Credit Union Branch Strategy- What Strategy ??

You can almost picture our tiny blog huddled around the circle of the other amateur blogs in the monthly blogging support group, “Hello…my name is Credit Union MBA and up to this point I have gone seven months without writing a blog. Today I fell off the wagon. Not just any wagon mind you. No, I fell off the wagon writing a blog about…the future of the branch. I know…I am not proud of it.”

 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)? 

Who Are You Trying To Be Like: An Old School Banker ?

Mobile:To Do or To Be ?

Many of us create “to do lists” that help move us toward goals we want to accomplish. Too often we repeat the process of adding and subtracting from a never ending list of things we need to do. Like cars hot wired to get us to our closest branch we simply proceed as instructed. Turn right…check…turn left…check…proceed four miles to the left…turn into the branch location on the left.

So why is it that people don’t have “to be" lists? After all we all know that “to do’s” are just activities or events that can be checked off the list when done. It seems rather simple when you put it down on paper. The same cannot be said for, “to be” lists. The reason is that “to be” lists are never done. You can’t earn check marks with to be’s. They continue to evolve and change as the circumstances in which we find ourselves change.

Too often I see credit union advocates looking for us to fall in line with industry “to do” lists. We need to support supplemental capital or we need to support an increased cap on business lending. What I rarely hear is what we need “to be”.

We have an aging demographic and a younger generation of consumers who do not know the difference between a credit union and a bank. We have ATM networks that supplement branch networks but the future credit union member is only concerned about their social network. So as we look forward five years we should ask ourselves who we are planning to be.

Do we plan on remaining relevant and meeting the needs of our members? Do we think our traditional branch and ATM network will be enough to meet those needs? Are we busy being better versions of the credit unions of 15 years ago or do we realize that we have to reexamine who we need to be for the next 15 years.

The writing may not be on your wall but if you look down at that Smartphone you are carrying it is definitely on your screen. So here is your first mobile alert: It is estimated that there are somewhere around 120 million internet banking users in the U.S. By the end of this year it is expected that more smart phones will be sold in the U.S. than traditional clam shell cell phones. One large Big Bank is predicting that 150 million smart phones will be sold each year by 2013.

According to another study conducted by the Tower Group there will be 53 million mobile banking users by 2013. If that pace holds true that means we will see a lift of more than 300% from 2010. Here is your 2nd mobile alert: Mercatus estimates that 30% of branch teller transactions will go away over the next three years because of the anticipated explosion in business and consumer remote deposit capture usage.

I know everyone kind of smirked at that one. The prediction of the branches crumbling into dust and going the way of the dinosaur has been around since…well…the dinosaur. That being said you have to consider we are approaching a tipping point when 58 million, or nearly one in four U.S. adults, attempted to open a financial account online in 2010, a more than 100% jump from 2007, according to Javelin Research.

So with 15 percent of credit unions rushing to mobile that means by default you have around 85 percent of them sitting on the sidelines waiting to see where the trends are going. So looking over the last four years what are the trends ? If you look from 2006 up through our current recession, US financial institutions transactions were expected to grow at an annual rate of 10 percent between 2006 and 2010 with the fastest growth in remote services with the online channel growing at 27 percent and call center growing at 7 percent. What channel is not growing? That would be those branches we all love to build.

Yep...that is the silent shot in the dark that most of us did not hear. What shot you ask? The number of branches in U.S. banks dropped by 1% in 2010, the first drop in industry history. Add to that future branch consolidation by Big Banks and suddenly the writing on the screen starts to become a touch easier to read.

This contraction in branches comes at the same time the industry has experienced growth in remote services. This growth is in part due to the increasing levels of trust members are placing in remote channels. This channel migration translates into opportunity to gain new members especially core relationships.

When we look at the competitive landscape we find that it breaks out into three distinct groups. You have credit unions who are about 15 percent mobilized. Then you have community banks which have been slow to mobilize holding fast to a brick and mortar strategy. Lastly, Big Banks are moving full speed ahead into mobile.

So with budget season right around the corner it is time to start thinking about our remote services “to be" list so let me suggest two questions to consider as we define what we want to be.

Have “To Be” on the Front of the Tablet Movement.

The advent of online baking brought millions of consumers to the realization that they could perform simple transactions with a laptop or a desktop computer. Most of the online consumer activity performed is still centered on “lean forward” activities. Lean forward activities are thought intensive and require uninterrupted time to concentrate on the task at hand. For example, setting up bill pay or categorizing transactions in a PFM tool.

The tablet has changed the way consumers interact with financial institutions. Today consumers sit on their couch and browse with their tablet on commercial breaks as they watch TV. They take their tablet to lunch and read an ebook then quickly open a financial app to conduct a quick transaction. Credit unions need to move to the front of the line and create a space for the rising number of tablet users.

There is a window of time to distinguish themselves from the local community banks and stay at the forefront of innovation with a financial app designed specifically for the tablet. The world in which we operate has changed. Today’s members expect the freedom to manage their finances on a variety of platforms and devices on the go. The proof of this can be seen by the widespread adoption of the iPad (25 million sold) and the14 billion apps that have been downloaded by consumers in the past three years.

Introducing an tablet app will help you drive growth and loyalty by accommodating even more of your member’s preferences. Instead of building that million dollar branch that serves a ten mile radius in the local market you need to invest in the technology that allows your members to access their finances when, how and on the device they choose. Some basics you will want to cover with your app:

• Viewing account balances and account transaction history

• Transferring funds between eligible accounts (remember cross member transfers)

• Paying bills on the spot (for eligible customers)

• Locating nearby ATMs and branches using the phone’s GPS

• PFM tool optimized for the tablet. Make the most of that large screen and create interaction that maximize the “lean back” time that the tablet offers.

Time “To Be” Serious about Creating a Real Virtual Branch

When you consider the movement in technology and the mass adoption of new technology by younger consumers, the one activity that young consumers can’t do without a branch is deposit checks. Allowing the mobile device to deposit funds now means your members have a true choice in how they want to interact with you. The wave is coming. Ignoring this trend is like saying you are in the record store business and you can ignore music downloads. Anybody bought a CD lately?

A recent Javelin study highlights mobile remote deposit capture as a strategic driver of member retention and acquisition. The same study noted,” …one of every four consumers [as] finding the service desirable or very desirable, this service can be used as a potential draw to lure customers away from other financial institutions.” 

The research also shares that members who adopt the solution have lower cost to serve as they tend to prefer self-serve channels. Credit unions need to charge forward on this growth opportunity. Partner with a respected vendor who can help you navigate the iphone and the 250 versions of Android and develop a robust mobile app that will enable more of your members to easily deposit checks via your mobile banking app.

In a recent article for Credit Union Times Robert McGarvey quoted Drew Sievers, CEO of mFoundry, a developer of mobile banking technologies, “Within 18 to 24 months almost all larger credit unions will be mobilized. This is happening very fast.” With Big Banks moving forward and larger credit unions moving forward where do you see your organization? Please don’t tell me you are looking at the stodgy local community bankers that are only interested in big branches and business lending as your peer group. Now is the time to look past your “To Do” list and start thinking about your “To Be” list.