
I mean we have all read dozens of blog
entries this year on the Future of the Branch.
I myself have yawned through a few of them. However, a few of them resonated with
me. I felt the old addiction start to call to me. Maybe this is the year when financial institutions will have a real conversation about channel strategy? Could this really be
the year that the digital channels will finally move from the proverbial “kids table” and join the other channels around the board room table? The tipping point in executives pondering channel strategy suggest that this might indeed be the year.
A Channel Strategy - I Don't Need No Stinking Channel Strategy
Earlier this year
I have attended a few conferences and had the privilege of sitting at the table
with the executives from some of the nation’s largest national banks, regional
banks, community banks and credit unions. The good news for all of us in
community based financial institutions is that no one and I mean no one has
this channel migration figured out. My observations of the various institutions
are listed below:
- Not one person at the table could clearly articulate their institutions overall channel strategy (possible exception was a national Canadian Bank).
- Each of the participants were actively trying to play catch up and understand what exactly they needed to do with branches and staff they had invested so much time and resources into.
- Many of the participants discussed the challenge of trying to coordinate and allocate capital or resources across the channel spectrum. Many admitted that the channels do not coordinate with each other when it came to resource or capital allocation. An all too common theme was that branches will look to create new branches, call center does its own thing, and digital channels look to expand. This approach is built upon channel champions advocating independently and thus no real cross-channel strategic prioritization happens within the organizations.
- The group consensus was that closing branches across the board was not feasible. This approach was too disruptive to local communities, and to internal cultures. It also did away with the talent that had been invested via training, coaching, and mentoring to the branch staff.
So what are the brutal facts we in the credit
union world need to acknowledge as we try and come up with our full spectrum
channel strategy? The brutal facts are that the world around our branches has
changed. Specifically two real challenges to the traditional branch channel
strategy are the migration of transaction volume and the change in the service
fee environment. These changes put at risk a model that has heavy occupancy
cost and staffing costs that has been allowed to flourish because it was able
to float on top of the rising tide of service fees. That tide has changed.
Transactions
are Migrating across Channels
Distribution
channels have continued to spawn and grow since the advent of the ATM. Today
branch network competes with the IVR, call center, online, and mobile and now
social networks channels are immerging.
The trend for financial institutions has been to try and blur the
lines of distinction between the various channels. I myself have been a
proponent of the channel agnostic approach in the past. I have come to realize though that this type of approach has a
fundamental flaw in it. The flaw is that you no longer proactively create your
channel strategy. When all channels are
equal in the eyes of your members then you place your channel strategy in the
hands of the group of people who are not even concerned with a channel strategy-
your members.
“When you have a loss of distinction between
the various channels value propositions then the member creates the channel
strategy for the financial institution. This can be seen as transaction volumes
continue to migrate.”
So let’s
consider some fundamental changes to the environment that are impacting channel
strategy. The first is that branch traffic (counting new account opening) are
projected to decline by 3 percent per year through the middle of the decade.
2010 -14.9
billion transactions
2012-13.54
billion transactions
2014 -
12.71 billion transactions
Online and
mobile transactions are expected to grow rapidly, becoming the primary
transaction channels within 2-3 years.
2010 -
28.5 billion transactions for online
2012- 30.8
billion transactions for online
2013 -
32.1 billion transactions for online
2010 - 5
billion transactions for mobile
2012 - 6.4
billion transactions for mobile
2013 -10.5
billion transactions for mobile
The United
States faces a prolonged environment of stagnate retail lending growth. This is
compounded by fee income that, in the past, was considered stable and is now
being targeted and eliminated with new regulations. Consider the following: Service Charges on
Deposit Accounts,
FDIC Institutions
2009 -
41.7 billion in service charges
2010 -
36.2 billion in service charges
2011 -
34.1 billion in service charges
Changing Consumer Behaviors
All deep
drivers of consumer behavior point to one direction - lower use of physical
channels (branch and call center). The accepted assumptions about the consumer view of convenience
and trust/safety that underpin the current branch strategy are in play. This has downstream impact as the branch
networks become expense areas of focus as for the past decade it has been
non-interest income (fees) that have funded and sustained the operational
expense of the branch network.
Any decline in service income will open a gap in branch
occupancy expense coverage. You can
expect uncovered branch network expenses to appear and grow rapidly. This will
be a mind-shift for channel leaders who have grown and matured as channel
leaders over the past decade in a service fee environment that is now
eroding.
The environment ahead is very
different than what many of these leaders have built their experience upon as
the existing banking model no longer generates sufficient returns. Added to
that, many of these leaders are not as familiar with non-physical channels and,
therefore, are not sure what direction they need to take.
"McKinsey
estimates that without substantial business model changes financial institution
ROE will fall below the cost of capital."
The way
forward is a combination of innovation (pricing strategies and target
segmentation for product development) and cost management initiatives. Every
financial institution will have to embrace digital channels to protect
ROE.
Questions
to Consider:
- How do you create space in the branch for digital channels?
- How do you create a space for the branch in the emerging digital economic intersection your members are now using?
- What are the specific channel value propositions you are educating your members on?
- What external threats are seeking to do the same thing (PayPal, Facebook, BankSimple)?