Size and Value of Bank Branch Networks

Banks are under intensifying profit pressure, so all are reexamining the size and value of bank branch networks. In How Many Bank Branches Do We Need in the U.S., posted in Celent Banking Blog, Bob Meara offers a brief discussion of the concept of “branch flexing,” as coined by Oliver Wyman to describe optimization. It’s no surprise that banks are questioning their massive branch expansions during the 2000s, especially in light of increased capital requirements and regulatory costs, which increase cost of operations. Moreover, margins are razor thin as interest rates are at historic lows.

What does this mean for branches? I’ll offer a surprising alternative.

Rethinking Banks’ Client Relationships

I encourage you to read the How Many Branches post as it’s asking productive questions. Here I’ll suggest another direction because I sense that hidden assumptions about banks, branches and clients are creating opportunities.

It is not only a question of “how many” branches because that assumes that we understand what a branch is—or should be. I think a more pressing question is, “What should be the function of a branch, now that clients are adopting online and mobile banking?” True, the response may be “Nothing,” but my crystal ball says that banks can reinvent their relationships with clients and therefore branches. Since banks are neophytes in social business, most do not appreciate that financial transactions are social actions, and they can theoretically deliver rare value to clients by showing them how to benefit from the insight that social actions provide.

Following this big data angle, banks can add more value to clients by understanding the social context of their financial transactions and helping clients to achieve better outcomes using these insights. Currently, most banks see themselves as financial utilities that safeguard client financial transactions, but that business has long commoditized. Understanding social data can help banks add value in the Social Channel. Safe, efficient financial transactions are table stakes. In the Social Channel, banks can understand the context of transactions and offer insight to help them produce better outcomes. This is the blue ocean.

Another social business opportunity is using social networks to support client business outcomes directly. For example, most banks have experts in business process, industry trends, etc., but their existing structures and processes are too costly to deliver experts’ knowledge to market efficiently. Many-to-many social networks change the game because, by letting clients/prospects set the context of discussions, experts increase relevance when interacting with people publicly. Moreover, they activate the network effect: by serving the people who are asking the questions, they serve hundreds or thousands by example. Even better, since the conversation is digital and discoverable at any time in the future, benefits keep compounding. For more on how the network effect works, view this short video. Examples of B2B and B2C social networks.

21st Century Branches: New Value of Bank Branch Networks

The social business context gives us a useful perspective to consider reinventing the branch. The prevailing assumption has been that clients and prospects wanted to transact in branches, hence the “convenience” justification. Although I agree with @Graham that the quoted mobile adoption figures don’t smell right, it seems obvious that directionally more transactions are shifting to self-service.

Banks can repurpose space within existing locations to serve people in new ways at relatively low risk.

I think that banks could redesign part of existing bricks and mortar locations to attract clients and prospects. For example, laptop- and smartphone-toting mobile workers are a very attractive demographic that is underserved around the world. There’s an opportunity to create coworking spaces for clients—and use a digital social network to add leverage. Imagine coworking spaces positioned between airport lounges and Starbucks.

This is far different than the half-hearted efforts in recent years that featured cheap coffee and donuts in branch lobbies. It caters to a growing market need of an attractive client segment: locations in high-traffic (dense) areas, a serious business setting, a reliable environment for phone calls/conferences as well as wifi services, etc.

See Bank Branch Client Coworking Space for how banks could experiment at a relatively low cost; if some branches succeed, banks could avoid costly and unnecessary retrenchments and significantly change branches’ profit picture.