The future of US retail-banking distribution

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The Stephenses live in a suburb of New York City. For more than 30 years, they had their entire banking relationship, including a small-business account, with a large bank in their neighborhood. The bank had a leading brand and a broad product suite. The Stephenses, now in their seventies, were so close to their bankers that they would bring Christmas presents to the branch manager and tellers.

Things began to change in the 1990s. Eager to wean customers off the branch, the bank sent an assistant branch manager to the family’s home to set up a dial-up banking system. In the 2000s, a series of cost-cutting measures caused rapid turnover in branch staff. To the Stephenses, their banking relationship no longer felt personal.

A few years ago, the Stephenses severed their 30-year relationship with the bank. Today, they have accounts at three different banks, but most of their assets are with one national institution. This new bank is not as conveniently located as their former bank, but it provides great service, encouraging the couple to come in if they ever have a problem.

The Stephenses view their accounts and make transactions on a daily basis through iPhone and iPad apps. They rarely use online banking and almost never dial the call center.

The Stephenses’ story is not unusual; it is representative of how bank-customer behavior is changing. Today, 65 percent of customers interact with their banks through multiple channels. Human interactions are generally reserved for more complex problems: only 25 percent of agent phone calls are inquiries that could be serviced in other channels. Most intriguing, digital channels have not replaced physical channels. Customers who use mobile and online banking more than once a week are over 60 percent more likely to be active retail-branch users than those who do not (Exhibit 1). So while customers have embraced multichannel access, they also expect higher value from face-to-face interactions at their bank branch.

The more that customers use digital channels, the more they want human interaction.

This shift in customer behavior is both a rare opportunity and a potential threat for retail banks. Those that act now to migrate transactions to digital channels, transform their physical distribution networks, and revamp their go-to-market strategies can significantly improve their efficiency ratios (Exhibit 2). Those that do not may fall victim to emerging disruptive models that leverage alternative distribution networks to acquire customers and provide a superior customer experience. For example, American Express’s Bluebird debit card, which is distributed through Wal-Mart Stores, signed up more than half a million customers within three months of launching in late 2012.

Transforming distribution and go-to-market strategies can improve the efficiency ratio by more than seven percentage points.

The creation of a new distribution model that meets the evolving demands of customers is founded on four imperatives:

  1. shift from a linear customer “funnel” approach to optimizing multichannel journeys for customers
  2. design the branch network to achieve the “minimum effective dose” through multiple format types and carefully built networks
  3. empower the front line to provide distinctive face-to-face interactions with customers
  4. increase marketing sophistication to meet customers’ emotional needs

1. Optimize multichannel journeys for customers

One large retail bank recently adopted a customer-experience strategy centered on “simplicity with a smile.” Realizing that customers are acquired and served through streams of activity across channels, this institution abandoned the classic funnel approach to customer acquisition and focused instead on cross-channel “journeys” that follow customers across multiple interactions. One of the bank’s first insights was that inconsistencies across channels were creating difficulties and increasing operational costs and risk. To solve this, the bank borrowed a move from the start-up playbook and created a cross-functional, frontline-led rapid-prototyping design lab to build a unified customer experience across channels, targeting the most common journeys taken by customers during the first 90 days of their banking relationship. The result was a 40 percent increase in products per new account and a 30 percent drop in time to open new accounts.

McKinsey interviews on consumer attitudes about online bill payment underscore the importance of looking at interactions from the customer’s perspective. For customers, receiving, queuing, paying, confirming, and storing paper bills offer benefits that standard online-bill-pay offerings do not replicate. For instance, by queuing bills in a paper pile, customers retain physical control over which ones still need to be paid (for example, it will be there until I move it), as well as over cash flow (I can wait to pay until payday and I know exactly what is outstanding). And after payment, the statement provides a confirmation (I can write “paid” and a confirmation number on the bill) and a sense of satisfaction from completing the task (ritual). By simply solving for the process of executing online bill payment, banks miss the opportunity to address customers’ behavioral and emotional needs (such as feelings of safety and security, aversion to change, a desire for a visual representation of the process, or a need for a habitual workflow). Consequently, the penetration of online bill pay in the United States is only about 50 percent.

The capabilities required to effect “customer back” improvements are new to most banks:

  • Big data analytical methodologies. To map and quantify customer pathways that lead to specific positive outcomes (such as successful cross-selling) and negative ones (for example, silent attrition or customer complaints), banks will need to use big data analytics. Data can also be leveraged to make the business case for customer-experience efforts and to prioritize those efforts.
  • Design-to-value economic approach. Bank profits and losses are typically highly disaggregated into functional areas. Banks know how much they spend on branches, call centers, technology, and marketing and have methodologies for cost allocation to the household level. However, when designing target customer experiences, many banks do not design to an economic goal. They must be able to measure the all-in economics of pathways (such as in-branch versus call-center service costs) and design target end states that meet economic objectives.
  • Cross-functional, rapid-prototyping capabilities. Banks often take a pilot approach, where one element of an ecosystem is well built (say, a product or a technology) but the rest is neglected. Armed with a big data approach to analyzing customer pathways and a design-to-value economic tool, banks must develop rapid, cross-functional processes to create “minimum viable experiences.”
  • Treat changes as a design exercise. Few banks designate an “owner” of the customer experience. Instead, they typically have functional owners: head of branches, head of call centers, head of online, head of products, head of marketing. As a result, the customer experience can be inconsistent. In most cases the “axis of power” in these institutions is still the retail-branch distribution team. Some banks are now shifting to a “segment led” approach but still lack the language, tools, and techniques to design and build customer experiences.

