I've spent the better part of the last three months meeting and talking to some of the best and brightest bankers in Australia, Asia, UK and the USA and what I've learned is fairly predictable, and just a little disappointing. Direct banking (mostly Internet and Mobile) is going off everywhere I go, but most banks are still saddled with an unhealthy attachment to their branch networks. I decided to try and figure out where Branch banking is really going and surmise the strategic options for Retail banks.
Branch Networks under pressure
In the US last year branch growth was non-existent, well to be technically correct branch growth was 0.39%, but that is the lowest it has been in 14 years and the trends are clear - there will be no more branch growth in the USA. In the UK branch growth has declined on average 24% in the last 5 years.
In Australia, after fits and starts, branch decline has definitely set in, with 2010 being the 4th year running that branches have declined in numbers. In Sweden last year, 88% of Swedes didn't even visit a branch. In the annual American Banker's Association survey on channel preferences, the branch continues to suffer (41% decline in just 3 years) as Internet Banking has become the dominant day-to-day channel of choice.
So does this spell doom and gloom for banking? No. There is some good news, in fact some may say excellent news on the horizon.
What UBank and ING Direct tell us
In Australia, UBank, an exercise in direct banking for NAB has rapidly paid dividends. Within just 3 years UBank has become the 8th largest bank by deposits in Australia. But where can UBank go from here after such a strong start?
While UBank has faced some leadership challenges in recent times, I spoke to Sam Plowman, Executive GM of Direct Banking at NAB, last week and I was delighted to hear that UBank is a big part of their forward-looking strategy, with a host of new products planned over the next few months. This must be the only sensible move for NAB given their current market share and the unbridled success of UBank. In fact, UBank would probably have to be considered the single most successful initiative NAB has launched in the last 5 years, wouldn't it? Sam's colleague Simon Terry is currently working on the launch of the Oracle-powered NextGen platform that will power future innovation in customer experience. Between Sam and Simon, they hold the future of the bank in their hands.
If UBank continues to perform so well though, what happens to NAB itself? The key lesson from UBank's success must be that direct banking is at the very core of NAB's business moving forward - if NAB falls into the trap of thinking it's a one-hit deposit taking wonder, they would be missing the point; Customer Behaviour has already shifted. How do you deal with the runaway success of a new direct banking brand when you run a $100m branch network? Tough question...
Is UBank an isolated case? ING Direct recorded profits of US $101m profit (EUR 75m) last year up 70.5% year-on-year, this in the tail of the global financial crisis. Rabo Bank, Jibun, Shinshei and PayPal have all had similar results as either Internet-only or mobile-based models of banking and payments. But it's not just profitability.
In their annual customer satisfaction survey, UK-based consumer sentiment research group Which? polled over 15,000 UK members to see what they thought about the relative performance of the various high street and direct banks. First Direct and Smile were top of the ranking this year, with scores of 89% and 87% respectively.
Mobile increases the threat to Branch
Mobile is now a huge area of investment. Bank of America has more than 4 million customers actively using their mobile banking platform currently, making it the most successful mobile bank in the USA. BofA say they've added more than 150,000 new customers just because of their mobile platform. But mobile is more than a transactional channel for BofA as this excerpt from a recent Bloomberg article shows:
Bank of America Corp. went from buying an occasional mobile campaign to paying Phonevalley, the agency run by Publicis' Mars, a $1 million annual retainer, said Kathryn Condon, a vice president of digital marketing at the bank. Google's AdMob is among the ad-placement companies used by Bank of America, the largest U.S. bank by assets.
With Direct and Internet banking at all time highs in terms of adoption rates, with the breakout success of mobile Internet banking in recent times, and customer channel preferences clearly shifting for the bulk of retail segments, where can we go from here?
- All the trending data is wrong and the branch is about to face a resurgence in popularity because people seek a return to high quality, face-to-face engagement
- Nothing will happen - branch population will neither grow nor decline in the next few years
- All the trending data is right and we are seeing a shift in customer behaviour that will increasingly see branch-based banking at risk
Key segments like Mass Affluent, and key product areas like mortgages, wealth management and loans are just too easy to position and service through direct channels. Branches better start figuring out how they're going to make money over the next 5 years, and they better do it fast.
The first thing banks need to do is reorganize their organization structure to be channel agnostic. The days of 'alternative' channels are gone - Internet, mobile, direct are mainstream. Thus, the organization structure should reflect the same - Head of Branches, Head of Internet, Head of Mobile, Head of Social Media should be equals in the retail team- why? Because that's how customers think.
The second thing is banks need to get better at measuring where the money comes from. A customer might end up at the branch, but how does he get there? Does he get there because of a compliance procedure ("Can you come into the branch to sign this?") or does he end up there because he wants a face to face discussion? By better understand the behavioral drivers, we can determine those branches which will remain profitable and those that no longer cut the mustard, as they say.