Practical_Steps_to Address the Crisis in Retail Banking 11Q4

7/31/2019 Practical_Steps_to Address the Crisis in Retail Banking 11Q4

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BY RICK SPITLER AND SHERIEF MELEIS

COVER STORY

Facing a continued revenue drought in 2012, retail bankersare eeling the heat or massive cost reduction. Across theU.S., about 16,000 branches are underwater, and an equalor greater number are barely getting by; one third o thebranch system is in trouble.

In lieu o draconian action, how will the retail ranchisebe xed? It is a complicated question that may involve repo-sitioning many lines o business that are dependent on thebranch. In the beginning, players ocused on immediate cop-ing tactics such as obvious branch closings, ee re-pricing andsta reductions. There is no silver bullet, as even pro ound

cost cuts cannot provide a complete answer. Branch bankingexecutives will inescapably ace the challenge o trans orm-ing their banks to compete in a changed market.

In act, it is practically impossible to predict exactly whatthe new industry con guration will eventually look like, giventhe shi ting sands o external actors. However, executivesstill can take a series o practical steps to address the crisis,beginning with a crisp set o revenue and cost tactics andextending to strategies or trans ormational change in coming

years. Such ocus is essential i organizations are to avoidparalysis during the protracted market slump.

Following basic measures to cope with the revenue drought, retail bankers face the steechallenge of transforming their franchises to compete in a changed market. Cost cont

will remain a top priority, but extreme branch closures are not the answer for an industhat still needs to retain customers and prepare for future growth.

S ST E PP r a c Ti c a l

to Address the Crisis in Retail Banking


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On the revenue side, the rst thing to do is to capture asmuch o the relationship wallet as possible long an objectiveo retail bankers. Speci cally, the most valuable and immedi-ate opportunity is to expand the credit side o the retail cus-tomer relationship, which monolines historically have scoopedaway rom all but the largest banks. It is time or banks to

nally master the art o selling loans to deposit customers,in particular, revolving and installment credit and to a lesserextent, home equity.

The other revenue priority is to re-think ees at a much

more undamental level. Banks have reacted in haste ollow-ing the setbacks with debit interchange and checking over-dra t ee revenues, mostly by trying to li t various charges

or current services. Across the industry, there appears to bemostly knee-jerk reactions, with little explicit rationale that cus-tomers could count on. Having done the rst round, it is timeto step back and think more innovatively about overall eestrategy, both or current and new services, that refects thebrand position and customer promise o the bank.

Competition in a tight market is sure to limit the amount onew revenue a bank will be able to generate to cover the costo the branch network. While banks cannot avoid the inevi-table cutbacks, branch network expense must be reduced ina way that minimizes the impact on long term growth. Theoptions include additional closing o the no regrets branchesand reducing sta ng and overhead within branches in whichsuch tactics have not been ully deployed.

From the Novantas viewpoint, the more progressive oppor-tunity is the proactive management o demand incentingmore retail banking customers to per orm their own servicedelivery. Along with promotion, education and training, thisentails deploying online banking-like capabilities in each othe banks points o contact, particularly in the branches andcall centers. Failing these, it may be time or banks to con-sider market spino s and targeted branch sales.

The objectives o these tactics are to increase the rev-enues rom the current customer base and to lower the costo providing local market presence. The ultimate target isimproving the e ciency ratio o the business by as much as20%30%. These tactics will provide a major step in thatdirection but may not close the per ormance gap.

At the next level o per ormance improvement, banksneed to experiment with new distribution approaches to

embrace the new economics. For example, almost 25% ocustomers who open accounts in branches sunsequently con-duct the majority o their business online or at the ATM. Thesecustomers o ten all o the marketing radar screen because theydo not appear in the branch lobbies.

Novantas has ound that a modi ed direct-to-consumerapproach is needed to realize the value o these network-orig-inated but undeveloped relationships. In such an approach,channels such as phone and online should no longer be con-sidered alternate. Meanwhile, banks need to get started on

new network ormats (small ootprint outlets, enhanced ATMnetworks, etc.) that will provide local market presence atmuch lower cost. Such evolutions in distribution will reshapethe way branch banking will be done.

