Bank Branch Disruption Enables Unusual Opportunity

Branch disruption enables unusual opportunity for bank executives who consider transforming their relationships with clients. More generally, retail banking provides an excellent example of an Industrial Economy industry whose services are facing commoditization and weakening profits due to the waning of the Productized Channel of Value. In 2013, bank branch networks are under intense scrutiny because they are expensive, and client visits have been falling steadily for several years as e-banking and m-banking adoption have accelerated. Astute banks will use branches to transform their client relationships by leveraging the Social Channel. Here’s how they will do it.

Bricks, Mortar—and Bars

Physical presence has a special significance in banking that merits some reflection to appreciate its impact on the prospect of much-needed bank transformation. Banking is one of the most primal industries: banks’ bars, soaring columns, wood and marble are extravagant when compared to other business buildings, but they serve to remind clients that their money is safe. By extension, this safety relates to clients’ families, legacies and futures. This aspect of banks’ locations is bottom-of-the-pyramid, primal, unconscious and very real. By contrast, retail shops or restaurants seek to charm, give comfort and pique excitement , but their importance is at a more “entertainment” level than banks’. Banks were modeled after temples, after all.

The significance of bank branches is compounded when we consider that bankers’ livelihoods are based on clients feeling secure and “keeping their money with us.” Of course, anyone who has delved into modern banking knows that few branches have much physical money anymore. Bars have virtually disappeared in favor of electronic security. Underneath everything, however, physical locations still carry this “security” significance, so discussions of “branch flexing” or optimization that lose sight of it may fail to anticipate significant resistance to change.

Bank Branch Milestones (United States)

The above notwithstanding, some milestones can help us understand two key themes that are tying bank executives in knots: they don’t want clients to transact in branches, where their transaction (fulfillment) costs are high, yet they want clients in branches, so bankers can “develop relationships” and cross-sell products (services). They have yet to resolve the conundrum.

• 1900-1969—There were no branches in the modern sense. Your bank was your bank. “That’s where my money is.”
• 1969-1993—The first ATM launched in 1969. Banks developed ATM networks. Branches and pseudo-branches developed in some states as banks tried to build economies of scale in spite of restrictive federal and state laws limiting bank branches.
• 1994-present—Banks capitalized on evolving legislation (deregulation) and steadily developed branch networks to increase convenience and build scale. Internet banking began slowly, soon after the launch of Mosaic, Netscape and other browsers as well as banks’ consultants’ prowess and Web-enabling enterprise systems; “online banking” became a “core” offering during the 2000s.
• 2007-present—Mobile banking hit an inflection point with the release of the iPhone, which led smartphone adoption in the U.S. With mobile Web interfaces and mobile apps, clients manage an increasing portion of their accounts, execute transactions, etc.

Observations

• Reflecting on the milestones, I’ll hazard that bank executives, having champed at the bit for many years, built branches aggressively to increase client convenience (“we’re everywhere you want to be”) and build scale. At the same time, bank consolidation has been torrid, so there’s a branding and market penetration element to branching, too. It may be that these organization-driven business cases caused executives to lose sight of client adoption of alternate channels—and overbuild.
• Depending on whose numbers one uses, transactions at branches continued to increase despite the increasing number of branches—until relatively recently, when transactions began their steady decline (this one projects 7% per year through 2015).
• During the last 40 years, banks have actively encouraged clients to adopt technologies that shifted transactions away from branches to ATMs, online banking and mobile banking.
• Now, however, banks find themselves in a quandary: since branch visits have fallen, the opportunity to increase “share of wallet” and cross-sell has diminished; moreover, as in every other sector, clients’ first stop in learning about banking “products and services” is online and in social networks. This has confronted retail businesses in general with disruption that few appreciate, even today.
• The global financial debacle of 2007-10 begot extensive and expensive compliance measures and capital requirements, which eat into profitability, along with the record-low Fed Funds rate.

Beyond the Bank

As suggested in Building Post-Product Relationship in the Social Channel, a large portion of the “retail” value proposition has dissipated, in most categories, and this is accelerating. In most cases, there is superior information and selection online, and Web 3.0’s offline/online integration will only accelerate the trend.

Banks arguably sell services that are ultimately computer services, so, unlike clothing or sexy electronic gadgets, “shopping” as entertainment doesn’t come easily to financial services. In fact, banks would look silly if they tried to emulate retailers that are tapping the social-as-entertainment layer of the Social Channel. No, banks will win by tapping the social-as-business-collaboration layer of the Social Channel, but doing so will demand a fundamental rethink of their identity and relationships to clients, but that lock leads to the blue ocean. The alternative, thinking inside the box, will seek to use management tools to grind out productivity improvements in the red ocean. Productivity improvements are laudable and can contribute to competitiveness, but banks that rely on that approach will go down with the ship because it doesn’t address differentiation, which is now in the Social Channel.

Banking in the Social Channel

The Social Channel, being comprised of innumerable digital social venues, enables people to be social which, prior to Web 2.0 applications, was very difficult for mainstream users to do online. There were no social features, tools or widespread adoption online. There are now, and options are exploding.

For primates, being “social” means being natural. It means talking about the end, what’s really important, more than the means. Prior to Web 2.0, organizations held the lion’s share of digital presences, so most interactions were between people and firms. Not social. But people prefer social interactions because they can “be themselves” more… talk with their colleagues, friends and acquaintances naturally. In 2012 that horse is not only out of the barn, she’s in the next county.

