|Reevaluate the branch channel (July 10, 2008)|
Cost pressures and declining household/branch ratios are forcing banks to rethink their branch strategy and their branch designs
The branch channel is besieged on all sides. Worsening net interest margins are making banks more reliant upon their branches for core deposit and fee income generation. The industry-wide, median net interest margin declined from 3.87% in the first quarter of 2007 to 3.71% in the first quarter of 2008 marking the fourth consecutive quarter of margin compression. This trend has increased the industry’s needs for low-cost funding and new sources of non-interest income, thereby elevating the importance of the branch’s traditional role as a sales channel.
Along with optimizing branch placement and allocation of branch network resources, banks need to determine how to make best use of facility space. In addition, as de novo activity slows—and indeed, the industry is on pace to build about 27% fewer new branches in 2008 than in 2007—many banks are increasing the proportion of their channel investment budgets devoted to enhancing existing offices. Bank products, alternative delivery channels, and customer expectations have evolved considerably in recent years, and the mammoth, traditional teller window-dominated layout of most branches has become somewhat inappropriate. In essence, banks should incorporate design tactics that:
1. Devote the majority of branch space to support the branch’s present-day role. Specifically, most banks will need to ensure that facility layouts are conducive to sales and emphasize relationship management services over transaction processing.
Since the advent of the ATM, bankers have predicted a day in which branches would become unnecessary; however, branches remain a key, if not the most important, component of bank distribution systems. While alternative delivery channels have gained in popularity, a 2007 ABA consumer survey found that 36% of respondents use branches more than online banking, ATMs, or telephone banking. In addition, the majority of consumers in virtually every segment prefer face-to-face interaction when opening bank accounts. Younger consumers (those in Generations X and Y) are becoming increasingly comfortable purchasing simple bank services over the internet. For more complex products, however, such as a mortgage, most consumers will confine their web activity to research and come to a branch or meet with a loan officer to apply for the loan. Branches also continue to be the channel of choice for problem resolution and complex customer service issues.
Still, the branch’s dominance over certain consumer behaviors is waning. Respondents preferring branches in the ABA survey tend to skew older, and younger bank customers are primarily dependent upon online banking. Businesses, too, have less need for branch transaction processing as electronic payment vehicles claim a greater share of total volumes and as services like remote deposit capture take hold. Altogether, some banks have reported as much as a 10% year-over-year reduction in branch transaction activity. Nevertheless, most banks are still very much wed to their branches. Many facilities and even some de novo designs may, however, be allocating too much space to teller lines and not enough for consultative discussion.
2. Utilize technologies that expedite and lower the cost of teller transactions, enable focus on more critical customer interactions, and facilitate more dynamic branch staffing. Given the diminishing need for transaction processing and the inherently greater opportunity associated with sales discussions, banks should aim to conduct the former as efficiently as possible and maximize flexibility and resource availability for the sales discussions. Technology can help significantly to enable this strategy. Modern branches now often utilize universal work stations that enable branch staff to cover both teller and platform roles as well as cash counters, dispensers, and recyclers that speed teller transactions and reduce cash-drawer shortages.
3. Enhance branch accessibility, preserve customer privacy, and enable desired traffic flows and customer behavior through effective design and placement of office furniture, modular walls, and creative design. Evolving concepts in interior design also help to promote and facilitate value-added customer interactions. According to Bill Stata, vice-president of business development for The Frerichs Group, banks are increasingly opting for open branch configurations with movable walls that maximize retail space and flexible accommodation of large and small parties for advisory consultations and credit applications. Effective lighting and inviting windows help to draw customers into the branch, and sleek yet functional furniture helps to open traffic lanes and direct customers past merchandising displays. Most banks can make significant inroads with relatively little investment by simply looking to reorient existing furniture and clear lobby obstacles.
Additionally, banks should consider access in converting and designing facilities. In recent years, banks began extending branch hours in an attempt to cater to business owners and other segments that require early morning or evening access to branch staff. This tactic can add significant incremental staff expense as most banks require at least two employees on duty when public access to the lobby, teller lines, and vault is permitted. Consequently, some banks are reversing decisions to extend branch hours due to low traffic and perceived lack of customer demand, thus once again limiting access to potentially lucrative customers and prospects. Instead, banks might consider building new branches and refitting existing offices in attractive business markets with branch manager offices that have doors that open both to the street and the lobby. Such offices would allow branch managers to meet with customers during off hours while lobby doors remain locked, thus eliminating a need for dual control and the expense of an additional resource working overtime.
4. Reflect the brand and value proposition of the bank and establish the branch as a relevant destination for targeted customer segments. Importantly, banks need to ensure their branches help to attract the right types of customers and effectively drive traffic. Many banks have attempted to turn their branches into financial coffee shops with the hope that customers would lounge in the lobbies and visit more frequently. While this might have some appeal with some consumers, most banks would do better to consider the needs of the specific segments they target and look to leverage the branch facility to meet these needs.
Banks that targets small businesses, for example, should aim to meet business owner needs. Viking Financial Services Corp. of Seattle, offers its clients the option of reserving community conference rooms during or after branch hours. Use of space like this for client meetings, WiFi zones, and access to printers and copiers are particularly attractive to the growing segment of SOHO (small office/home office) businesses.
Finally, banks should ensure that the design of their branches reflects the company’s brand. Often, de novo branches exhibit a bank’s current image well, but older branches do not. Banks need to assess the design of existing branches periodically for design consistency with both other branches in the network as well as with the look and feel of the bank’s alternative delivery channels. BJ
[This article was posted July 10, 2008, on the website of ABA Banking Journal, www.ababj.com, and is copyright 2008 by the American Bankers Association.]
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