NEAR TERM REVENUE PLAYS

A top priority or 2012 is rebuilding retail lending and eerevenue streams. In lending, winning banks will distinguishthemselves by gaining market share, principally throughtargeted cross-sell to the deposit customer base. Winnerswill also optimize their lending activities through precisionpricing. In ee-based activities, banks should lay the ground-work or innovative new services that can unlock uture rev-enue streams, and ee strategies that will encourage the cus-tomer migration to online sel -service.

c ed t.Product cross-sell is an old concept that has takenon new urgency. In selling retail credit to deposit customers,home equity loans and lines o credit still o er superior returnsrelative to most other options. However, campaigns will needto be tailored to select customer groups, given the great varia-tions seen in household debt capacity and local housing mar-ket conditions. Most o the opportunity resides with a fuenthouseholds situated in more stable local markets.

Enhanced capabilities are needed to unlock these pos-sibilities. In particular, banks need to leverage the treasuretrove o in ormation they have on their DDA households,which can be used to predict credit per ormance, productusage and price elasticity o demand. Novantas has oundthat banks must upgrade both the analytical marketing andpricing o these products to close the per ormance gap. In sodoing, substantial near-term revenue improvements are pos-sible. Leaders in this area will be able to gain strong competi-tive advantages.

At the next level o per ormance improvement, banks need to experiment witapproaches that embrace the new economics. For example, almost 25% o cusaccounts in branches conduct the vast majority o their business online or at th


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Revolving credit can be a daunt-ing challenge as the best practiceshave already been highly developedby monolines. In general, banks should

not try to replicate monolines; ratherthey need to modi y their approaches torecognize the undamental advantagesthey have over national players, namelytheir deposit relationships with their cus-tomers and their local presence.

P odu t innov t on.There is anopportunity or innovation by reconcep-tualizing the deposit product as a cashmanagement o ering that incorpo-rates components o revolving credit. Byblending revolving credit with deposits

and payments, banks can provide pro -itable new arrangements to help meetcustomers short term revolving needs.

P ng.In marketing and pricing,banks will enhance consumer lendinginitiatives to align with borrowers pro-

les; intended purposes or using credit;and accompanying price elasticity odemand. In a growth-starved environ-ment, the tendency is to price aggres-sively across the board or the sake ovolume growth. Along with eroding risk-adjusted returns, this overlooks manyopportunities or segment-based pricinginitiatives that can realize similar levelso growth at higher spreads.

In home equity lending, there is alarge group o credit-worthy customerswho dont have time or price-shoppingand just want convenient access to arainy-day line o credit. In other cases, segment- ocused rateo ers can attract many substantial new borrowers, materiallyimproving pro t by more than 20% in one case study without disturbing underwriting standards.

Fee St tegy.Turning to retail ee revenues, much o theindustrys response to the collapse o checking overdra t anddebit interchange revenue has been a scattershot re-pricingo various exception ees and monthly services, mostly basedon the premise o inelastic demand, or customer toleranceout o a desire or continuity. It is time or a more systematicapproach that re nes current practices and also sets the stage

or new innovations and strategies that will support emerginggoals in a changed market.

For various customer groups, a central question on ees iswhat kind o currency would they like to pro er expressor implied in exchange or checking and payment ser-vices. Some customers, or example, will accept a minimalmonthly ee that includes incremental charges above amonthly transaction threshold. Others pre er ree servicesthat are conditioned on checking balances or the total bank-ing relationship. Still others pre er ree services that are con-ditioned on the substitute usage o ATM and online channels

or transactions.With exception ees, our research shows continuing cus-

tomer demand or some orm o checking overdra t coverage.There are opportunities or proactive arrangements including

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standby credit; trans ers rom other accounts upon noti ca-tion and approval; protection that limits potential charges inexchange or a monthly ee (i.e. insurance) that provide value

or customers and revenues or the bank in a positive context.We also see possibilities to extend concierge propo-

sitions into ee-based payments services. This includes, orexample, expedited services or important transactions, orvarious kinds o in ormational services that help with specialsituations and/or overall household cash management.

Providing such o erings will entail a development cyclethat includes customer and competitive research, productinnovation and testing, sta orientation and eld marketing.Particularly among regional banks, we have not seen the levelo developmental e ort that is needed in these changing cir-cumstances. Building new ee revenue streams must be one othe highest priorities over the next ew years.

NETWORK RENEWAL AND COST RATIONALIZATION

Despite potential new revenues, branch networks are vastlyovergrown relative to the oreseeable revenue opportunity.The role o the branch is also changing as customers movemore o their everyday banking activities to alternative chan-nels such as ATMs, online banking, call centers and mobiledevices. This introduces a dual challenge: reducing costsdecisively while also repositioning networks or uture com-petition in an increasingly multi-channel market.

