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.