22 October 2017

Alex Noble

Alex Noble - McAfee

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Innovation in Financial Services

Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.
A post relating to this item from Finextra:

Branches hold strong in face of digital onslaught - FDIC

20 February 2015  |  9504 views  |  2
westpac branch.jpg
Despite the rise of online and mobile banking, there has been only a modest decline in the number of branches in the US over the last few years, according to research from the Federal Deposit Insuranc...

Bank Branches, do we bet on Botin or BBVA or the stats from the FDIC?

24 February 2015  |  5076 views  |  1

It’s been a fascinating contrast between the statements of Ana Botin and Francisco Gonzalez. 

In her first interview, Ana Botin (the new Global Chairwoman of Santander, formerly CEO of Santander UK) told the Financial Times that, “Bank branches will save banks from digital challengers”.  Meanwhile, with uncanny timing, it was reported that Francisco Gonzalez (CEO of BBVA) took what might be appear to be the opposite view, stating, “Half of the world's banks set to fall by the digital wayside”.  

Meanwhile the FDIC provided strong evidence last week (“Branches hold strong in face of digital onslaught”) that whatever is happening to bank branches, there is not much sign of it in the US market and any decline in the number of branches is in line with historical trends for an economic downturn.

It’s fascinating because both are highly experienced bankers, both have clear visions and both have learnt their branch banking in the Spanish market. The Spanish element is more significant than just the CEO’s nationality.  In my experience (having worked with Spanish banks), the Spanish model of branch banking is radically different from that of the UK or US markets.

In the UK, and to some extent Ireland and other northern European countries, the bank branch has tended to be developed into something of a service centre.  The extent has varied from bank to bank and country to country, but the conversations I had with UK branch banking executives pre-crash,  all of them stressed the importance of the branch and then all complained about cost and focused on branch cost reduction and branch transaction efficiency in large branches.

By contrast, when I first started working with Spanish banks, the branches were much smaller, there were many more of them and they were much more focused on sales. I was particularly impressed by BBVA, who were already wrestling with how to avoid channel commoditisation. Unlike the UK market, they were very clear about the distinction between the frequency and the value of interactions. High value interactions were infrequent, but (in BBVA’s view) they were achieved by being relevant to the customer through many low value interactions.

 This had led them to some innovative thinking around channels and some early delivery of what is now call omni-channel (and before was called multi-channel). Although the branch is now the area of focus, some of the Spanish banks had started with that other physical channel, the rather neglected ATM. The percentage share of payments conducted in cash may be declining, but cash still remains an important payment means, especially for peer to peer and micro-payments. Driving preference and brand with ATMs is hard if it is purely transactional but I was impressed at the way La Caixa enabled its ATMs to sell transport tickets and the relevance that gave its ATMs to its local customers. One of the senior managers at La Caixa explained to me that (in his view) loyalty at the ATM kept the brand relevant without pushing low value transactions into the relatively small branches – and kept the branches free for sales and the low frequency/ high value interactions that customers really needed.

This early interest in channel automation and branch based sales in the Spanish market means that actually the two CEO’s position is not so far apart.  

Ana Botin is no technophobe and in the same interview she reveals she has set a target of moving 45% of Santander’s customers to online banking channels over the next two years from a current base of 28%.  Similarly, BBVA are not averse to investing in the branch. For example in their US operation, BBVA Compass, they have been investing in a branch based, video based ATM pilot to add a much richer service for transactions conducted at the branch drive-thru (… and presumably with that, increased customer loyalty).

The real concern for both of the bank leaders is not the disruption to distribution channels from new digital banks, but the potential entry into the banking and payments market of a major tech company.

Although neither says it, the strength and size of their bank’s balance sheets means that if any particular start up model does gain traction, then a bank can either copy the start-up or buy a promising contender.

By contrast, for start-ups the cost of rolling out a branch network is a challenge although some are managing it. The branch is not the control point it once was, but it still has huge strengths if brought up to date, placed in the right location and aligned to customer needs. The traditional branch role of deposit taking and transaction handling is declining fast. The FDIC statistics I mentioned earlier show transactions per teller declining by 45% between 1992 and 2013, from 11,700 per month to 6,400 per month. I would suspect that transaction volumes are declining even faster in markets like the UK and Spain where cheque based payments have reduced even more. By contrast, though, for product sales a physical presence is increasing in importance. Most of this is driven by two factors, product complexity and increased regulation. Together, they make it much easier to sell in a face to face sales session (although you might use video to bring the expert to the branch), as Nationwide Building Society has done for mortgage sales since 2013. Some of the start-ups understand this implicitly and it’s notable that Metro bank in the UK builds branches that are closer to retail or coffee shops than to traditional transactional branches and is extremely selective about location.

It may not be popular, but I suspect their “fast follower” approach is the right one, and most of the big banks will win through this round of disruption. We have been here before.  I worked through the early 2000s where web 1.0 and web based online banking were going to be a market transition. The popular view was that the slow, bloated incumbent banks were too handicapped by legacy system issues to compete.

The online only banks did, initially, poach the profitable higher-value customers and did annoy the incumbent players. However, 15 years on, very few of the start-ups have survived, even as brands owned by the other banks. A good example of the survivors is First Direct yet they were hardly a traditional start-up. They remain a powerful brand but are owned by HSBC and they were no internet start-up; they started offering virtual banking via a call centre before the internet ever arrived. In the same way, I’m cautious that many of today’s start-ups will go the way of Egg, IF and their ilk, and either be bought out as they become successful or merged into a larger bank.

On-line banking in the era of web 1.0 did not kill the branch (despite the prophecies at the time) and while mobile banking may transform payments, I’d be amazed if killed the branch either.

TagsMobile & onlineRetail banking

Comments: (1)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 02 March, 2015, 14:22

Fully agree. As for the threat from tech companies, I tend to believe that banks don't have much to fear from them either. 

Banks Have Nothing To Fear From Neobanks

The relative success of Apple Pay among mobile payment providers proves that tech companies can go a long way by keeping banks square and center of their offerings than by trying to disintermediate them.

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job title Account Director
location London
member since 2008
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I specialise in solutions for complex banking processes. Current areas I'm working on include Security, contact centre, improving compliance and digital transformation. Previously, I've worked...

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