Nationally, Novantas research indicates that about16,000 branches, or about 18% o the U.S. total, are in ail-ing nancial condition. First and oremost, banks should beexploring ways to minimize closures at total loss.

The good news is that about two-thirds o the impairedbranches roughly 11,000 in all could be o value iplaced under stronger management and situated in strongerlocal networks. Major possibilities include in-market mergers;local network spino s as part o market exits; and selectivesale o individual branches to other players in local markets.

All o the options depend on a clear understanding olocal market opportunity and the role o network presencein winning customer patronage. Even as the customer onlinemigration continues, area branch networks still per orm bestwhen they provide adequate density o coverage. This den-sity actor is the key to branch consolidation and divestment

options that create value by helping acquirers to optimizecustomer share o market. It also is a guidepost in makingdecisions about individual branch closures.

Finally, within almost all networks there are clear candi-dates or No Regrets closures o branches that may nevermeet the parent companys hurdle rate. These could includemarginal branches in low opportunity markets and isolatedbranches in good markets. Possible closures could also extendto de novo units opened as part o the recent real estate

boom in branching, which according to current orecasts odeposit growth and customer pro tability, will never achievebreakeven.

Where some banks will go wrong, however, is in sweep-ing network cuts that only consider individual branch pro ts.Our national research continues to show material per ormancebene ts or branches that operate within solid local networks,which o er more convenience or customers and carry morebrand impact. This local market perspective will be needed tomake sound decisions about necessary branch cuts.

A key question is how to maintain adequate density olocal market coverage at much lower cost. Many customersstill select their bank on the basis o local network presenceand branch adjacency to home and work. Yet there is a need

or a migratory path in branch location and design, thatenables outlets to capitalize on the sales opportunity in densemarkets and also make greater use o technology substitutes,lessenging the need or manual transaction services. In manymarkets, there are customers with high-value needs, but sim-ply not in su cient quantity to justi y an elaborate physicalbranch presence.

A complication is the accelerating customer migrationaway rom the branch and into direct channels. Novantasresearch shows that roughly 25% o U.S. retail customershave already dri ted away rom local branches or day-to-day banking.

A leaner version o the traditional branch network willnot keep pace with the growing ranks o virtual domiciledcustomers. Instead, uture industry leaders will need a trans-

ormed distribution and sales network, one that is much morermly guided by the multi-channel usage patterns o major

customer groups. A growing portion o the retail customerbase and revenue stream will hinge on success in this area.

Nationally, our research indicates that about 16,000 branches, or about 18% oin ailing fnancial condition under current ownership. First and oremost, baning ways to minimize closures at total loss.


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To balance multi-channel development with branch costcontrol, there are three waves o activity that regionalbanks should pursue, each with a signi cant cost and rev-enue component:

Most immediately, there is a strong need to developcross-sell strategies or virtual-domiciled customers. Thisgrowing customer port olio is not ormally ownedby any part o the organization today, and revenueis being le t on the table. On the cost side, hopelessbranches (i.e., lacking growth prospects or eroded bytransaction trends) should be closed. Others will needmuch leaner sta ng.

The intermediate stage enhances, accelerates andcapitalizes on the current customer migration trend.A major goal is promoting customer sel -service too foad greater chunks o branch transaction volume,

permitting urther sta ng e ciencies. Strategies willbe needed to acquire more virtual-domiciled customersand serve them more ully.

Longer term, new distribution models will come intoview. Networks will be more e ciently adapted tolocal markets; branch ormats will be modernizedand tightened. Cross-channel sales and service willbecome a much rmer reality.

In contrast with this progression, some banks are clingingto troubled branches and local networks while actually curtail-ing investment in online and mobile banking, awaiting somedistant revival o interest rate margins and loan demand. Thistype o hunkering down, in our view, simply locks in a com-petitive handicap that will only grow with time. Banks in thissituation ultimately will eel the greatest pressure to sell.

TRANSFORMING SERVICE & SALES

Ultimately, retail branch banking is de ned by service andsales transactions. But currently there is an imbalance in thesta ng and technology con guration needed to assure ser-vice and sales productivity in uture markets.

Fewer tellers will be needed to support manual branchtransactions, and major improvements in plat orm sta salesper ormance will be needed i banks are to sustain revenuemomentum as they tighten network headcount. Meanwhile,

technological acilitation o customer interactions must be ur-ther strengthened and promoted to encourage uller customerusage o direct channels as true and complete substitutes or

ormer branch activities.

