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BirdsEye View

the channel quandry

Retail banking is in a bind. One the revenue side, deposit valuations are at an all-time low, and banks are literally pushing outstanding commercial customers' deposits out the door, as they are negatively margined on every incoming dollar.

On the cost side, demand for channel proliferation is extreme. Prospects select their bank not just by branch location convenience but, often more importantly, by their mobile offering and the ease of navigation of self-service channels.

We continue to ask age-old questions:

  • How do customers prefer to get information?
  • How do customers prefer to transact?
  • How do we encourage them to use self-service channels to get information and to transact?
  • How do we sell services to customers when we're successful and they start using self-service channels?

We now know that there are very few single-channel users. As the chart below depicts all too clearly, new channels augment but do not replace older channels.

There are some tweaks in the usage intensity. For example, ATM usage declined 8% in 2012 while debit card usage continues to explode. While this is useful information, it's not wholly actionable, since no channel can be discontinued at this point in the evolution cycle. Promiscuous channel usage ensues, since there is no downside to customers to become channel hogs. Banks' attempts to create such a downside, most famously First Chicago's ill-fated attempt to charge customers $3 for talking to a teller, haven't fared well.

The underlying issue remains: how to achieve profitability in the retail business when spreads on deposits are razor-thin at best, and when operating costs continue to rise.

One effective guiding principle calls for keeping distribution costs fixed, but shifting investments across channels to reflect customer preferences. For example, reduce the physical footprint and human resource investment in the branch channel wherever appropriate and possible (a tall order, I know), and utilize the freed investment capacity to improve mobile offerings. Link such shifts to service enhancements and new features, not simply to defensive moves to catch up.

Another guiding principle calls for investment in channels that increase customer engagement (a strong proxy for customer retention, which is an important part of enhancing earnings stability). Researchers such as Raddon, Greenwich and private bank information correlate logins, swipes and other customer behavior to engagement and retention. Customers are voting with their feet by reducing branch activity and increasing self-service and remote channels usage. Ergo, investing in those channels will increase customer engagement and retention.

One more guiding principle involved investments in value-add channels and features. For example, if you use your tellers primarily as transaction fulfillment resources, an ATM can be an excellent, sometimes even preferred, fulfillment center. Conversely, if your bankers truly become trusted advisors to your customers, whether in person or by phone, investment in banker counts and skill sets will generate greater revenues.

"Finally, the quest for a seamless customer experience across channels, while a noble goal, might impede progress by setting the bar too high. Customers do not necessarily expect the same experience from a teller as they do from an ATM, their phone etc. Following your cultural edicts across channels to guide the customer experience is a more practical approach to giving the customer the experience you strive for across channels. Seamlessness may be nice, but it is also very difficult to achieve".

It seems as if channel management today is driven by different motives, primarily cost cuts. Looking at distribution holistically is a necessary first step to wisdom, rather than examining each element in isolation. An excellent example of such an approach is branch optimization studies that ignore the network effect impacting each branch, and where customers do their business vs. where they initially opened the account. Traditional retail banking models won't do in today's channel proliferation environment. Consider your entire universe of customer touch points and follow the customers' behavior and value-add opportunities to reducing investment where appropriate.