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Will There Be Personal Branch Banking in the Future?

January 11, 2013

By Jack Johns, Vice President of Client Services at FMSI

Jack JohnsBoth of my grandmothers were avid letter writers but that institution is certainly a thing of the past having been replaced by texting, e-mail, Skyping, Face Time and other social media.  As we think back over our lives other institutions may come to mind that are becoming obsolete or have become obsolete.  For the most part, gone are the days when we would go to Blockbuster on Friday or Saturday night to rent a movie; most of those we simply download now.   The largest seller of books is the mega online outlet Amazon .com and the hard copy book is even going the way of the dinosaur with the development of the Kindle and iPad and other tablets.   In fact Newsweek has recently announced that it will print its last paper edition at the end of last year and become digital-only.   In some markets we have seen the demise of retail outlets such as Barnes and Noble and Borders Book Stores.  More music is sold by Apple thru iTunes than thru any retail store front. One of the largest sellers of shoes is the online retailer Zappos.com.  Our behavior to migrate to the convenience of the internet and these technologies has contributed to the altered existence or non-existence, as the case may be, of many of the institutions as we once knew them.

Think for a moment about all of the technology conveniences we are exposed to in the bank and credit union world and how our utilization of these conveniences may possibly be impacting the state of the physical branch.   Are branches soon to be a thing of the past as well?  Certainly institutions will have to struggle with decisions about specific branch locations with regards to keeping them open due to lack of activity or duplication of effort from mergers or in some cases safety considerations.   The branch in general is likely not going away completely anytime soon although our culture and behavior are changing the way we use the branch.

Many of you have probably experienced it firsthand and know that transaction activity as well as sales activity within the branch has been on the decline throughout the years.  For 30 years, experts have predicted a decline in banking activity and it actually started in the 1970’s with the introduction of the Automatic Teller Machine.  The years since the 1970’s have seen further advancements in technology such as online banking, banking with image capture and most recently mobile banking and video teller machines.

The widespread adoption of the smartphone is proving to be the first big innovation in a while in banking that is actually causing people to make fewer visits to branches.  Mobile banking is said to be growing at a rate of 300%-500% faster than internet banking did when it first came on the scene. All of these advanced technologies have left us with fewer and fewer personal face-to-face interactions between account holders and branch personnel.  Future technological advances will likely continue to drive account holder activity away from the branch.

An August 2011 study by the American Bankers Association indicates that since 2009, the number of customers who prefer to bank online has jumped sharply.  The study states that sixty-two percent of account holders said they prefer banking online to all other methods, up from 36% in 2010. The study also indicates that only 20% of account holders said they preferred using a branch, down from 25% in 2010.

A random sampling of 5% of actual FMSI client data from September 2012 shows that from September 2011 to September 2012, there was an average decline in transaction volume of 13%.   The same number of reporting centers was captured during the sampling period suggesting that account holders have opted to transact business thru other channels.

Furthermore, each March since 1992, FMSI has compiled statistics detailing transactional activity for account holders in the teller area.  The study is a compilation of data from community banks and credit unions across all regions of the United States.  The 2012 analysis is comprised of over 17 million transactions from 2,500 branches or reporting centers.   The March 2012 study shows a 40.2% decline in activity since the study’s inception.  Transaction activity is down from an average of 11,700 transactions per branch to an average of 7,000 transactions per branch.  Taking the analysis a step further to look at the differences in banks vs. credit unions, over the last 5 years, banks have shown a decline in teller related activity of 29.7% (down from 7,400 to 5,200 average transactions per branch) while over that same 5 year period, credit unions have fared better and shown a decline of 4.5% (down from 8,800 to 8,400 average transactions per branch.)  All the while with transactional activity on the decrease, the delivery cost has been on the increase by 119% due largely in part to the increase in average salary and benefit rate throughout the years and also in part to the fact that branches have continually struggled with right sizing with staff as the volume has declined.

What continues to draw the account holder to the branch?

A study by Price Waterhouse Coopers shows that 39% of consumers visit a financial institution branch less than monthly and 20% visit a branch less often than every 3 months!  In the U.S., the number of branches has continually risen but in recent years we have seen a decline in new branch additions and even seen more branch closures due to institutional failures.  Statistics show that there are four times more branches today than there were in 1970—before people had access to ATM’s and other alternative delivery options.  John Stumpf, Chairman and Chief Executive of Wells Fargo Bank says, “Branches continue to thrive because people still think that money is special and want reassurance that their cash is safe.  Location is the first and most important decision-maker when choosing a branch.  After the initial choice, you might bank online; you might not go back to visit that branch again but that location is where you think your money is.”

Is the branch a forever fixture?
The branch as we know it today may change but it is unlikely that it will go away completely; there may be fewer of them and they may look different.  Rob Markey of Bain & Company, a business consulting firm states, “people crave physical interactions with human beings in the branch to make them feel that their money is well looked after.”  Obviously, branches are expensive to maintain and every branch has certain fixed costs.  As the case may be in your institution, in some instances  branches have at least four (or more) staff members  on site at all times, even though three (or more) of them may have nothing much to do!  Can these survive in the long haul?   Financial institutions such as ING, Ally Bank and USAA do not offer branches to their account holders and business thrives!

With the introduction of the video teller machine, face to face does not have to mean in the same room anymore.  This type of technology allows branches to provide a type of personal touch that the account holder craves but in a more cost efficient manner.  The Price Waterhouse study cited earlier, also details why account holders are visiting the branch.  Based on this survey, the top three reasons account holders visit branches are to conduct activities that could have easily been handled thru some alternate channel.  As the average age of account holders becomes younger, these services will likely be transferred to those alternative channels!  Aside from the teller activity, during the fourth quarter of 2011, FMSI conducted a study of 344,000 account holder interactions in branches who utilize its Lobby Tracking System.  Interactions include all types of service and sales exchanges between account holders and lobby employees; interestingly 65% of the interactions did not involve selling products but were more service related activities.   How much of this could have actually been handled thru an alternative channel?   The Price Waterhouse survey shows that only 10% of those who visited a branch did so for a sales related reason.  What are your trends showing and telling you?

As transactions and sales opportunities continue to shift out of the branches and as new technology emerges I am continually reminded of the once great retail store fronts and how the convenience of the internet and technology has taken those institutions away from us and driven us away from visiting those establishments.  As grandmothers today turn to texting and Face Time vs. old fashioned letter writing how much longer will the younger generation of account holders be able to convince the bank and credit union of the future to keep the brick and mortar building?

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