The largest U.S. banks have been publishing their quarterly and full-year financials over the past two weeks. Within these reports, we can discern a number of channel-related trends. These trends have a direct impact on how banks interact with their customer base in terms of providing everyday banking and value-added services as well as cross-selling additional products and services.
We’ve listed these key channel trends below:
Banks are continuing to reduce their branch networks. According to SNL Financial, the total U.S. branch network fell by 1,614 branches and is now at 92,997, a decline of 1.7%. These declines are driven by banks’ desire to cut costs, as well as from a recognition that greater usage of self-service channels for everyday banking transactions may enable banks to reduce bank density. The following chart looks at net changes in branch numbers for leading banks with more than 500 branches:
Citibank reported that it plans to close an additional 50 branches in the first quarter of 2016 as it exits certain markets (including Boston) and will concentrate its branch presence in six key metro markets. It is worth noting that in other markets where Citibank has cut its branch presence, it claims to have retained over 50% of deposits through its online and mobile channels.
Banks are overhauling branch design and staffing. Not only are banks reducing their overall branch numbers, they are changing how branches are designed and staffed. In its 4Q15 earnings conference call, SunTrust mentioned that it is relocating to new, smaller branch locations in Richmond and Raleigh, which will reduce its square footage in these markets by half. Overall, it has reduced its branch footprint by 2.5 million square feet over the past four years. PNC reported that 375 of its 2,600 branches have been converted to its Universal Banker model, and it plans to convert an additional 100 branches in 2016.
Mobile banking is maintaining its strong growth trajectory. According to Javelin Strategy & Research, 30% of U.S. adults used a mobile banking service weekly in 2015. Reflecting this trend, leading banks continue to show double-digit y/y growth in mobile banking users (Chase +20% to 22.8 million; Bank of America +13% to 18.7 million; and Wells Fargo +15% to 16.2 million). These customers are also using mobile banking for a greater variety of transactions. For example, Bank of America reported that mobile banking’s share of total deposit transactions rose steadily from 4% in 4Q12 to 15% in 4Q15.
Online banking usage remains strong…and is growing. While mobile banking garners most of the headline in financial trade press, online banking remains a key customer service channel, and some leading banks continue to register strong growth rates in online banking users. This is likely due to a number of factors, including overall account growth, increased customer comfort with using online banking, new online banking functionality, as well as lingering concerns over mobile banking security. The following table compares 2015 online and mobile banking users and growth rates for Chase, Bank of America and Wells Fargo:
We expect that as banks continue their migration towards self-service channels for a growing number of everyday banking transactions, banks will continue to scale back their branch networks. This will involve reducing branch density in particular markets, as well as exiting markets where they lack a critical mass or where their branches are underperforming. However, banks in general want to maintain a physical presence in markets, so they can leverage the power of the branch as both a sales channel and a branding beacon.
In addition, banks need to provide a consistent user experience across their online and mobile channels. In the short term, banks will continue to provide more functionality in the online channel, as consumers build trust in using their mobile devices for more complex financial transactions. But the distinctions between online and mobile channels are blurring, and banks are already starting to refer to “digital channels” to encompass desktop, tablet and mobile channels. Even the traditional delineations between “online” and “offline” channels are breaking down, as banks showcase their digital services in branches, and as digital channels include functions to enable customers make in-branch appointments.
The quarterly reports of the leading U.S. banks revealed a number of important channel trends:
Mobile banking is continuing its strong growth. Three of the leading U.S. banks provided quarterly updates on active mobile banking users, and each reported double-digit y/y growth in 1Q15: Chase +22% to 20.0 million; Bank of America +13% to 16.9 million; and Wells Fargo +19% to 14.9 million. According to eMarketer, more than half of adult mobile phone users are expected to use mobile banking in 2015.
Consumers are transitioning to self-service channels for a growing range of transactions. PNC reported that 50% of its consumer customers used non-branch channels for a majority of their banking transactions in the first quarter of 2015, up 7 percentage points y/y. PNC also reported that the non-branch (ATM and mobile) channel share of deposit transactions doubled from 20% in 1Q13 to 40% in 1Q15.
Many banks are slowly shrinking their branch networks. Leading banks who reported significant branch reductions in the most recent quarter include: Citibank (down 61 during the quarter, as its pursued its strategy of consolidating its presence in 7 U.S. markets), PNC (-37 branches), Regions (-33) and Chase (-31 ). Although Bank of America has closed more than 800 branches over the past three years, the net branch decline fell to 20 in the first quarter of 2015.
