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Chris Steele and Chris Pohl, Ernst & Young
Chris Steele and Chris Pohl, Ernst & Young
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Branching Out

Brick-and-mortar branch outlets and electronic delivery options must work hand-in-hand to insure bank prosperity.

The ability to perform personal financial transactions over the Internet was supposed to be the death knell for traditional branch banking. After all,at first glance Web banking appears to be a win/win situation for both consumers and financial institutions-customers get the ability to instantly access accounts without going to a brick-and-mortar location; banks reap the benefits of appreciably lower transaction costs.

But a funny thing happened on the way to this financial revolution. Despite the diminishing costs and increased convenience associated with online delivery channels, the branch continues to be an important component of most banks' operations. Indeed, although there has been a noticeable decrease in the number of bank institutions over the past two decades, the number of branches continues to grow. (See the chart on this page.)

Apparently, the need for a human delivery outlet is still desirable among a large number of consumers, and therefore necessary for the survival of a retail bank. The importance of such physical branches was recently verified by the announcement that WingspanBank, established as an Internet-only distribution model, now plans to open physical locations.

But these brick-and-mortar venues cannot continue to live in the past. The role of the bank branch must continue to evolve to accommodate customer preferences. The availability of new delivery options raises many questions for bank executives about how branches fit in with their overall distribution strategy. What physical form should the bank branch take? Should branch expansion continue? What is the best way to integrate online channels with the physical branch?

Physical Changes

The market is already answering some of these questions for the industry. For example, the physical form of the bank branch has changed radically over the past 20 years. Gone are the large marble column buildings with expansive floor plans that housed all the bank's offerings under one roof. Today's branch is usually a specialized 3,500-square-foot storefront or a kiosk at the front of a supermarket.

And people continue to flock to these branches, since some functions in both commercial and retail banking still require human interaction. For example, the opening of a new account is still best handled through live interaction with a bank employee, someone able to answer customer concerns directly and start the banking relationship off on the right foot.

Branches also satisfy the needs of customers who have not yet developed a comfort level with computers. There will always be people who feel uncomfortable about virtual transactions-who need to feel checks and bills pass physically through their hands before they can be at ease.

So for the time being, banks will have to devote resources to branch operations-money and manpower many institutions would prefer to spend on enhancing the electronic transaction environment. But this investment need not be considered a waste. If properly reconfigured, banks can use their physical branches to benefit their electronic offerings. Here's how:

- Information integration-There needs to be data connectivity between the branch network and the online channel, and this connection must extend throughout the whole banking organization.

Banks can leverage information only if they have access to it. Some banks have relegated the electronic business to a separate arm of the bank or, as in the case of WingspanBank, have spun it off entirely. While this may appeal to a certain subset of the population for a period of their banking lifecycle, this relationship will be limited to low-cost (and therefore likely low-return) interactions.

- Move high-cost service functions to lower-cost channels-Several banks have already started to move their less profitable, service-intensive transactions to alternative channels by offering customers incentives to shift checking balances, account transfers, and some bill paying from the branch to electronic options. In turn, this allows the branch to move into a more active sales culture, and bring in higher value customers.

- Leverage combined data-Banks that can seamlessly integrate branch and electronic banking functions will be rewarded with a huge amount of free information about their customers. This data can be used to improve the bank's overall relationship with its clients.

For example, Amazon and similar e-retailers already do a fine job of suggesting ancillary products their customers may want or require based on their purchasing history. Banks should take advantage of similar information collected through their various channels to personalize service and provide tailored product suggestions to their customers.

As long as there continues to be some need for direct human interaction, there will be a need for physical bank branches. In fact, branches must be a significant component of the overall retail strategy, even in the online environment. The challenge for bank executives will be to understand how to adequately exploit these resources to bolster market share and better capture and serve the retail customer.

About The Authors: Chris Pohl is a manager in Ernst & Young's Financial Services practice in Minneapolis. Chris Steele is a manager in the Corporate Real Estate Advisory Services Group in New York.

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