Business Case for Branching in a FinTech World
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Consumers strongly desire branches. Doing it well drives performance.
Measuring is key for improvement. In today’s consumer-centric world, change is constant. In fact, the only thing that doesn’t change is change. However, if we can quantify the change, then we can measure, and improve.
If you build it, they may not come. The world of branch banking has and is changing rapidly. FinTech and consumer behavior has disrupted banking as we know it. Therefore, financial institutions (FIs) have to continue to change, always quantifying performance, measuring performance, and managing change to improve performance. Competition is fierce for FIs, and pressure from non-traditional sources force all decisions to branch to be supported by a business case. The perception by some industry experts, and pundits is this has not always been the case. Remember when you could build it, and they would come? Me neither!
So, branching has always been about establishing a business case, connecting with the opportunity, and execution. Each part of the plan is integrated with the next to eliminate unknowns, loss of information, and speed up the return on investment (ROI).
Measuring Effectiveness and Performance
Over the last decade, LEVEL5 have partnered with over 150 FIs across the US. Each FI has embraced process integration to define a business case, connect/design with the opportunity and construct to that case. In the last four years, we have completed over 100 design-build projects: branch and main office transformations, denovo branching, main offices, and operation centers. And, we have another 50 projects flowing through the system. Therefore, measuring the effectiveness of the strategies we create, quantify, and implement through construction is huge in measuring performance – our clients and our own.
The Research and Results
Last month, we completed a thorough examination of our client’s branch performance. We went back to our clients to quantify, and measure the effectiveness of the implemented branching plans, so we can improve. Processing their data, here is what we found:
Our client’s branches are producing an average of $35 million in net new business
Our business case projections were 92% accurate
Our clients are growing total assets – 10% annually, compared to the national average of 3.2%
An integrated approach to branching. The results our clients have experienced speak to what’s possible when specific strategies, tactics and actions occur. It is the integration of these components, through a specific project approach, that yields great returns for FIs investing in branching.
Consumers strongly desire the branch for connection and relationship. Doing it well with a defined and executed business case drives performance for all the FIs stakeholders.
For a deeper dive into the thought pattern and science behind earning a great ROI for branching…
Micro Branches | The Next Big Idea?
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Enhancing your branch strategy with the most flexible of solutions – the micro branch.
Branch density is the goal. Space to build is the challenge. What makes a financial institution’s branching strategy successful? Many experts point to density “more locations and brand”. Agreed! However, what if the target community doesn’t have any suitably sized site options within the desired market? Or, what if there is not a lease space available in this market?
Are more branches an opportunity? Or a risk?
This begs a follow-up question: What about branch network density? Should a financial institution continue to invest in branch density given the advent of new technologies that may lead to a decreasing need for branches? On the other hand, what if digital and mobile channels, video tellers, and smart cash equipment don’t decrease the number of branches, but rather enhance the capability of the branch to better serve consumers? Is it possible the micro branch can be a solution for these facility questions?
What is a micro branch?
Essentially, It can be whatever you dream up! As long as it has a small footprint, is heavily branded and uses smart technology. For instance, it can be a shipping container converted into a permanent freestanding branch (see image above), equipped with an ATM and a universal banker office. Or it could be a 1,000 to 1,500 square foot freestanding branch equipped with video tellers, assisted self-service or ATMs and staffed with a few universal bankers.
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All kinds of possibility.
These imaginative facilities can contribute to branch density through a downsized, refined package while still offering similar services as larger branches. We have the technology; let’s use it!
The micro branching movement is putting the spotlight on a new way of thinking about service facilities…here’s how:
- Speed to market – Micro branches provide financial institutions the opportunity to enter the market quicker because design and construction durations are much shorter.
- Cost does matter – Because of the reduced branch size, these facilities require less real estate, and the cost to build and maintain is lower compared to a more conventional cornerstone (hub office) or community branch.
- Staffing – Micro branches typically have a reduced staff. The staff is focused on high-value customer interactions – while technology handles the more mundane transactional components.
- Resiliency – Micro branches provide agility in decision making for financial institutions needing to quickly adapt to the market. For example, a container facility can be converted to a cashless location, or due to a shift in market dynamics, the micro branch can be converted to a loan or mortgage facility.
- Dream big with less – Micro branches give financial institutions the opportunity to venture into markets that previously were not considered a possibility due to lack of site options. For example, in a dense retail area, where room is snug and will not accommodate a community size branch, a permanent container facility or small prefabricated facility may be a quicker and more effective solution for the market.
