Adapting Branch Networks in the Era of Digital Banking Dominance

There’s no question that consumers are increasingly using digital platforms for their everyday banking needs. According to a 2019 American Bankers Association (ABA) survey, the banking channels used most often are online (37%) and mobile app (36%), with bank branches in third place at 17%. However, at the same time, multiple surveys show that branches remain important channels for consumers. A 2018 Celent survey found that 77% of consumers prefer visiting a branch to discuss a lengthy topic, 63% prefer a branch for investment advice, and 51% opt for a branch to open a new deposit or credit card account.

So while banks are developing more advanced digital platforms, they are maintaining their commitment to the branch channel. Here are 4 ways that banks are adapting branch strategies to ensure they continue to perform effectively in a digital world.

Reduce the overall number of branches, but look to open branches to expand reach.

Over the past decade, there has been a net decline of more than 13,000 bank branches in the U.S.

In general, banks are reducing branch numbers. For individual banks, the pace and extent of the branch reductions depend on multiple factors, including the bank’s current position in a given market (market share and branch density), competitive factors and market dynamics.

  • In April 2019, U.S. Bank announced plans to trim up to 15% of its branches by the end of 2021 as it pursues a digital-first strategy.
  • Wells Fargo’s branch strategy involves maintaining a significant branch presence in attractive markets, while aggressively reducing branch counts in other markets.

However, lower branch density has reduced the cost of entry into new markets. While many banks are cutting their overall branch numbers, they are also opening branches in targeted markets.

  • In 2018, Chase announced plans to open up to 400 branches in 15-20 expansion markets, including Boston, Washington, D.C. and Philadelphia. As a result of this expansion, Chase’s branch network coverage will rise from 69% to 93%.
  • Similarly, though Bank of America has reported a net reduction of more than 750 branches over the past five years, it has also opened 200 new branches, with another 400 expected to open over the next three years in markets like Cincinnati, Cleveland and Pittsburgh.
  • To achieve its ambition of becoming a national retail bank, PNC has targeted new markets with digital-first strategy supported by a thin branch network. It recently opened branches in markets like Dallas and Kansas City, and claimed that these new branches are generating deposits at five times the pace that the bank would expect for a de novo branch in its legacy markets.

Redesign and restaff branches.

Branches are changing from primarily being rather forbidding places to process everyday banking transactions to become more welcoming and dynamic locations where consumers and small businesses can engage more deeply with the bank, obtain advice, discuss financial solutions and showcase new banking technologies. Branches are even acting as meeting places.

To reflect this change, many banks are redesigning their branches, making them smaller and even removing teller stations in favor of a more open-plan layout. Along with branch redesign, banks are also changing the composition of branch staff: smaller branch formats need fewer staff; and the shift from transaction processing to engagement has led to significant shift from tellers to advisors and product specialists.

  • In May 2019, Berkshire Bank outlined plans to introduce new “storefronts” in the greater Boston market. These storefronts will not act like traditional branches (i.e., will not accept deposits or payments), but will feature free co-working spaces as well as event rooms.
  • Bank of America is the middle of a six-year plan to renovate 2,800 of its branches.

Incorporate technology into branches.

Many banks are incorporating cutting-edge technology into branches, which can help to showcase new products and other bank innovations, build customer engagement and improve employee productivity:

  • In April 2019, HSBC Bank USA won the Consumer Banking Innovation Award from FinTech Breakthrough for Pepper, a social humanoid robot deployed in HSBC branches in New York City, Seattle, Beverly Hills and Miami. The bank claimed that the presence of Pepper in its New York City flagship branch boosted business by 60%.
  • Chase launched Digital Account Opening in its branches, which it claims enables bankers to optimize their time for providing advice.

Build synergies between physical and digital channels.

The key to future success will be to develop a channel-agnostic approach that:

  • Recognizes the strengths and limitations of different channels
  • Avoids channel conflict and cannibalization
  • Cross-promotes channels, such as enabling clients to:
    • Conduct digital and mobile banking tasks in branches (and that includes having branch representatives show consumers how to use digital tools)
    • Make branch appointments through the digital platform
  • Applies different retail banking models for in-footprint vs. out-of-footprint markets

Six Keys to Building a Successful Digital Banking Unit

In our recent blog post, we summarized different digital banking models and examined the varying objectives and constraints banks have when building a standalone digital bank. Whether starting from bricks and mortar or monoline, here are several best practices to consider:

Clearly define your goals and expectations.

