phobia, but a more human reason.
“For many people, they actually like the social interaction,” says Taraporevala. “They tell us that they like the dialog with live bankers and like the expertise. And there are still many people who say they can’t do what they want to in other channels. In North America that segment is 17% and that’s pretty meaningful.”
Given that nearly three-quarters of customers say they are willing to use digital channels, David Tan says, it makes sense to work at converting the willing to those that have a preference for digital. This won’t be accomplished by strong-arming them, but by improving the digital experience overall.
For many institutions’ apps, a virtual assistant that is at the center of it all — much like a branch greeter in the physical domain — will help them find everything they need. This is especially necessary as the number and range of functions continues to grow. Their shorthand for this strategy is “innovate the interface.”
Beginning the Rethinking of Branches Versus Digital Channels
Interestingly, while banks weigh how to transition from traditional omnichannel thinking, fintechs and neobanks have mostly put their chips on one channel. Taraporevala says that the best, most successful neobanks have “trained” their customers to rely almost solely on the digital channel.
“It’s pretty hard to get somebody on the phone at the neobanks. You can get someone eventually if you try hard enough. But constraining the supply of people does boost usage of digital channels.”
— Zubin Taraporevala, McKinsey & Co.
To a degree the strongest ones can do this because they are “continuous innovation machines,” in Taraporevala’s words. People want to see what they come up with next and will put up with some frustration.
Banks, having much broader offerings long in place, must think things through. The trend does not mean that branches will all die, but that they will evolve, according to the consultants.
“You will see a lower density of interactions in branch networks,” says Tan. “On the other hand, there will be a much greater variety in the types of things people come in for — and there will probably be less predictability as well.”
Tan says this will mean hiring bankers for “universality.” That is, for the ability to serve nearly any type of inquiry where the consumer needs to deal with a person, not an app or artificial intelligence. This means finding people who have both banking skills and people skills — but that means conceptual banking skills, rather than they’re being amped-up transaction handlers. These will be people who can handle everything from a customer who is dealing with a death in the family to a victim of fraud to utter confusion over mortgages.
“People will be coming to your branch because they want to speak to someone with expertise who can empathize with their situations,” says Tan.
“Banks will have to carefully manage things to make sure the right demand lands in the right places,” he adds. In some cases this will mean having highly skilled people showing customers how to handle transactions in digital channels, a role that some institutions have dubbed “digital ambassador” in past years.
Tan believes banks will tend to opt for that educational approach.
“I don’t think they will simply turn things off in branches yet,” he says.
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McKinsey to Banks: Dump the Generational Thinking, Already
Ever since the arrival on the banking scene of Millennials, and then Gen Z, bankers have been harangued to think of “tomorrow’s customers” as a guide to what to do and how to do it.
Tan and Taraporevala think it’s time to stop typing consumers that way, and the debate over branch versus digital banking strategy represents an excellent place to start.
The increasing role of artificial intelligence in banking should enable institutions to see consumers at the personal level, not as delegates for a demographic cohort strictly based on the year they were born.
“We’re way beyond just going after young people or middle-aged people or older people,” says Taraporevala. “There are people in older demographics who are super active online.”