Branch Banking - A Cat With Nine Lives

Branch Banking – A Cat with Nine Lives
Dr. Nicos Rossides: CEO MASMI Research Group
Bud Taylor: Director Consulting MASMI Research Group
Introduction

Branch banking is dead!  Technology is killing the retail branch!  The Internet rules!  Younger tech savvy customers are taking over as the brick & mortar customers die off!
Maybe.  But to-date we have not quite lopped off the head of the face-to-face banking Hydra.  Things may be different in twenty years, but they’re not dramatically different today.
But we like being in denial.  Every time we are confronted with evidence of the survival of branch banking we find ways to dismiss it.  For example, research in the UK published by Deloitte & Touche in September 2002 found that 80% of bank customers use the branch, and 52% regarded it as the preferred channel. Similarly a Gallup Poll conducted in the US in April 2003 found that 83% of Americans had visited their bank at least once a month on average over the previous year. It is easy to disregard these studies – we can dismiss them as dated.

When we update the studies we get some indications as to the impending demise of branches. For example, an American Bankers Association survey in the summer of 2007 found that 36% of U.S. consumers use branches as their primary banking method. Is that the death knell?  Not really.  That 36% is still the largest group for any one channel. Online banking came in second at 23%, followed by ATMs at 21%, mail at 8% and telephone banking at 5%.  Damn, thought we had them!

Ok, Ok.  Branch banking still exists, but is it just for the old and infirm? You know, those people who have a difficult time getting around and would find it most convenient to do their banking from their home.  Yes, that group.  Well, maybe they are the ones holding onto the legacy of the past, but does that mean that young people don’t want to do their transactions in a public location? The evidence only confuses matters further. The 2007 American Banker’s Association survey found that those who go to a bank branch are generally older folks; but still, a substantial 25% of those under the age of 34 side with the older crowd and prefer to do their banking in person.  When will these youngsters learn?

Even if we take a somewhat narrow look at branch banking in New York City we come up with the same trend. In September 2007 the New York Times reported that branch visits decreased by 11.5% between 1995 and 2000; yet they increased by 28% between 2000 and 2006.  What can we conclude from this? Many things, but the imminent demise of branch banking isn’t one.

If we extend our scope of vision beyond banking we find that younger generations like physical retailing even in their technology world where you’d think they would always gravitate to online purchasing for the latest electronic gadgets.  That’s not the case.  Apple’s retail stores are a magnet for younger consumers, and this is turning out to be good business.  These stores now contribute close to $1.25 bn. to the company’s annual revenues of $6.2 billion and rising - with a profit margin exceeding 20%.  That’s huge by retailing standards. Of course, we need to be careful here.  Is it really possible for transactional banking to rival Apple’s retail experience?  It may not be possible, but it is a good target.

Why Don’t Customers Comply with the Efficiency of Technology?
So, as much as we try, we can’t make the case that retail branch banking is dead in the US, in Europe, or in Emerging Markets.  It may be dwindling, decreasing, or diminishing, but it’s not dying.  That may be good news for customers, but it’s bad news for bank executives.  Branches are the most expensive way of conducting transactions.  Computers were invented to process millions of transactions at centimes per transaction.  Do this from your house, or car phone, please!  You don’t need to go to a building that houses friendly people.  Banks have to invest capital in information systems and technology to do volume processing, but they’d prefer not to continue the capital drain into structures and operating expenses for people.

Why don’t bank customers just "stop" using branches?  Why don’t they follow good business principles and complete their transactions efficiently, by machines?  Well, MASMI research demonstrates the hypotheses that trust (a somewhat elusive yet critical notion) is an important driver of choice; and trust tends to be delivered better by people than by machines.

"Banking", read that as "my money", is so important to customers that they want to entrust a personal transfer of their wealth to a human being – on the assumption that a person understands the value of the transaction, whereas a machine only sees it as a transaction. This is an interesting hypothesis and a body of MASMI research corroborates it.  We see that customers want more than a transaction; they want to personalise their relationship with the bank.

This desire for a relationship may be stronger in banking than in many other business sectors because banks have high switching barriers.  Customers are fundamentally averse to artificial constraints as a way of doing business – they want choices.  When customers don’t have choices, they want to be compensated. When it comes to banking, the compensation is the personalisation of the transaction.  Customers tend to be saying, "…I may not be able to easily put my money somewhere else, but I can make my bank provide personal accountability when I want it!  I want to be sure someone is handling my money – not just a machine.  I want to see human beings, so I can relate to them, and I don’t want to travel across the city to a strange neighbourhood to find them.  I want them down the block, at the corner."

