It's been almost a year since my last branch rant (here), so I feel I'm due. As I've said before, as founder of a business tied to the success of digital channels, I'm totally biased, so proceed with caution.
During lunch at the Bank Innovations conference here, I engaged in a spirited debate about the value of branches. And later that week, I enjoyed Optirate's rebuttal to The Financial Brand's defense of bank branches. It's one of the more highly charged, and important, issues of the day.
Here's what it boils down to:
Branches have value...
...but not enough to pay the rent
Since customers won't pay directly for branches (see note 1), banks must cover their costs with low deposit rates, penalty fees and other charges. That has worked for a while, but eventually leaner competitors will figure out how to cherry pick the profitable customers/services. We saw ING Direct siphon off a few billion in deposits during the high-rate years and now we are finally starting to see alt-lenders making a small dent on the loan side ($1 billion or more each being originated this year by Lending Club, Sofi, and OnDeck Capital).
The writing is on the wall. The branch, as we know it, is on the way out (note 2).
But most banks have built their franchises by opening new accounts at branches. So what are the alternatives? There is no right answer as it depends on your strategies and customers, but here are some general ideas (note 3):
- Provide state-of-the art online/mobile applications and onboarding (note 4)
- Go after the kids of your current customers, then take care of them through major life stages so they never leave (note 5)
- Increase your branded-ATM presence in your geographic footprint (apartment lobbies, large employers, etc.)
- "Power the POS" with free card processing for your cards (if merchants steer customers to your card)
- Partner with employers to provide banking as an "employee benefit" including a schedule of bank employee "office hours" for advice, help and limited transaction support
- Focus on small and mid-sized businesses (including startups), and take staff directly to the business location
- Drive traffic (foot and digital) to your merchant customers with relevant offers
- Consider roving "mobile banks" that operate like food trucks, moving about the community and parking in high-profile locations (might as well sell cheese and bacon sandwiches too)
- Participate in crowdfunding/P2P loan platforms to gather new assets (note 6)
- Provide in-store/dealer financing (real-world and digital)
- Co-locate with compatible service businesses (insurance, tax prep, real estate, etc.)
- Have a presence at local events, festivals and street markets (portable ATM, water stations, bathrooms, etc.)
- Get very involved in local real estate
I am not saying that all branches should be closed. Schwab proved that it pays to have at least one physical location in every major city. But branch costs need to be reduced fast.
It won't be easy. Change is hard. Layoffs are VERY hard. And unproven digital strategies supplanting longstanding branch-based sales are risky. But I'm not sure there is any realistic alternative for the majority of financial institutions.
Embedded image used with permission of Getty Images.
1. It's true that the same could be said about online or mobile channels. But, for the most part, the digital alternatives operate at a fraction of the per-user cost of branches.
2. It's a 40-year process, however (see OBR 128, April 2006, subscription).
3. For 500+ ideas, see our annual planning report (Sep 2013, subscription).
4. See: Online Account Opening, OBR 168/169 (June 2009, subscription).
5. See: Youth Banking, OBR 194/195 (July 2011, subscription).
6. See: Crowdfunding, OBR 216/217 (May 2013, subscription).