There is no question that banks have undergone a massive transformation in recent years, from branch network downsizing to large restructuring initiatives. However, the pandemic has increased pressure on today’s banks to accelerate new transformation efforts that will help them meet customer needs while also reducing costs and driving continuity. As a result, banks have turned to digital tools to help deliver efficiencies, model disruption, and identify new opportunities to drive growth in a changing market landscape.

Retail banks embrace digital strategies

Branch density has steadily declined over the past twenty years as retail banks continue to invest in more digital offerings to meet changing customer preferences. Adopting a digital-first strategy should be a priority whether to sell products or provide services to customers. 

Beyond shifting customer preferences, retail banks are leaning on digital technologies to accelerate efficiencies and reduce costs. A low interest-rate environment has kept banks’ interest income under high pressure while high operating expenses continue to weigh on profitability. And with rising loan loss provisions caused by the pandemic, a deterioration of cost-to-income ratios has occurred. By shifting to digital channels, retail banks can embrace a more efficient and effective workforce model to help reduce costs and drive profits.

Finally, digital innovation enables retail banks to diversify their non-banking services and find new non-interest income sources of revenue. In Singapore, for example, DBS launched Marketplace, offering online services that position the bank as a day-to-day partner to customers who are searching for new homes, servicing their cars, booking holiday travel, managing their utility bills, or simply doing some online shopping.

Critical considerations when transforming the distribution network

As banks continue to accelerate their digital transformation journeys, reducing costs and improving customer experience should be top priorities, but how each bank approaches this journey will likely be dependent on other considerations.

Some banks may decide to downsize or differentiate their branches to meet customer demand across their networks. For instance, HSBC decreased the size of its branch network by 60% during the last twenty years and decided to repurpose its remaining branches in four different formats.

Others might merge branch networks to optimize branch location strategy, drive network synergies, and eliminate redundancies. In France, the merger between Societe Generale and Credit du Nord branch networks is set to lead to a 30% reduction of the size of the combined retail network in the next five years. Similarly, in the US, Huntington and TCF banks have identified a three-mile overlap for more than 17% of their branches as part of their merger.

Finally, some banks will supplement their digital offerings with large branch networks as a way to offer physical access to a bank within twenty miles of wherever customers live.

Keeping up with change

There is no one size fits all solution for branch networks but finding the right balance between physical and digital services will require transformation across other bank areas.

For instance, there will likely be a significant transfer of in-branch resources toward contact centers and digital teams in the coming years. This shift will require banks to adjust their workforce models accordingly. Planning for the future of the workforce will be a key success-factor of the branch network transformation.

Additionally, embracing artificial intelligence and machine learning will enable banks to create technology taskforces to serve their retail customers, similar to the AI Factory initiative driven by BBVA in Spain. Nonetheless, branches are not deemed to disappear and will remain the place to deal with specific operations where customers need human interaction with a financial advisor they trust.

Whether redesigning a branch, revisiting location strategy, or adapting distribution channels to shifting customer needs, banks will continue to rely on digital innovations to drive their transformation in the coming years. Digital tools that leverage agile modeling, forecasting and scenario analysis functionalities will help banks monitor this multi-year journey and refine it according to the evolution of market conditions.  Scenario modeling and forecasting will be great assets to support a forward-looking approach and enable transformation efforts with agility and confidence.