Banking should see this as a huge opportunity.  Relationships are the essence of customer loyalty and they have fallen into the banks’ lap.  Banks that continue to build their business on faceless transactions will lose in an increasingly competitive world.  The push for faster, better, cheaper is a siren call.  In commoditised banking only one competitor is allowed to dominate at any one time - until someone else shaves a point off a transaction.  Customers are giving us the answer to these ever-decreasing concentric-circles of cost reduction.  They want a relationship.  The question is whether we’re willing to listen and can provide this cost effectively. The bank that listens will win.  It will keep its customers who will purchase more and refer the bank to others.  For the foreseeable future, banks will need to continue to invest, albeit wisely, in their branch network.  The fact that branch banking is expensive is irrelevant – it has to be done.

Since you have to make the investment, doesn’t it make sense to maximise the return in a branch development strategy?  Of course it does!  So what do we do?  We have to meet the customer expectations for two things: excellence in operational mechanics (the rational dimension), and creating engagement in relationship dynamics (the emotional dimension).
Customers want more than a "painless" transaction

Our banking executives are fine with the operational mechanics part.  They understand this, they can control it, it’s right brained. Banks have a good measurement handle on their missions from an internal, transactional point of view.  They have numbers and they know how to manage by the numbers – even from a customer perspective. They immediately go to defining and implementing best in class metrics, like:
o    Efficiency to measure the relationship between inputs and outputs.  That is, what does it cost to complete a transaction?  How many tellers does it take to serve 100 customers?  How many square meters of floor space is required per 100 customers?  How much computer time does it take to process a transaction?
o    Level of service that brings time into the equation, like turnaround. Time needed to complete a transaction?  Time needed to resolve an issue?
o    Quality of service that brings accuracy to the table.  Number of error free transactions?  Number of complaints resolved at the first level?

These are the essentials. We know how to measure transactions, identify service gaps, and take corrective action. But these essentials are only an ante.  This is taking "pain" out of processing; but this isn’t playing the whole game.  This isn’t where we should stop.  Yet, often managers do just that.  They don’t want to go further.  Stopping here is comfortable.  But stopping here doesn’t bring "gain", and that’s how banks can differentiate themselves.
Differentiation is all about enhancing the dynamic relationship that customers have with their bank – and the focal point of this relationship is the branch.  Sure, we can ‘humanize’ the IVR system by recognising the caller by name; and we can evoke an emotional connection to a website by embedding your avatar into the transaction. However, how effective can a machine or technology be in this regard?  At what point does clever technology fail to overcome customer cynicism?  For the present, at least, our research says that most people prefer to interact with human beings, not machines.  What is this customer group looking for?


Customer Centred Business Strategy

At MASMI we know that once customers have their rational needs satisfied then they’re willing to enter into a relationship.  Something that is emotional and personal.  There is a huge body of research and literature to support this belief.  Often the proponents have widely different perspectives on how our rational and emotional beings interact.  For example, Clotaire Rapaille presents the thesis of our "reptilian hot buttons" and argues that our reptilian emotional brain always wins.  Antonio Damasio comes from the point of view that emotion and reason are not separate, but are quite dependent on each other – neither leads nor follows.  Bank branches may not resolve these positions, but they need to address the point of agreement, that emotions matter! There is a relationship among our memories, our emotions, and our behaviours.

The need for an emotional connection while banking will differ by customer.  It’s not critical for everyone; it’s likely strongest for the people who keep going to branches.  So, if we’re going to spend money on a branch strategy, how do we make the best of it?  How do we tap into the emotional connection that customers seem to want?

First, we need to realign the banking business model around the customer. This might seem to be stating the obvious, but, in fact, traditional service models tend to be focused on optimising back office efficiencies with insufficient attention paid to the front office side of the equation.