In the previous blog, we discussed that a bank’s motivation in creating a new digital banking unit is largely based on its current channel structure, product portfolios and customer bases. Therefore, banks’ goals and expectations will vary somewhat.

  • Some regional banks are creating standalone digital banking units to expand their banking operations into new geographic markets.
  • Credit card issuers (and other specialist lenders) are offering online savings accounts with high interest rates to provide a relatively inexpensive source of funding, while also reducing their dependence on a single product.
  • All financial providers want to remain relevant to younger consumer segments.

And of course, many banks will conclude their interests are not best served by establishing a standalone digital banking unit. For example, national banks and many regional banks have opted to focus efforts on enhancing their digital banking platforms.

Get internal support for the development of a digital banking unit.

Change within many organizations – but especially banks, which tend to be conservative – often faces internal resistance from legacy structures, systems, policies as well as organizational inertia. For a digital banking unit to be successful, these internal barriers need to be identified and overcome. Key to overcoming this resistance include:

  • Getting senior management buy-in and active support
  • Ensuring that all relevant bank departments are included in the unit’s design, launch and ongoing rollout
  • Implementing an internal marketing program to gain widespread understanding and acceptance of the new unit

Develop a digital banking unit road map.

Most digital banking units start with a high-yield savings account. Then there is usually a lull before a new product (such as a checking account or a lending product) is added. This delay is due to a number of factors:

  • Banks often create these units with a narrow focus on growing deposits. CIT launched an online bank in October 2011, and its product portfolio consisted of savings accounts and CDs until November 2019, when its launched eChecking (a digital checking account). In the same month, CIT described its digital bank as a “nationwide digital deposit franchise” in an Investor Update.
  • Banks want to analyze how units are performing (in terms of customer acquisition, customer attrition, deposit growth, etc.), what marketing approaches and offers are most effective, and what roadblocks have been encountered.
  • Banks tend to focus investment and energy on the initial launch and not enough on the post-launch period.

This delay in launching additional products can be addressed by creating a plan that also covers the post-implementation period. The plan should include comprehensive feedback mechanisms for providing actionable intelligence to all relevant departments, which in turn improves turnaround times for technology fixes, new product introductions, offer development, and follow-up marketing campaigns.

One bank that has shown the way in rolling out new digital banking products is Citi. In launching a digital-first approach outside of its light branch footprint, one of the bank’s primary objectives was to cross-sell banking products to its huge credit card customer base. In 2019, it launched Citi Accelerate Savings, two lending products (Flex Loan and Flex Pay), and Citi Elevate Checking (a digital high-yield checking account).

Create and launch a comprehensive marketing plan.

While the technological, operational and product-related issues around the development of a digital banking unit are hugely important, the bank’s marketing department should also be involved in the initial design and development of the unit. Marketing needs to develop a marketing plan that covers:

  • Branding: determining how closely the unit should be associated with the parent bank, and developing a brand and branding guidelines.
  • Targeting: identifying and profiling target segments, and creating a plan to reach them.
  • Media: determining the optimal allocation of investment in traditional and nontraditional marketing channels to reach and engage with targeted consumers.
  • Messaging: developing messaging that both highlights your digital bank channel’s key selling points, and tackles perceived concerns, such as security and privacy. This messaging should be consistently expressed through various media channels.
  • Offers: testing and refining a range of offers (acquisition, cross-sell, referral, etc.) for different segments.

Once this plan has been developed, the bank then has to devote equal energy on the development and implementation of specific marketing initiatives, which should include testing various program components to get feedback on what is working – or not – with a focus on speed and flexibility.

Integrate your digital and human channels.

Even as many consumers move to digital channels for their everyday banking (and even for more complex financial transitions), these consumers continue to prefer a channel mix that includes digital and human components. This is a key advantage that traditional bricks-and-mortar banks will continue to have over digital-only banks, so they will want to leverage digital-human channel integration.