- Deliver the deliverables – Micro branches are outfitted to deliver the intended service solutions for targeted communities. In fact, these facilities give greater flexibility for branch density strategies by providing the financial institution greater access for entry into specific markets of interest.
- It’s on the menu – Micro branches can have full-service capabilities such as cash handling technology (ATMs or ITMs), and even drive up lanes. Furthermore, micro branches can be constructed “your way” with the same high-quality construction, and architectural brand identity, as seen with a traditional facility.
Customized for the community. The beauty of the micro branch, besides its lower cost, is that it can meet the desired financial needs of a community, creating better opportunity for consumer loyalty and satisfaction. As is the case with all branches, micro facilities are targeted for specific market and community conditions. And, having the ability to enhance the product and service offerings to a community while contributing to branch density. The micro branch is an option that gives financial institutions greater flexibility to enrich its intended branching goals and improve its presence in communities once thought to be out of reach!
The micro branch reduces the risk of branch density and rewards institutions willing to explore the possibilities.
The relevancy of branches for an FI is something to greatly consider. Maybe this article will help.
Return on Investment for Branching
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Is the deck stacked against the physical branch?
Priorities, priorities. A recent study released by the Financial Brand revealed the top priorities for financial institution (FI) marketers. In order of priority: 1) Increase Wallet Share, 2) Increase Loan Growth and 3) Acquire New Customers. Given the branch has historically been a dominant tool in the FI tool belt, it would appear that these goals are challenged.
Too many branches? In an increasingly omni-channel consumer society where branch visits are down, and population per branch is low (thanks to the proliferation of branches), it would appear the deck is stacked against FIs trying to get a return on investment (ROI) from branching, while reaching its goals. This is especially true when we consider how branch use has changed. No longer is the branch the primary channel of choice for consumer transactions. Consumers today use branches for different things than they did even 10 years ago (see graph below). Branch use for depositing, withdrawing, and transferring funds is a shadow of its former self. However, when we consider what the branch IS for today…there is more than a little light at the end of the tunnel.
Survey says… According to an Ernst & Young survey, 65% of sales occur in a physical environment i.e. the branch. So for FIs looking for a ROI for branching look no further than sales and service for your key driver of success. With this shift in mindset comes the opportunity for a new result.
Great brands think alike. Marketers of brands like Apple and Disney keenly identify that brands change over time – they evolve. Furthermore, they know that the brand and the business are intertwined as they seek to make emotional connections with their customers to drive sales. A good example is Coca-Cola. Coke’s market cap is attributable not just to the commodity of soft drinks, but also to Coke’s iconic bottle, a physical embodiment of the brand. In fact, without the Coke brand, its value is half.
FIs can learn from other retailers and develop specific strategies to get a ROI for their efforts to market their company’s brand in its primary channel, the branch.
HOW TO DO IT
Is opportunity knocking? The journey begins with market research and analysis that drives to a business case for or against branch investment. Understanding the loan and deposit potential in a market can quickly start an effective narrative for branching by defining goals and expectations based on facts. Those facts frame our investment in land, building and people so we can predict with greater certainty what the future holds.
Execution is everything. Then based on these facts, we build a plan to connect with the opportunity. Our engagement begins by tailoring the interior space to the culture and desired customer experience. The focus is on enabling “bankers” to easily connect with their clients. The physical identity (architecture) and signage of the branch is an extension of the culture and makes a statement to the market at large, so the market knows we are different. This means we don’t run the same play every time and in every community. Specifically, we don’t always use teller lines, or pods, or self-service, but look at each market’s components and then tailor our connection.
Make your intentions clear. As we build the connective environment, we are intentional to communicate our brand message in graphics, colors and materials. Our value to the community and customer cannot be guesswork because these components drive action – action taken by our employees to use these materials to cross sell, and action by the customers who are now educated on what we can offer.
What we can learn from the major players. Bigger banks have taken these components to heart and are leading the way on branch experience, and getting great returns. Earlier this year, JD Power revealed that customer satisfaction at big banks is at an all time high, which is remarkable given the attitude of the marketplace toward big banks after the financial crisis. Big banks have learned that customer engagement in the branch is powerful, and they have learned how to clearly communicate value proposition.