MASMI research shows that high performing businesses put the customer at the centre of their strategy.  They articulate their strategic intent based on an analysis of customer needs and then build their key operational capabilities in alignment with that.   They recognise that the heart of their business is to provide pain free transactions that are infused with connectors that evoke emotional responses from customers.  The strongest way to do this in a bank is face-to-face at a branch.  A branch is more than a building – it is a stage where we can create a performance, an experience for our customers, where we can connect with real people.  But we need to know what buttons to push.  Research can give us some answers.
Reliable customer feedback is difficult to obtain as even complaints by customers do not represent a particularly reliable benchmark – for many reasons, not least of which is the fact that customer tend not to complain, even after bad experiences.  To get around this barrier we use a number of research methods to align the internally focused "customer service standards" with the externally focused "promise to customers".  These methods include strategic customer loyalty research programmes aimed at understanding drivers of customer behaviour and corrective actions; performance tracking of transactions; and mystery shopping to monitor whether the promise to customers is being delivered.

All of these methods are aimed at uncovering the unarticulated needs held by customers that drive them to a face-to-face relationship at a branch.  What we have learned is that loyal relationships with customers come down to an activation of the person’s senses about their deeply held conviction of what a bank must be.  We all know the five senses that activate emotions.  They are seeing, hearing, feeling, touching, and smelling.  These have to be matched with the customer’s personification of their bank. That is, how does the branch banking experience reinforce the customer’s expectation of what the bank should be?


The branch can’t provide this experience until we know what customers want – and this may vary among branches.  For example, some customers might want their branch to appear "safe and secure", while at another branch people expect to be treated "casually and informally"; somewhere else the branch must be the "friendly meeting place", a social experience; while the cross-town customers want to have a sense of "efficiency and frugality".

The right customer experience has a business purpose – it contributes to profitability through incremental sales.  Building relationships will require an advisory and service orientated profile within our physically redesigned branches. Better design plus skilled employees will certainly be required to personify the branch to enhance the emphasis on the emotive triggers – moving beyond a transaction towards building relationships.
Winning branches will find ways to work this personification and enhanced value addition into their operations. As neuroscientists tell us, we are emotional beings before we are rational ones. If we were totally rational, no one would smoke and everyone would eat organic food. Customers may find it hard to articulate their needs, but they come to their branch wanting to be comforted by the feeling that people at their bank is "one of us", "…I feel good about my bank, they understand me".

The emotional response to the customer experience starts in the parking lot.  Not finding a space creates anger; if the path to the door is clean, most people feel a sense of comfort; when the door opens easily they feel confident that things are working well at their bank.  What happens when they enter? Is there a safe in-sight to promote the feeling of security? Is there music to make them feel welcomed? What’s on the television while waiting for service – financial information that helps them feel up-to-date? How is the transaction completed? How are the staff dressed? Do they convey a sense of professionalism? Is the deposit slip on re-cycled paper to make them feel environmentally responsible or is it embossed with the bank logo to make them feel elegant? The beauty of branches is that they can be configured to meet local needs – one size does not fit all.  It’s all about "staging" at the branch level.  By conducting research into the customer experience we can pinpoint how to activate the emotions and keep customers coming back.

The bank branch is the strongest touchpoint for the customer assuring them that their bank "gets it".  The branch engages most deeply with the emotions of the customer.  It is the branch that delivers the strongest relationship and activates emotions.  A bank’s Internet site can be easy to navigate, and an ATM transaction can be efficient – but efficiency only touches one dimension of a complex web of requirements from a banking partner.  Slick automation doesn’t tell us a lot about professionalism, security, and concern for me when things go wrong.  I want to go to my branch, and I do!  
Bank Branches and the Credit Crunch

Of course, headlines across the world in 2008 have been dominated by the impact of the credit crunch and the subsequent banking crises, with bank failures, bankruptcies, government bail-outs and eventual part nationalisation in some countries. Billions of dollars have been pumped into economies world-wide to prevent systemic banking failure, and try and encourage greater liquidity into the money markets.

Yet how much this affects the individual bank customer is difficult to judge at this stage. Clearly when there is fear of an individual bank collapse, scenes of depositors trying to withdraw their money become prominent in the media, such as appeared in the UK with the collapse of Northern Rock in 2007. However, whether this fear has permeated customers at a widespread general level is too difficult to judge at this stage. There is little evidence to date that customers are concerned with who owns their bank – whether it is one institution or another or the government - as long as their savings and deposits are not at risk.