Banks, like all organizations, need to learn to relate to people socially while being true to their identities. This is eminently doable. Here’s a conceptual framework.

Step One: Rethinking “Social”

To begin, it’s necessary to go beyond the “social” stereotype. We humans are so social that we have a hard time perceiving and understanding sociality objectively. For our purposes here, I’ll propose this working definition:

Being “social” means interacting with people we trust, so we can be less guarded when discussing what’s most important.

Taking these words literally does not pre-suppose beer and football or Hollywood. But most people associate “social” with leisure, home, friends. Not “work.” However, according to this definition, LinkedIn is very social, in a business sense. People are discovering new people, interacting with them and forming judgments about how they can trust—and therefore relate to—them. Higher trust means being less guarded and collaborating more deeply.

Step Two: Making Banking Social

Bankers, as all other professionals, can be forgiven for not “knowing” their clients because, prior to Web 2.0, there was no economical means of doing so. However, the Social Channel is replete with opportunity once they learn to relate to people while people are relating to their trusted colleagues, friends and acquaintances. Simply put, we can get to know what’s most important about someone, not by relating to him or her one on one. No, in most cases, we’ll learn far more by observing how s/he interacts within a trusted entourage. And trust is relative.

When clients are interacting, they often have amateurish knowledge of financial services and products and how they work. But the revolution is, they help each other in areas they know much more about than most bankers: user outcomes. As any banker who has mastered “consultative selling” knows, people usually need help in thinking through what they want. Learning in groups is a very social process. People share their thoughts, and others react by adding angles, disagreeing, agreeing, and everyone learns very quickly.

Therefore, to make banking social, bankers need to commit to focusing on client outcomes. Most will probably think, “But I already do that, I’m in consultative sales!” I’ll argue that the latter doesn’t go far enough because its goal is understanding the client’s situation only well enough to “get her into the right product.” In most cases, the consultative seller isn’t really interested in the client’s situation because the goal is to sell a product. That used to add value, but adds far less now because clients are getting accustomed to interacting business-socially, where other clients are primarily interested in the outcome, no one is selling anything. Yesterday, “consultative” approaches differentiated, today they ring hollow.

Keep in mind that interacting “socially,” that is, with a client and her entourage, has never been economical on a mass scale before the emergence of the Social Channel. Today, bankers can engage clients and prospects by participating in public outcomes-oriented discussions that are happening right now. They can also create digital social venues that can attract clients and prospects. Even better, they can do both.

Lest you find this discussion a bit abstract, dial into these banking conversations, which feature straight-ahead businesspeople helping each other.

Step Three: Back to Branches

To recap so far, banks are being squeezed in a three-way vice: regulation-driven operational costs are rising, client adoption of alternate channels (online, mobile, social) has tipped, and branch operational costs remain high. Since transactions have been successfully pushed to other channels, selling opportunities have diminished.

CSRA’s crystal ball says that bank branches can capitalize on several converging Knowledge Economy trends:

• For a growing portion of the population, “free agency” is the default for knowledge workers, not lifetime employment. Most people work interim jobs and serve as contractors, whether literally or in practice. In the management ranks, tenures are short and searches long, so most employment is “interim” for practical purposes. Let’s call all these people “mobile knowledge workers.”
• Mobile knowledge workers are equipped with smartphones, tablets and laptops, but they are increasingly working near their clients and prospects (“go to where the customer is”). Having a physical office is expensive and impractical since they have meetings all over a metropolitan area—or the country or the world.
• CSRA’s current research is preliminary, but mobile knowledge workers’ biggest frustration with using hotels, restaurants and cafes as impromptu offices is the lack of a “professional environment.” Moreover, they spend much time alone, so working solitary has its limits, so many like to work “around” other people.
• Many financial facets of mobile knowledge workers’ lives are being disrupted, which affords astute financial providers the opportunity to be relevant at a whole new level—by focusing on emerging needs and outcomes.

We are engaged in diligencing the concept, but the Bank Branch Client Coworking space looks as if it has legs. This concept combines physical coworking spaces in select branches with an online client social network in which clients can interact among themselves, facilitated by banks’ specialists, experts and social business teams. The coworking spaces are conceptually positioned between airport lounges and Starbucks.

What I find most exciting about this concept is that it:

• Repurposes real estate in high traffic locations in the service of a highly desirable, growing demographic in a visceral and meaningful way.
• Amps up the dynamism of bank branches—with the organic energy and interactions of clients.
• Uses the private social network to add unprecedented leverage to experts and specialists across the bank, who can interact online, boosting their utility. This can transform the “branch” network paradigm.
• Affords the opportunity to have client-centric round tables and educational sessions on user outcome-specific topics—online and offline. Offline events can be captured online for viewing in the private social network.
• Updates the original bank location value proposition to the Knowledge Economy—security, integrity and professionalism—by providing clients a “home away from home.”
• Clients gain access to online and offline spaces with existing bank credentials, which enables banks to understand their behavior.
• It can morph into a platform for concepting, piloting and scaling many types of services as well as value-added services.
• I’ll close with this breakthrough coworking space example from State Farm. The social context is completely different, but the concept is relevant: State Farm is learning about an exciting new client by interacting with them socially, online and offline.

CSRA is conducting a research survey as a part of our diligence process, “FSI Social Business Adoption 2013.” If you are a financial services executive and would like to participate, I invite your inquiry.

Please share your thoughts about the future of bank branches in comments.

References

You can find many of the resource sources I’ve used on my Pinboard.