ROI in action. The great news is we can quantify the ROI for branching using the tools mentioned above. For example, a FI in Michigan wanted to create a new customer engagement model in its community to achieve more loan opportunities. The plan included relocating a branch and remodeling a second facility with a new way of connecting, and the glue that held it together was training. The FI changed the engagement model to focus on asking questions and relationship building. They also changed their branch environment, and moved away from teller lines and used technology to automate routine activities. When the brand message became specific to the community, and the FI’s mission, then the culture changed. Within the first two years, the FI has grown its loan to deposit ratio from 88% to 92%.
More proof. Furthermore, a FI in the Southwest grew from $1.0 Billion to $3.5 Billion in 5 years through a similar shift. The shift included a new engagement model in the branch, and messaging throughout the customer experience. The exterior also changed, which was important; it helped the community identify with the change. By the way, the bank quantified the business case through research before each move.
To recap. In review, FIs can reach their goals of increased wallet share, loans, and customer growth in the branch. Here are the steps:
- We are clear on what we want and whom we serve. Our customers are diverse and changing, so our channels must appeal to all generations.
- We tailor the message of the branch to the market. This includes doing our research and quantifying the loan and deposit opportunity – upfront. Then we focus the branch experience on the opportunity.
- Our goal is to establish an emotional connection with our customers and community to drive results. Our focus is on engagement and inviting the community in, so we listen more and talk less.
ROI for branches can be justified by clearly defining the role of the bank and its value to customers.
Engagement in the branch takes a new kind of banker…welcome to the age of the universal banker!
Building Relationships: the Heartbeat of the Universal Banker
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Technology hasn’t just required an upgrade in equipment, but a shift in employee skill sets.
As American as apple pie. Community based financial institutions (FI’s) are the heart and soul of America. These locally owned and operated institutions are woven into the fabric of the communities we live in, work in, raise our families and build our lives. That building involves our careers, our hobbies and our futures. That future in large part depends on…money, investment and risk.
The saying “It takes money to make money” is still…right on the money. Most of us are not born with the equity we need to see our hopes and dreams come true. We need money to finance our education, our houses, cars and businesses. We need equipment, tools, facilities and employees to make our lives work. The local community bank and credit union steps in to make all of this possible. It is the reason they were created, and they fuel the economy and future.
In order to serve, first we must adapt. In today’s changing consumer environment, where omni-channel delivery is the norm, community banks and credit unions are also challenged with delivering services in a way that deepens their wallet share, household penetration and margins…so they can continue to fuel the American spirit.
The old way worked. In years past, that service was almost universally delivered the same way. A customer interacted with a “banker” in a branch across three feet of mahogany. Most interactions were transactional in purpose…check cashing, payments and order filling. The world had fewer channels for consumers to access financial resources and the delivery model…worked. No, it worked great!
Automation is Everything!
Times have changed. However, today we have smart phones, the Internet, and global mobilization thanks to technology. Routine components of all things financial are now automated. Checking balances, moving money, making payments and even loan applications are handled via smart phones, tablets, laptops, drive thru’s, and ATMs. Therefore, the purpose of the physical channel i.e. the branch has changed and with it the identity of the banker.
Change didn’t happen overnight. But it still came fast. A 2014 study by Ernst & Young sheds tremendous light on what is happening, and what FI’s have done to adapt. The graph below shows consumer channel preference by banking task. The study found the more routine and automated the task, the more likely the consumer is to choose a “nonhuman” interfacing channel. However, the more complex the interaction, the more likely the consumer prefers a physical channel…especially when it comes to sales.
New skill sets emerged. Over the last decade, FI’s have been moving toward a different branch delivery model based on these preferences by consumers, so they can continue to deepen wallet share, reach more households, businesses and boost margins. What was born are Universal Bankers who do so much more than the routine…they now educate, advise, and teach consumers as they discuss products, introduce experts and create deeper relationships with their customer or member in the process. In fact, NCR estimates Universal Bankers can handle up to 95% of customer requests; the remaining 5% are referred to subject matter experts.
From “doer” to “partner”. The deepening of relationships with the customer is the key. Consumers today are becoming so much better at research and analysis, but they need help making decisions and choosing a partner. So, they’ll ask a friend or a thought leader, and then go and meet the people others also trust.
How to grow your people. FIs can strengthen these interactions and introductions by following these steps as they develop their own Universal Bankers:
- Hire people who like people and are engaging. Customer engagement is a culture shift that moves away from transactions and toward conversations.