St fng.One implication is a need or radical restructur-ing o branch sta ng. With branch transactions declining ata rate o 4% to 5% per year, it wont be long be ore networksare 20%+ over-sta ed. Novantas sees many opportunitiesto close this gap, including re-structuring o roles (e.g. moreuniversal bankers); lowering minimum sta ng requirements(through changes in administrative and security policies);replacing manual transactions with in-branch sel -service; andmore precisely allocating sta resources, i.e. part time sta ,based on local demand.

However, as every banker knows, it is not always easyto reduce sta in small branches. Where sta ng levels reach

irreducible minimums at particular branches, banks are con-sidering adding non-branch responsibilities to branch sta ,e.g. helping out with customer inquiries routed through thecall center (which can permit immediate reductions in callcenter resources).

Lastly, banks are now realizing the long-talked-aboutalignment o sales sta with local market potential. Rigorousallocation o sales resources and market based goal settingare becoming the norm. To urther leverage branch salescapacity, some banks are adopting centralized systems ormaking phone-based appointments.

S es P odu t v ty.Aggressive sta contraction reintro-duces an age-old problem: creating equal or greater branchsales volume with a smaller team. Sta sales productivityalready was declining prior to the recession as customersbegan transacting an increasingly substantial amount o busi-ness online. In act, as measured by weekly sales per ull-timesta er, average branch sales productivity has declined by athird since 2003, according to our research.

While sta cuts may lower expenses, much o the ben-e t will be lost unless the remaining branch sta can sell atsustained higher levels. There are our mechanisms or banksto reverse the current sales productivity trends, including: 1)superior fexibility in resource allocation and goal setting;2) recasting branch managers as sales leaders instead o

Our research shows that top-selling branch managers, by contrast, have well-dincluding units and revenues, more strongly linked with overall branch targetsproft generation. Managers also respond well to specifc cross-sell targets.



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back eld coaches; 3) improving service-to-sales conversionprograms; and 4) eliminating internal channel competitionin avor o collaboration between the branch, contact centerand online channels.

F ex b ty.There are several dimensions o fexibility inthe ormula or improving sales productivity. In regional stadeployment, our research repeatedly shows dramatic skewsin local market opportunity. By segmenting various types omarkets (i.e. urban vs. rural) within the branch network, bankscan re-direct sta talent rom less promising areas to marketswhere the bank can grow aster than the competition.

Inside the branch, fexibility is equally as important. Thereare huge untapped opportunities to cross-train sta so thatthey can fow among multipleassignments during the workday.The universal sta ng concept

is already in use at supermarketbranches and in select tradi-tional networks, but is currentlyunder-utilized nationally.

Banks should consider usingcross-trained, universal sta ngat most locations having six or

ewer ull-time equivalent stapositions. There are also oppor-tunities to provide more advi-sory and product expertise just in time, or example throughthe use o roving specialists, appointment-based service romcentral teams, and greater use o video technology.

M n ge s s S es le de s.Both in terms o skill and cus-tomer rapport, branch managers typically have high salespotential, yet many are o ten severely distracted rom thatrole. There is a widespread perception that managers shouldlargely unction as coaches or sales sta , but our researchshows that branch sales productivity is sharply higher whenmanagers are directly involved in selling themselves.

In a recent multi-bank study, we ound that among top-per orming branch sales teams, managers spent an averageo twice as much time on individual and direct selling than thebank with average branch sales productivity.

Se v e to S es.One o the great ongoing challengesin branch sales is converting customer tra c or service intocompleted sales. Some banks do a ar better job than oth-ers in preparing and equipping branch sta or peak salesper ormance.

On average, banks convert walk-in customers only atthe rate o a decently per orming mail campaign (roughly18 sales per every 1,000 customers). There is much room

or improvement in this area. Better in ormation on customer

tra c and potential is needed, or example, as well as cre-ative programs or handling lobby tra c.

The service-to-sales challenge is urther compounded byskewed per ormance incentives that o ten emphasize admin-

istrative goals. Our research shows that top-selling branchmanagers have well-de ned sales goals, including units andrevenues, more strongly linked with overall branch targets orrevenue and pro t generation. Managers also respond well tospeci c cross-sell targets.

ch nne coo d n t on. Our research indicates that onlineand contact center channels likely will continue to grow rap-idly relative to branch sales, yet most customers still pre er anin-the-branch sales experience. This calls or a coordinated

channel proposition seldom seenin retail banking. O ten individ-ual channels (branches, contact

center, online) unction with ahigh degree o autonomy thatborders on rivalry, with internalcompetition actually taking prece-dence over collaborative e orts toserve the customer more ully. Asmore customers come to expectall channels all the time, retailbanks ace a rising need orcross-channel coordination.

