By Chris Nichols
Which of these branch transformation strategies are you pursuing?
At present, there are two major schools of thought over what the future of the branch looks like. In one camp, we have the “omnichannel” group, while the other is the “mobile-first” faction. How you fall out is of no small consequence, as the difference between the two is huge in terms of customer experience and cost. In this article, we explore both models—and look at a third alternative—and show why this single choice will have far reaching ramifications the success or failure of your bank.
The omnichannel orientation.
The omnichannel crowd stakes out a position that the branch will remain relevant. The idea is that banks should set a strategy that allows customers to conduct their banking business through any channel they want, with the ability to seamlessly switch between channels. Here, the core design means that customers could start a loan application via the mobile phone, sign it on the desktop and seek help with questions in the branch.
Most large and regional banks fall into this group. Proponents point to the fact that survey after survey show that the customer continues to want to use the branch.
The downside of this strategy is that it is the most expensive way to architect a bank.
Executing on this strategy not only requires an investment in all major channels—to include the branch, mobile, desktop, call center, voice and any future channels—but also a data warehouse with thick transaction layer that allows processing across multiple channels.
This is no easy feat to pull off. But banks that can will also gain the advantage of having channel diversification that can handle anything else that might arise in the future. Part of the attraction of this school of thought is that it offers banks the greatest level of operating stability.
The mobile-first movement.
The mobile-first school, on the other hand, laughs at the omnichannel crowd. Proponents of this view argue that surveys consistently show that bank customers want branches because we make them want branches. If experience tells you that you must go into a branch to solve a problem, send a wire more than $10,000 or complete a commercial loan application, then, of course, you are going to want a branch.
Before Amazon, everyone wanted a book store near them.
The mobile-first school of thought foresees the end of branches—the only exception being a few flagship branches in major metro areas. Banking would be almost completely contained in an app—supplemented by some online, desktop support. The assumption here is that the banking customer never wants to go into a branch unless it’s absolutely necessary. Any face-to-face interaction would be done via a Facetime-like banking application.
Being able to engage with customers on a robust mobile platform eliminates the need for developing banking capabilities on social media, text, chat, ATM or other channels. Current banking channels would all be integrated into mobile—thereby simplifying the choices for the customer.
The possible implications are astonishing:
- The processing power and capabilities of the smartphone, to include location services, camera and app integration—allow the phone to act as a “local cloud,” enabling the device to gather, secure, process and transmit the banking information of the retail customer.
- Wifi and Bluetooth integration help the smartphone extend the reach to a variety of other integrated channels, such as voice and home IOT devices.
- On the enterprise level, “edge computing” allows for the large-scale aggregation and processing of data from channels such as sensor-enabled manufacturing equipment, point-of-sale terminals and cash management equipment like scanners and cash recyclers, and then downstream the compiled data to the commercial customer’s smartphone.
The smartphone, in other words, could replace the branch as the traditional central point of bank information processing.
Having a mobile-first model is substantially less expensive and more flexible than a branch-centric or omnichannel model.
Mobile-first proponents argue that the savings on capital and technology can be passed along to the customer. By focusing on mobile, the mobile-first bank can master the one channel while the omnichannel banks will be trying to figure out how to pass your CRM data from ATM to desktop.
Furthermore, they contend that there are few situations that don’t involve the delivery of a physical good in which customers require the ability to switch channels. Currently, the exchange of physical currency is the only reason why a customer may need an ATM or branch. And in the next ten years, the use of currency may be minimized to the point of immateriality. If the mobile experience goes right, customers will be more than happy to complete everything in the digital world.
What’s at stake?
At the risk of seeming overly dramatic, this single decision will control a bank’s future.
The omnichannel crowd believes that the banking customer of the future will always want physical interaction, while the mobile-first school of thought believes that if mobile can serve all needs, then online and the branch will be limited and largely exist to support mobile.
Proponents on both side point to the fact that bank customers are getting more and more comfortable with a variety of channels, especially mobile. The latest Gallup poll, illustrated below, shows that 64% of bank customers use four or more channels already. On the digital spectrum, that shows a majority of banking customers using more digital channels than physical.
The challenge is that both infrastructures take years to build and banks that can successfully execute first will have a huge advantage.
Banks that are able to execute on either vision will be able to acquire customers at a cheaper and faster rate than the competition while being able to manage that customer at a lower cost than a traditional branch-centric bank.
Community bank positioning.
Part of the challenge is for banks to start now with a 10-year transformation plan. While this is outside the planning time horizon of many banks, branch transformation demands a longer-term view. This is something that banks will have to adjust for—creating a strategic plan that goes from the traditional three years to a ten year horizon.
The omnichannel methodology looks the most similar to most current architecture, and since all channels are covered, it’s the safer bet when it comes to customer service. For the $500 million community bank, however, pulling off an omnichannel strategy is almost prohibitively expensive. Sure it will become cheaper in the future, but the sheer capital investment alone—in addition to the human capital support—puts this future out of reach in almost every scenario that can be imagined.
Can community banks refocus on a mobile-first strategy?
Maybe. A mobile-first strategy can be achieved, but community banks will have to decide on what a “slimmed down” version looks like. Banks from different markets will have to band together to develop their own proprietary platform.
Alternatively, banks may decide to white label a third-party vendor’s technology and accept the risk of losing their service-based competitive advantage. Though it may seem daunting to community banks, working with mobile banking vendors is likely the easier and safer strategy to execute on. Banks choosing this path would be served well by focusing their strategic plan here and figuring out how they can augment any third-party applications to create additional customer value.
The third option for community banking.
Banks that are not big enough or sophisticated enough to pull off an omnichannel infrastructure or execute on a mobile-first strategy will likely be acquired quickly. As a bank’s growth-cost differential widens enough, its franchise price will drop to the point where it will become more and more accretive to a bank with a lower operating cost infrastructure.
As we run this model forward, some argue that there will be less than 1,000 banks in America able to survive. However, the consolidation will present an opportunity for some community banks that choose to go a separate way.
Community banks that specialize in a niche can survive.
As omnichannel and mobile-first banks make geography irrelevant, the next strategic option is to stay ahead of technology by focusing on a niche market such as a particular industry or type of banking. While this path will have limited growth potential, it will provide community banks with another 20 years or more of runway and above average profitability.
Developing a hyper-focus on a customer segment or industry will allow a bank to remain relevant. Niches such as healthcare, professional firms, food processors or similar will only be limited to a bank’s creativity.
The cost of doing nothing.
Of course, many banks will be frozen by this decision and passively opt to not choose. This could be the most risky bet of them all. Customers will gravitate towards the omnichannel bank because of the service, the mobile-first bank because of their convenience and efficiency, or the specialty bank because of their knowledge. To compete, banks that don’t choose a strategy will have to misprice risk in order to attract customers—which will hasten that community bank’s demise at the next downturn.
The community bank that does nothing is tacitly betting on the hope that the future banking customer will primarily desire the branch—and that today’s status quo will be maintained. Maybe that is the correct way of thinking about the future. But we are not so sure.
Whatever path your bank’s chooses, being proactive and having intent in your decision will place you light-years ahead of the bank that sits back and lets the future happen.
Chris Nichols is a contributing editor to ABA Bank Marketing.com. Located in San Francisco, he is the chief strategy officer of CenterState Bank, which has its headquarters in Winter Haven, FL.