- Train the banker to ask questions. Educate the consumer before offering solutions. The Banker’s job is to listen first, and then speak from his/her wealth of knowledge or bring in experts…when needed.
- Invest in tools that automate routine activities and create margin for the banker to invest time with their customers. Scheduling tools, staffing models, cash handling equipment, ATMs, and or Interactive Teller Machines (ITMs) are examples of such investments.
- Remove the barriers to the customer. Often this involves eliminating fixtures that separate the customer from the banker, but it doesn’t have to be radical. The key is the facilitation of the desired experience.
- Promote the bank or credit union’s brand in the physical environment. Stay away from artwork and use flat screens and marketing materials to communicate your unique brand message. Promote your value proposition so the community and customer know what you are about.
Why move in this direction? The answer…ROI.
Banks and credit unions that embrace this model often see dramatic results. According to FDIC reports, a community bank in the Southwest organically grew its assets from $1.0 billion to $3.5 billion in five years with this engagement model. Furthermore, NCUA loan and asset data prove a credit union in Tennessee grew its loan portfolio by 50% in four years and another in the Carolinas grew its book of business by over $100 million in a similar period. These are real results, from real financial institutions who have embraced the Universal Banker model - engaging customers in a new way…and there are more.
Investment in people and creating an environment that fosters engagement can change cultures. And, that culture is about building relationships…the heartbeat of the Universal Banker.
The Universal Banker delivers a world of knowledge in a very personalized way.
Today’s branch is moving at a rapid pace as well as its relevance. How has it changed? Read more below.
Branch Transformation and Safety…A Great Marriage!
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Could the evolving role of the branch actually lead to fewer robberies?
As we think about branch transformation, one of the overlooked benefits in the rush to design-build a customer or member-centric environment is safety. The 2014 Bank Crime Statistics compiled by the FBI recorded 3,879 robberies of financial institutions in the U.S. The breakdown shows 3,430 commercial banks and 312 credit unions robberies are included in the report. The overwhelming majority of the robberies occurred at a branch office. The most common approach used in the robberies was a note or oral command. Nearly 47% of reported robberies involved a firearm or handgun. Needless to say, robberies remain a significant threat for branch operations.
So how can Branch Transformation…the marriage between Design and Technology, change the branch environment to hinder potential robberies? Glad you asked! FBI data shows that premeditated robbers research their target by scoping out the institution or branch paying particular attention to where the teller line is and how money exchanges are performed. For instance, a common robbery scenario involves a note passed to a teller. Per their training, the teller hands over the money and the assailant casually slides out of the bank trying to maintain anonymity.
Fighting back by smiling back.
One key aspect of Branch Transformation involves creating a retail environment that encourages personal interaction between the staff and their customer/member. By engaging the customer as they walk into the branch, conversations take on a completely new meaning. Therefore, many Branch Transformation projects work hand-in-hand with the FBI’s new technique for avoiding robberies called “SafeCatch” tactics. The heart of the tactic is engaging the customer as they walk thru the door thereby taking away the anonymity from a potential robber disarming them with great customer service.
Phasing out the teller window.
The physical components of Branch Transformation often replace the traditional teller line with a Pod System. This change in delivery method encourages staff interaction with customers using a face-to-face posture. An integral part of the system is the cash automation i.e. cash recyclers. In a robbery scenario, the assailant now sees cash being dispensed, not from a teller drawer, but from a machine. Since the cash recyclers are UL Rated as a secure currency container or safe, the staff operating the device needs a passcode in order to interface with the system to dispense cash. This provides the branch staff more flexibility to walk away from the Pod unit to engage the customer/member verses using a teller line, and provides more security.
Path of least resistance.
Robberies and crime are probably here to stay; however, alternative ways of delivering services and technology can greatly reduce a financial institution’s branch from being a target. In yester-year, the teller line’s main purpose was to facilitate a transaction, but with the rapid decline in transaction activity in branches…the teller line is going the way of the dinosaur in favor of alternative approaches to facilitate new interactions with customers.
Vault-less banks?
The latest advancement in branch transformation utilizing interactive teller machines, may finally eliminate the physical opportunity for robberies. However, only time will tell, and history teaches us that robbers have always evolved when desire intersects with ability. Nevertheless, the goal of all financial institutions is to insure a safe and enjoyable work environment for employees, and the goals for many is an engaging environment for their customers. The good news is with the advancements in technology and design both of these goals can now be a reality.