Prospecting and lead generation, are o ten better con-ducted through the contact center, where dedicated sales per-sonnel have the right skills and tools; more experience; andtypically a better temperament and more perseverance indealing with low acceptance ratios. Meanwhile in the smallbusiness segment, contact centers and relationship bankersare nding new ways to jointly deepen current relationshipsand nd new ones.

Mu t -ch nne St tegy.Any major bank that is seriousabout improving sales productivity will be actively targetingand testing new coordinated multi-channel sales strategies,especially given changing patterns o customer channelusage. It will also study customer behaviors, attitudes andpro les, particularly as they pertain to the growing base ovirtual-domiciled customers.

Overall, we estimate that a quarter o the retail customerbase is attitudinally receptive to the use o alternative chan-nels as substitutes to the branch. Multi-channel strategists willmake it a central mission to move this group into alternativechannels and eliminate the corresponding costs their ormerbranch service.

The question is whether this will simply be a talking pointor a basis or sustained action. One o the largest U.S. banks

Far ewer tellers will be needed to supportmanual branch transactions, or example,and major improvements in plat orm stasales per ormance will be needed i banksare to sustain any kind o revenue momen-tum as they tighten network headcount.


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has seized the initiative to guide an estimated 40% o checkdeposit activity away rom the branch to the ATM, more thandoubling this type o channel substitution seen elsewhere.

Customer sel -service seems to be gaining new momentumin other service industries, or example in checkout lines indrug stores and grocery stores. The proposition is much morecomplicated in banking but it is not without possibilities.

As we have repeatedly stated, a new rontier in retaildistribution is demand engineering, a proactive exercise thatuses the customer standpoint to guide strategies or channelsubstitution and sel -service transactions. The idea is to pro-vide appealing technology bridges that provide recognizedbene ts to customers while lowering the cost to serve, sup-ported by orientation, marketing and pricing arrangementsthat will more rmly cement customers in new transactionbehaviors. The goal is to develop a suite o segment-targetedchannel migration campaigns.

ORGANIZATIONAL ENABLERS

Finally, banks are particularly in need o stronger customerguidance and market guidance as they broach the chal-lenges o 2012 and beyond.

The virtual-domiciled customer segment, or example,should be carved out or special attention, much in the mannerthat banks already do with small businesses and mass a fuenthouseholds. This change will provide a ocus or marketingand sales, products and pricing, and in rastructure investment without the disruptive e ect o a wholesale reorganizationo the bank.

Banks also need to get up to speed on customer behav-ioral analysis, based on multi-channel transaction patterns. Tostay abreast o ree-roaming customers and make accuratedecisions, retail banks will need a detailed, trend-line under-standing o how individuals and major customer groups areusing various channels, linked with cost-to-serve and channelpro tability metrics at the customer level.

Credit card companies have made a science out o antici-pating emerging customer needs rom transaction patterns andrisk actors. But in retail banking, longitudinal data about cus-tomer transaction and payment behavior (at the branch, at

the ATM, on the phone, online and on mobile devices) hasroutinely been ignored or never even compiled at the cus-tomer level. Few banks can reconstruct customer behavioralhistories longer than 12 months, or example, and many canonly look back 90 days.

There is also a strong need or customer-in ormed pricingexpertise in retail credit. Precision pricing, based on price elas-ticity o customer demand, will be critical in optimizing mar-gins and balance ormation in a climate o slack demand.

In network and sta ng-related decisions, banks will needa stronger grasp o local market dynamics, including ac-tors such as the shape and scope o customer demand and

competitive presence. This is undamental context in makingdecisions about mergers, spino s, targeted branch sales andbranch closures. Context will be needed in exploring sta ngpossibilities and requirements, both sales and service.

While retail banks ace a challenging 2012 overall, therestill are systematic ways to address the major issues con ront-ing the industry. Particularly or executive management, it is atime or clarity about speci c options and priorities, and theorganizational abilities that will be needed to ollow through.

Rick Spitler is a Managing Partner and Sherie Meleis is a Parto fce o Novantas, LLC, a management consultancy.

To stay abreast o ree-roaming customersand make accurate decisions, retail banks will need a detailed, trend-line understand-ing o how individuals and major customergroups are using various channels, linked with cost-to-serve and channel proftabilitymetrics at the customer level.


Practical_Steps_to Address the Crisis in Retail Banking 11Q4

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