  • PNC is following a digital-first approach outside of its footprint, supported by a very thin branch presence (“solution centers”) in selected markets. In a December 2019 interview at the Goldman Sachs U.S. Financial Services Conference, PNC’s CEO Bill Demchak claimed the bank has been “really surprised to the upside on how important those solution centers are…. We’ve accelerated the solution center build, and we’ll do more than we originally assumed.”
  • Santander Bank’s planned digital bank is expected to operate initially within its footprint, so it will need to coordinate efforts with the bank’s branch channel (and avoid cannibalizing existing clients). In a November 2019 American Banker article, the bank said that the account-opening process will be entirely digital, but clients will be able to access accounts through the branch if they choose.

Build a compelling customer experience.

Even for the most tech-savvy consumers, conducting their banking operations primarily through digital channels is a relatively new phenomenon. While consumers are attracted to the speed, ease and convenience of performing banking tasks online, they remain reluctant to fully commit to the digital channels for all their financial activities (e.g., acquiring new products and services, discussing sensitive financial matters). Banks can in part address this concern by providing the option to engage with the bank through a physical channel. Banks can also build consumer trust and engagement by providing a digital experience that incorporates user experience (UX) design, personal financial management (PFM) tools and content, as well as access to customer support via social media, phone and/or live chat. In a recent ABA Banking Journal article, John Rosenfield, president of Citizens Access, claimed that “designing an excellent customer experience was the highest priority” in creating a digital bank.

Picking a Path to Digital Banking

Consumer transition to digital channels for everyday banking needs reached a tipping point in 2019. A recent ABA/Morning Consult survey found that 73% of Americans access their bank accounts most often via online (37%) and mobile (36%) channels. Consumers are also now embracing digital channels for a broader range of financial activities, from buying new financial products and services to securing financial advice.

Responding to this trend, and the march towards improved efficiency, many financial providers are “chasing digital” from the boardroom to the back office. Some take an incrementalist strategy, doggedly adding functionality or product sets to online and mobile platforms. Some have bought or built standalone digital brands, or layered digital over thin branch networks out of footprint. And, of course greenfield revolutionaries continue to dive in to the fray. We look at four models that are working, and what marketing mix and methods matters most for each.

All banking roads lead to digital these days–which path is right for you?

National Banks Double Down on the Human-Digital Model

Banks with a national or quasi-national branch footprint and strong brand equity – including JPMorgan Chase, Bank of America and Wells Fargo – are focused less on driving digital deposit growth and more on developing an integrated human-digital channel strategy to optimize customer relationships.  One good example of where these banks are going in terms of powerful and dynamic digital banking platforms comes from Bank of America, which launched Erica (an AI-based personal assistant) in June 2018. Over the past 18 months, Bank of America has incorporated new functionality into Erica, and the platform recently reached 10 million users.  JPMorgan Chase launched a standalone digital banking unit (Finn) in June 2018 to appeal to a younger demographic, but shut it down just one year later and now appears to be doubling down on both digital banking enhancements and selected branch expansions.

Marketing Priorities and Challenges:

  • These national banks can leverage their huge technology budgets to launch a stream of new digital banking capabilities, which they feel will increase customer satisfaction, win a greater share of wallet and reduce attrition. Bank of America characterized its approach as “moving from digital enrollment to digital engagement.” Banks look to drive usage of new digital banking tools through various channels, including broadcast advertising, in-branch demos, social media channels, financial education programs, as well as promotions within these digital banking platforms.
  • To pursue a successful human-digital channel model, the banks will need to build a channel-agnostic approach that emphasizes the individual strengths and features of both its physical and digital channels, encourages channel cross-promotion (e.g., digital demos in branches and the ability to make branch appointments via digital platforms), and offers clients a fully integrated user experience. 
  • The main challenges in achieving these objectives include legacy structures that often inhibit cooperation between business units, as well as the tendency of large banks to be slow moving and reluctant to respond to and embrace change.