And it may be in such difficult times that the branch will come to play an increasingly important role in terms of providing a visible sign of a bank’s permanence and viability. MASMI’s research has shown that, in Emerging Markets, where the banking sector is still relatively immature and local bank failures are not uncommon, for many customers a visit to the branch remains important – not only because it helps them to better understand details about a bank’s products and services, but as a means of providing reassurance as to a bank’s stability. In a world where even banks in developed markets are perceived as weak, the branch may acquire greater symbolic status.  It can give customers what they really need: a sense of trust, and a degree of confidence that their bank is here to stay and has a relationship with them.  It’s not a glass tower full of over compensated executives.  It’s a part of their life, staffed by people just like them – good people who are trying to build a good life, and who strive to serve them with honesty and care. Ultimately, the litmus test is whether customers feel that through its branches the bank is an indispensable part of their own lives.

Conclusion
The branch is critical in the life of a bank. Significant numbers of customers still visit the branch weekly. But branches need to be more than simply efficient at the transactional level.  They need to exist at the personal level where relationships are developed; and it is these relationships that will turn the branch from a primarily transaction center into a home for loyal customers.  This is good news for banks and the crisis they are currently facing.  Trusted banks and their branches are an important source of client engagement and revenue generation.

The future is therefore bright for bank branches. They will be a revived source of business for banks. Customer loyalty, through staged customer experiences, will increasingly turn banking towards cross-selling and value-added advisory services.  By connecting rational and emotional elements, branches will reinstall trust in financial institutions and regenerate economic growth.

Customers have shown that they want to work with their bank branches; now banks have to find ways to make this a worthwhile and profitable experience for both parties.

Sources:
"Bank branch transformation: The new multi-channel reality", CEO Eontec Limited and Mark Greene, General Manager, Global Banking Industry, IBM Corporation, The Bankwatch, March 23rd, 2005
"Bring Back the Branch", Deloitte &Touche, September 2002
"Banks Race to add Branches", USA Today, 19th June, 2003
"Inside Apple Stores, a Certain Aura Enchants the Faithful", New York Times, 27th December, 2007
"How to Develop Stronger Retail Partnership to Accelerate Small Business Sales", Martha Crawford, NBW Consulting Group, American Banker 8th Annual Small Business Banking Conference, October 2003
"Customers still like to use bank branches", Dennis Jacobe, Northwestern Financial Review, August 1 – August 14, 2003
"The Branch Bank is Dead, Long Live the Branch Bank", David Webber, The Banker, November 2000
"Long Live the Bank Branch", Greg McBride, Bankrate.com, May 17, 2004
"Retail Banks Must Redefine Role of Teller to Meet Customer Demand and Achieve Overall Cost Savings", Tom Brogan, TowerGroup Research, July 2008
Damasio, Antonio.  Descartes’ Error.  Putman Publishing, 1994.
Lehrer, Jonah.  Proust Was A Neuroscientist.  New York: Houghton Mifflin Company, 2007.
Rapaille, Coltaire.  The Culture Code.  New York: Broadway Books, 2007.
"Has the Bank-Branch Frenzy Peaked?", Sewell Chan, New York Times, September 10, 2007.

About the Authors
Dr. Nicos Rossides: CEO MASMI Research Group

Dr Rossides is Group CEO of MASMI, a leading independent research agency operating in Central Eastern Europe and the Middle East.  Prior to joining MASMI he was CEO for Synovate’s CEEME region, the global head of solutions as well as CEO for its Loyalty Practice.

Nicos has more than 20 years of market research and consulting experience, much of which involved developing a research infrastructure in Central and Eastern Europe.

Prior to becoming a market researcher, Nicos was Senior Research Fellow at Kyoto University, where he received a Doctor of Engineering degree.  A Fulbright and Mombusho scholar, he also received senior management training at MIT’s Sloan School.

Nicos has published a large number of articles in professional journals, contributed papers to numerous conferences and lectured at several universities and symposia.

Bud Taylor: Director Consulting MASMI Research Group

Mr. Taylor is a senior associate with MASMI where he advises clients on how to put their research data to work.  Prior to MASMI he was an SVP and Global Director of Consulting for Synovate Loyalty.  Before joining Synovate Bud was a Partner with Deloitte where he led its change practice in the US southwest.

Bud is a Canadian and naturalized US citizen.  For over 30 years he has consulted to marquee clients in all major business sectors and in all parts of the world.  Bud’s clients include: Microsoft Europe, the National Commercial Bank (Capital) of Saudi Arabia, the Whirlpool Corporation, Sony Electronics, and the Overseas Chinese Banking Corporation.

Bud contributes articles to professional journals and has published a business book: Customer Driven Change that demonstrates how to unite customers, managers, and employees in the process of organizational transformation.