Some banks are growing branch numbers…and in-branch sales staff. In spite of the general perception that the branch channel is in the process of terminal decline, some banks are in fact acquiring or opening branches in order to capture growth opportunities. Huntington Bank reported the addition of 43 new in-store branches in Michigan. And even though Bank of America reduced branch numbers by 260 over the past year, it grew sales specialists by 5%.
Banks remain committed to the branch network as consumers use multiple banking channels. While electronic self-service channels have a dominant share of everyday banking transactions, branches still play a key role in areas like new account generation, customer relationship management (including cross-sell), and branding. Wells Fargo claims that its most loyal customers are not those who have the most products, but rather those who use the most channels most often. It reported that mobile banking sessions rose 38% in 2014, while branch visits remained steady.
There is a wealth of evidence that consumers are using online and mobile channels as the primary channels for their everyday banking needs:
Having reached critical mass in online banking penetration, the largest U.S. banks continue to report strong growth in active mobile banking customers (Chase +23% y/y to 17.2 million; Bank of America up 17% to 15.5 million; and Wells Fargo +22% to 13.1 million)
Regional bank customers are also growing their usage of non-branch channels. 45% of PNC customers use non-branch channels for a majority of banking transactions. Fifth Third reports that ATM and mobile channels’ share of deposit volume rose from 12% to 31% over the past two years. KeyBank claims that online and mobile transactions are growing by 9% annually, while branch transactions are declining by 3%.
The rise of self-service channels for everyday banking transactions is leading banks to re-assess their investment in their branch networks. For example, banks are changing traditional assumptions as to what constitutes optimal branch density within markets. In a recent presentation, KeyBank claimed that branch density is now less relevant as long as a bank can pair branches with a good mobile offering. In addition, in a low-revenue-growth environment, banks are under pressure to cut costs in order to meet earnings expectations. As a result of these factors, banks are cutting branch numbers.
Bank of America is expected to cut branches to below 5,000 by the end of 2014, compared to more than 5,700 in the second quarter of 2011. It recently announced the sale of branch clusters in North Carolina and Michigan.
Over the past six months Citibank sold all of its branches in Texas, as it focuses its energies on a select number of large metro markets.
KeyBank has closed or sold 8% of its branches over the past two years, and plans to cut its network further, by about 2-3% per year.
However, banks remain strongly committed to their branch networks. This is largely due to the fact that consumers continue to value the branch channel, even if usage has declined. A recent ABA survey found that 21% of consumers named the branch as their preferred banking channel, up from 18% in 2013. In addition, banks recognize the benefits in encouraging customers to use multiple channels. Wells Fargo found that customers using its stores as well as online and mobile channels have a 70% higher purchase rate than customers who only use online and mobile. With in this mind, the following are five branch strategies that banks should follow, with examples of banks that have already implemented these approaches:
Deploy new branch formats. Given lower traffic and transaction volumes in branches, banks should launch branch prototypes with smaller footprints, so that they can maintain their physical presence, but at a lower cost.
PNC has converted 200 of its branches to a smaller format, with 100 more to follow by the end of 2014.
Launch flagship branches in selected markets. With changing ideas around branch density, bank can consolidate multiple branches into a large flagship store. These flagship stores act as a brand beacon for the bank in specific markets, as well as providing space for the bank to showcase new innovations
Reconfigure branch staff. As branch activity is switching from transaction processing to sales and advice, and branches switch to smaller format, bank can reduce the average number of staff per branch, but should also change the functional balance, with fewer tellers and more sales specialists.
In the 18 months to June 2014, Fifth Third cut 22% of its branch service staff, but increased sales staff by 6%.
Over the past year, PNC has grown its number of investment professionals in branches by 4%.
Incorporate technology into branches. As consumers become more accustomed with using technology for their everyday financial needs, banks should showcase customer-facing technology in branches. This can enhance the user experience and capture sales opportunities
Regions is installing two-way video to enable customers communicate directly with bankers via an ATM.
Open branches outside of footprint. As having a critical mass of branches in a market is no longer a prerequisite for success, banks can open branches beyond their traditional retail footprint, to target specific consumer or business clusters.
City National has established branches in New York City, Atlanta and Nashville, dedicated to targeting entertainment firms that are clustered within these markets.