Regional Banks Create Digital Banking Units to Expand Reach

Regional banks operate mainly within a multi-state branch footprint (although some offer specific products on a nationwide basis). Some of these regional banks see opportunities in building deposit bases in new geographic markets, and are doing so via standalone digital banks (in some cases supported by a very thin physical network).  These digital banks typically start with a high-yield savings account, then add other products (e.g., checking, lending) and digital tools. While many regional banks remain committed to a human-digital channel structure that mirrors the national banks, we expect that some will be testing and launching out-of-footprint digital banking operations in 2020.  

Regional banks leading the digital bank charge include:

  • Citizens Bank: Recognizing its low brand equity outside of its Northwest and Great Lakes footprint, launched Citizens Access as its “nationwide digital platform” in June 2018.  Citizens Access had attracted $5.6 billion in deposits through 3Q19 and is now considering adding new products, such as business savings and digital lending.
  • PNC: Launched the national expansion of its digital banking capabilities in October 2018, leading with a high-yield savings account. It supported this expansion with an out-of-footprint thin network of retail locations (solution centers), initially in Kansas City and Dallas, which the bank has emphasized as key in supporting the digital bank.
  • Union Bank: In 2017, introduced a “hybrid digital bank” under a separate digital brand, PurePoint Financial, which offers savings accounts and CDs and is supported by 22 Financial Centers in six metro areas. 
  • Santander Bank: Recently announced plans to introduce a digital bank in 2020.  The digital bank will be piloted in its Northeast footprint with a view to expansion into other markets.

Marketing Priorities and Challenges:

  • These banks need to raise brand awareness outside their footprint, in particular in adjacent markets (where there may be some brand equity) or in targeted markets where the bank has established a thin branch network.
  • Optimizing relationships with existing clients by upselling additional products and services and by maintaining a keen focus on providing a positive customer experience – whether as a standalone digital bank or a digital/physical hybrid – is key.

Specialized Lenders Generate Digital Deposits as a Funding Source and Means to Diversify

This category of financial firms includes dedicated credit card issuers with no branch presence (e.g., American Express, Discover), as well as banks with a strong heritage in card or other lending and who have a limited retail banking footprint (e.g., Capital One, Citi, Ally, CIT).

Marketing Priorities and Challenges:

  • These banks have national credit card franchises and strong brand equity. However, as their brands are often strongly associated with their credit card operations, a key marketing challenge will be to expand consumer awareness of the bank as a provider of other banking and financial solutions. 
  • They will need to focus on data analysis, targeting, offer development and messaging to effectively cross-sell deposits and other products to their existing card/other loan client bases. This approach will also involve significant cooperation among different business units. Citi has been at the forefront in marketing deposit accounts to its 28 million credit cardholders and generated $4.7 billion in digital deposits in the first 9 months of 2019: two thirds of the deposits came from outside its six core banking markets.

Challenger Banks Seek to Disrupt Traditional Bank Dominance of the Deposit Market

With relatively low barriers to entry and the widespread availability of private equity money willing to bet on which companies will break through in the digital deposit space, a spate of fintechs are entering the market, including Chime, N26, Radius Bank and Monzo.  These companies typically partner with a small bank in order to offer deposits, but some are now looking to get a bank charter.

Marketing Priorities and Challenges:

  • The digital bank upstarts tend to appeal to younger age segments who are both more accustomed to using technology to manage their financial needs and less loyal to traditional banks. These companies need to clearly understand how these younger segments consume media and make financial decisions and tailor their marketing investment and messaging accordingly.
  • As “new kids on the block,” fintechs will need to develop solutions and marketing to differentiate themselves from both traditional banks and other challenger banks.
  • The design and ongoing review of the digital user experience is critical, as this is the only platform consumers will have to interact with the bank. Some digital banks are not even offering phone-based customer service.
  • While challenger banks have a number of advantages over traditional banks (such as higher rates on deposits), there are other areas where these newcomers are seen as inferior (for example, a recent Kantar study found that 47% of consumers completely trust traditional banks, but this falls to 19% for challenger banks). Challenger banks need to develop messaging to directly address these areas of vulnerability, and communicate consistently through all consumer touchpoints.