2. Design the branch network to achieve the ‘minimum effective dose’

Almost 90 percent of US households live within ten minutes of three or more different banks. Seventy-five percent have a choice of six or more. For banks, this apparent saturation presents an opportunity for cost reduction. It also posits a genuine game-theory challenge: no bank wants to be the first to thin its network when there are competitors within striking distance of its customers. Many institutions are taking this step, however, as more than twice as many branches closed their doors as opened in 2013.

In interviews with recent bank switchers to understand how bank location played into their decision, McKinsey found that there continue to be customer segments focused on community banks, online-only banks, and even classic convenience drivers. But another segment is emerging that is focused on a new twist on the idea of convenience, based not on proximity, number of branches, or even longest hours but on what many describe as “ubiquity.”

As customers shift to online and mobile channels and increasingly automate other interactions through direct deposits and online bill pay, the idea of changing banks seems less appealing and often unnecessary. Instead, customers in this new segment are increasingly looking for banks that seem to be ubiquitous, even at the expense of a denser local presence.

The growing importance of ubiquity—combined with the rapid shift of transactions from bank tellers to ATMs and other self-service channels—presents an opportunity for banks to redesign their branch networks and develop new approaches to market entry. There are four capabilities required to build the distribution network of the future:

  • Multiformat versus one-size-fits-all branches. To maintain the sense of ubiquity, meet customer-servicing needs, and maintain viable economics, banks should explore a multiformat-branch distribution model. This approach requires significant changes in the areas of human capital (such as organization, business processes, and job design) and technology (for instance, ATM upgrades and sales-platform capabilities).
  • Geospatially enabled capabilities. Banks need geospatial capabilities that allow them to build the right format for the right segment. This approach (see sidebar, “Optimizing the physical distribution network”) will require banks to predict both how and where their desired customer segments will grow.
  • Demographic insights. McKinsey research suggests that there is a sweet spot in density and coverage levels for retail-bank branches—they become less efficient at any level below or above this optimal point. Banks must have the capacity to determine what these optimal levels are for given segments.
  • Optimize branches in locations that are difficult to exit (for example, due to long leases or low property values). Banks should consider increasing the utilization of branches that cannot be exited. One approach—sharing space with partners (for instance, as Sears did in leasing out excess space to Whole Foods)—could provide an early-mover advantage.

3. Empower the front line to make face-to-face interactions distinctive

Within five years, more than 95 percent of banking transactions are likely to take place through direct or digital channels. When customers do visit a branch, however, the stakes will be higher. They will be coming for sales and advice or to resolve a complicated service or transaction requirement. The traditional front line in most banks does not have the support or capabilities to meet these new demands. In order for their branch networks to remain a source of competitive advantage, banks must act in three areas:

  • Build frontline skills and capabilities to advise customers and address their service issues. One bank’s branch staff routinely redirects customers with complicated service issues to a call center and tells customers inquiring about investment products offered by the bank that they are better off going to a dedicated investment firm. To address issues of this kind, banks must transform the role and skill level of tellers and potentially empower other employees, such as assistant branch managers, to play a dual sales and service role.
  • Construct systems and processes to enable the front line to deliver advice and service. At a minimum, this means that in-branch personnel are able to access the full relationship and service history of the customers they are speaking with and can resolve service issues in real time. One bank doubled the number of proactive (adviser-generated) meetings per week simply by leveraging a customer-relationship-management tool.
  • Create a culture that empowers the front line. The retail-banking frontline mind-set should resemble that of small-business owners who are serving customers rather than that of salespeople and order takers. Frontline skills, capabilities, systems, and processes are wasted investments if the front line is not empowered and motivated to use them.

4. Engage customers emotionally with sophisticated marketing strategies

Money is emotional. It causes happiness and anxiety. It empowers and deflates. As stewards of customers’ hard-earned assets, banks must deal with emotions in ways that few other retailers must contend with. Banks can learn from financial-services firms that know how to emotionally engage through direct channels. There are three major archetypes for customer engagement:

  • Belonging. USAA orients its value proposition around integrity (for example, it is the highest-ranked bank in response to “My financial provider does what’s best for me, not just its own bottom line”) and a strong community focus (for instance, active-duty military receive reduced fees). The company has created a feeling of belonging among its customers that has led to disproportionate success. From a single branch in Texas, USAA has increased its deposits more than fivefold over the past decade and achieved industry-leading rates of cross-sell.
  • Autonomy and empowerment. American Express has always relied heavily on direct channels (phone and online) for customer acquisition. Through decades of effective marketing, the company has created a brand of empowerment, helping customers achieve their aspirations and experience life. And recent digital initiatives such as “Sync, Tweet, Save” and “Mobile Offers” have allowed American Express to provide customers with access to unique, personalized, and convenient tools for making purchases (for instance, tweeting the name of the item).
  • Trust and security. Charles Schwab’s value proposition focuses on “Ask Chuck,” combining personalized investment advice delivered largely by phone with a full-service online channel while maintaining premium pricing. This personalized, high-quality service has built deep trust among customers, in some cases leading to lower price elasticity, even in commoditized products like mortgages.

Retail-banking customers are changing their behavior, making greater use of multiple channels, and moving almost en masse to digital or direct access. Banks have encouraged these changes by offering customers more ways to connect. But, as always, behavior is more complex than it appears at first. Many banking customers still want branch access, and when they do visit, they are expecting the highest levels of service. Other customers are more interested in having a bank that is everywhere. Still others have financial-emotional needs that are not being met.

The challenge for banks is to first understand what their valued customers really want and then to build the distribution model of the future based on those needs.

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