The Branch Expansion/Remote Deposit Capture Paradox

There is an emerging paradox in retail banking between investments in branch renewal and remote deposit capture (RDC) technologies. Following heavy investment in branch renewal, the industry is also seeing rapid adoption of technologies like remote deposit capture and image-enabled ATMs, which keep customers away from branches. Early indications of consumer capture of check deposits will also contribute to reducing branch traffic. However, recent research conducted by Celent indicates no reduction in branch expansion. Last year alone, approximately 2,800 new branches emerged, and branch counts are expected to continue their climb despite increased adoption rates of remote technologies.This paradox results in a conflict between the imperatives of customer intimacy, value optimization, and process efficiency and profitability. But is this really a paradox, or a strategy for bankers to stay ahead of the curve in an evolving landscape?

Branch Expansion: No End in Sight According to the survey, 75 percent of respondents have "definitive plans to increase branch count in the future," with only 3 percent saying they have plans to reduce branch geographic footprint. Meanwhile, ATM deployments are saturated, according to the Federal Reserve's 2006 "Guide to the ATM and Debit Card Industry." The total number of U.S. ATMs peaked in 2000, and transactions per ATM have declined since 1992.

In branches, 30 percent of commercial banks surveyed reported a decline in transactions. Among mid-tier banks (assets between $1 billion to $50 billion) surveyed in the study, 43 percent cited a decline in branch transaction volume, yet many of these still have plans to build more branches. The bulk of transaction declines are linked to teller transactions, where 90 percent involve checks.

So where are the transactions going? Internet banking has been the most influential in displacing branch transactions, with ATMs closely following. Remote deposit capture has not yet become a major factor broadly, but adoption rates have exceeded 50 percent indicating that it will become a significant factor. According to those surveyed, 60 percent of banks with remote deposit capture have observed an impact on branch traffic and transaction volumes.

Consumer Capture Takes Flight The industry has witnessed the revolution of RDC in teller, merchant and ATM capture, and now consumer capture is gaining attention. Among banks with assets greater than $50 billion, 20 percent assert definitive plans to deploy, and 20 percent are considering consumer capture. Thus, nearly half of the nation's top 30 banks may offer consumer capture.

Image-Enabled ATMs Increase Transactions Another self-service channel impacting branch traffic is the ATM. Image-enabled ATM adoption, while becoming significant, shows no signs of ubiquity. Larger banks are showing clear leadership in both current and future adoption despite the decline in ATM usage.

Despite processing cost reduction and improved customer experience through image-enabled ATMs, a sizeable group of the bankers surveyed feels that high device cost is a barrier to deployment, particularly the smaller banks. While deployment rates of ATMs continue to decline, there is growth ahead in transactions through ATM capture.

Reduction in Checks Felt by Branches A steady decline in branch traffic has been directly correlated to the decline in check volumes, and this reduction has been evidenced by the Federal Reserve's processing site consolidation efforts across the nation. By the end of the decade, banks will see less than half of their current branch activity. Self-service channels will siphon even more traffic out of branches, while check usage steadily falls (a 6.4 percent CAGR decline in checks paid over the past three years, according to the 2007 Federal Reserve Payments Study). As a result of these concurrent trends, check-related branch transactions will dwindle.

About 56 percent of banks are concerned with the foreseeable reduction in branch activity, and about a third have no plan to mitigate the loss of sales. Some banks (about 10 percent) are even welcoming the reduction.

What's in Store for the Future? While it is premature to declare the branch dead, there is an imperative to re-invent the branch. Despite years of debate on its effectiveness, cross-sell and up-sell of bank services appear to be alive and well. Nearly 90 percent of large banks make it a primary objective to cross-sell customers when they visit branches to complete transactions, perhaps balancing the sales lost from declined branch traffic.

As branch traffic declines, branch renewal and remote deposit capture will spark the evolution of the traditional branch. Nearly 80 percent of survey respondents believe that branch staff will take more proactive roles by reaching out to customers rather than waiting for them. Branches might become home bases to market products like certificate of deposits (CDs), personal and commercial loans, mortgages and credit cards.

As branches evolve, the role of the teller is anticipated to change. Nearly 70 percent of survey respondents agree that tellers will become more full service representatives. According to the data, nearly two thirds of branch activity occurs at the teller line, and more than 90 percent of teller transactions still involve checks. Even with the clear decline in check volume, the automated processing of deposits through teller image capture (TIC) provides tellers a renewed role. Tellers can leverage reduced data entry into building rapport with customers and identifying sales opportunities.

The concept of transforming branches into marketing outlets and tellers into sellers to maximize "relationship value" is not new, and this concept may be the underlying reason for an increase in branch expansion with a parallel increase in remote deposit capture technologies. Perhaps there is no paradox. Banks obviously want customers in their branches. But a growing number of banks will seek to limit those customers, favoring visits from customers wishing to conduct business beyond routine transactions that can be more efficiently administered via a growing portfolio of self-service channels.

Jon Reneslacis is director of solutions engineering for Duluth, Ga.-based VSoft Corporation. Bob Meara is a senior analyst in the banking group at Boston-based Celent who concentrates on check processing.