Branch Strategies For The Next Five Years
The next five years in retail financial services will be quite different from the last five. The past five years have seen near-zero interest rates, slowing of retail expenditures, high unemployment, limited migration, huge stimulus infusions, and compressed margins. The next five will be different. Are you ready?
From time to time it's important to reflect on the recent past and then look forward to the near future, identifying how things will be different. There may be no better time to do so than now.
The last five years have seen near-zero interest rates in an effort to drive incremental purchases and investments, to stimulate the economy. The Federal government pumped over $2 trillion into the economy in the last two years for the same purpose. The impact of that stimulus was a reduction in overall lending levels as existing debt was paid down, and a massive increase in savings levels more than double the typical annual deposit growth rate. Combined, these changes reduced overall loan-to-deposit ratios further shrinking narrow margins.
Covid-19’s arrival pretty much shut down the economy for a while—reducing consumer demand, increasing healthcare outlays, nearly eliminating discretionary travel, and causing massive layoffs. Branches closed only to re-open later under severe restrictions. An accelerated shift to digital transactions was seen across all age groups, changing how consumers interacted with their banks and credit unions.
Fewer people moved due to the lack of new jobs thus reducing attrition. Many of those with jobs began working remotely, changing their branch usage patterns from downtown employment areas to more residential suburban areas.
The combination of all these factors has led to dramatic changes to balance sheets and income statements. Sales volumes have declined along with branch foot traffic. The rise of digital-only fintech companies, like Chime, are nibbling at the edges of demand, especially among younger, lower-income consumers. Fintechs target consumers with simple banking needs like a debit card account and credit card.
Our world has changed a lot in these last five years.
Looking forward, things will likely shift again.
First, due to increasing inflation pressures, interest rates are poised to rise rapidly. Those inflation pressures are in response to booming demand coming out of the Covid lockdowns combined with supply chain deficiencies reducing the available supply of the goods consumers want. The supply chain deficiencies are a complex problem, starting with manufacturers lacking staff to ramp up production due to rising demand. This lack of qualified workers, caused by Covid deaths and continuing restrictions, impacts manufacturers at multiple levels. A notable example is the auto industry. While they can make cars, they can’t get the computer chips that operate them. Even if they can, they can’t get truck drivers to deliver them. Or look at most consumer goods that flow from Asia to the US. Many 1000s of containers are being held offshore because there aren’t enough dock workers to offload them or truck drivers to deliver them the final miles. New home construction was first impacted by limited lumber supplies, which drove significant price spikes, and is now impacted by things like a lack of garage doors and tint for paints. These supply chain issues are a drag on a growing rebound economy.
The year-plus shut down leading to a huge increase in remote workers has also given many people the opportunity to rethink their career paths. That’s a contributing factor in the difficulty many employers are having in finding skilled workers to fill open jobs at the offered pay levels. Wherever you go today, you’ll see the ubiquitous “Now Hiring” signs. We’re at record job openings and still little movement on filling them all, partly due to issues like a general lack of affordable childcare, and many school districts slowly going back to in-person classes. These challenges will persist in the coming years.
We’re also likely to see a major shift in growth patterns as more remote workers leave “expensive” communities to move to those that are more affordable. Recent studies are showing that larger urban areas are seeing a net outflow of people while smaller communities are seeing a net inflow, as city-dwellers seek a better lifestyle. This movement trend will redistribute demand to new places.
What do these changes mean for your branching strategy?
The most important thing you need to address is flexibility. Old strategies won’t deliver for you. Whatever strategy you choose, it must be flexible enough to adjust to changing times.
The answer isn’t digital or physical, but how digital and physical deliver the customer experience people want. Digital offerings provide transactional convenience, or as a customer might say, “banking on my terms in my way when I need it.” But digital-only isn’t the solution for all. A balanced “digital+physical” strategy will provide your customers more options for interacting with your brand. Having all of your customers comfortable with digital channels for routine transactions will minimize disruptions should another major catastrophe occur, whether it’s a pandemic, a hurricane, or a tornado outbreak. Providing them easy access to human assistance when needed will help establish and build a personal relationship with your brand. “Easy access” is the most essential element.
Most consumers (and small businesses) demand access to live assistance when dealing with more complex transactions and questions. Automated phone systems and chatbots are not acceptable alternatives. I’m sure that many of you reading this article have at some point yelled “agent” repeatedly into your phone while navigating your bank’s phone system. You can deliver on that individualized touch via your branches or your call/contact centers. Here’s the key. When people finally reach out for human help, assume they have already tried solving the problem via your online or mobile app and that most people assume there will be wait times to see or speak to an actual person, based on their past experiences.
Therefore, build out a branch network that is designed for account servicing and advice. Since those interactions are less frequent than transactions like deposits or withdrawals, your branches can be farther apart. Geographer’s Rule #1: The less frequent the needed interaction, the greater distance people are willing to drive to do it.
Design those branches for the go-forward reality that their primary purpose is personal interactions. That implies comfort and privacy, not queue ropes and teller lines. Leverage technology to help your branch staff focus on the customer standing or sitting in front of them.
Infill those markets with free standing ATM sites that can manage most transactions. They will build your brand awareness, provide more customer convenience, and lower the overall cost to serve. Building a mixed site network can help reduce the branch footprint and average branch size. Place these remote sites where you have large customer bases between branches.
Invest in digital channels to develop solid functionalities for all routine transactions. But don’t stop with just building a good mobile app. Invest in educating and training your staff and customers in how to use them. Building it isn’t enough; adoption rate is the critical metric. Consider all the diverse ways people search for information today and leverage those with instructional videos and demonstrations.
Finally, think beyond financial products and day-to-day account servicing. Consider programs that educate and inform customers about their financial options. Start with educational programs in your local schools on financial literacy, explaining how to manage your money and resources. It's not taught enough nowadays, and it’s the thing Gen Z is clamoring for as they get started in life. Provide retirement planning for Gen X who are 20 years away from that life-changing event and trust planning for Boomers who are already there. All generations want advice. You want a relationship. Give them unbiased advice that isn’t a sales pitch. Help your customers navigate life.
