What a difference a crisis makes. Prior to the economic meltdown in the fall of 2009, banks had been on a branch-building tear, boosting the total number of offices by more than 16% to 99,000 between 1999 to 2009, according to the Federal Deposit Insurance Corp.
In the wake of the financial crisis, many institutions have slammed the engine into reverse, closing marginal branches and laying off thousands of employees. As a sign of the times, Portland, Ore.-based Umpqua Holding Corp., one of the industry’s pioneers in innovative branch design, has put much of its experimentation on hold.
And what will the “branch of the future” look like when the smoke finally clears? Many experts say the key word over the next decade will be “optimizing” – making the most of smaller-sized branches by employing more technology to both expedite transactions and better capture customers’ attention for new products. But the goal isn’t just cost-efficiency; it’s about upgrading the design of branches to match the evolving nature of how they will be used, as other channels such as online and mobile banking become more prevalent.
“Over the next 10 years, there will be much less focus on transactions and teller lines, and more emphasis around retail delivery,” said Terry Zink, the executive vice president of retail banking at the Cincinnati-based Fifth Third Bancorp. “Branches will become more like stores to facilitate the purchase of financial services.”
Changing “the Visit”
Just what those new banking “stores” will look like remains a work-in-progress. Some of the design elements introduced in the last decade – concierge desks, flat screen TVs, less formal teller lines – are likely to remain but the fancier add-ons – marble countertops and high-quality wood finishes, for example – may fall victim to tighter budgets, experts say.
There is general agreement, however, that branches will make greater use of technology to reduce the reliance on tellers, including, for example, automated cash dispensers and more automated teller machines inside the facility. Banks will also utilize more technology to better market products, such as digital touch-screens with downloading capabilities for customers and wireless notebooks for bank employees to enable them to roam the floor and sell more products.
For now, most of this development is on hold because it takes money and regulators are currently emphasizing capital preservation above most everything else. Umpqua is a case in point.
The $9 billion-asset company has been a pioneer in forging the retail sales concept. As early as 1995, it renamed its branches as “stores” and its employees as “sales associates.” After launching several generations of stores, Umpqua created an “Innovation Lab” to experiment with new technologies and other features, such as interactive kiosks describing new products and video conferencing with offsite banking and investment experts. It even pioneered a “Discover Wall,” a series of plasma-screen display panels that people can touch to learn about new products and print marketing materials.
But the financial crisis has put the brakes on Umpqua’s experimentation and curtailed the rollout of some of its newer ideas to its branches, according to Lani Hayward, Umpqua’s executive vice president of creative strategies, who doesn’t expect full-time experimentation to resume until next year.
“It’s not so much about tightening the belt or spending less on innovation as it is finding a balance in doing what felt was appropriate during this downturn,” Hayward said.
The conceptual work at Umpqua goes on, however. One concept the company is considering is replacing some of its tellers with experts in various financial products, such as mortgages, other consumer loans and small business loans. Umpqua already has stationed investment experts in a number of its branches but is considering “bumping” that up, according to Hayward. The bank also foresees posting technology experts in the branch or on call who can help businesses actually set up their cash management, ACH, wire and remote deposit services – sort of a “geek squad” for banking services, as Hayward termed it.
Jim Rice, executive vice president of market development at Minneapolis-based John Ryan Performance Inc., points out that branch redesign doesn’t necessarily mean you have to gut existing buildings and spend tens of millions upgrading structures. “You don’t have to dramatically redo the branch to turn it into an effective sales location,” Rice says. “You’ve just got to really understand why your clients are going to the branch and you’ve got to ‘change the visit,’ meaning make it clear to customers that the branch is a place to buy financial services, not just to cash or deposit checks.
Rice recommends that banks employ digital screens to help market their products. Such screens enable the messages to be distributed more easily to the branches online and can be altered to fit the particular customer makeup of individual branches, he says.
Other ways to streamline transactions in the branch include implementing dedicated teller lines for more profitable premium checking account customers, similar to the “first-class line” at airline counters, says Aaron Fine, a partner in the retail and business banking practice at Oliver Wyman Group in New York.
Citigroup Inc., for example, has dedicated tellers in some branches for Citigold checking account customers, according to Natalie Riper, a Citi spokeswoman. The account is free to customers who deposit or invest a total of more than $100,000 at its bank. Citi has also instituted an exclusive telephone customer service line for such customers.
Even as customers gravitate to other channels – online, mobile and more robust ATMs, for example – for simple transactions, banks must make sure that their branch staff is well-trained to handle the more difficult issues that customers seek to resolve in a branch when they are unable to get satisfactory answers through the bank’s Website or call center, says Andrew Frisbie, a vice president at First Manhattan Consulting Group in New York.
“It’s often a moment of truth for the bank,” Frisbie says. “When customers come into the branch to have someone resolve their problem, they have already been disappointed in the banks’ performance in the other channels. Now the bank has got to fix it or the customer relationship suffers.”
Hub and Spokes
The branch network itself will continue to evolve over the next decade, as banks aim to make them more cost-efficient, experts say. One popular way to do that is utilizing the “hub and spoke” model: having clusters of branches within a particular community, anchored by one stand-alone branch that will likely be smaller than in the past – about 2,500 to 3,000 square feet – surrounded by four to five even smaller branches in grocery stores, strip malls or even drive-through ATMs. The goal is to build the clusters around customers’ “live-work” commuting patterns, generally within a five to 10-mile radius.
Fifth Third is planning on using that model in a number of its markets over the next decade and already has reconfigured its networks in Cincinnati and Louisville, Ky., along those lines, Zink says. While it's easier to build hub-and-spoke clusters in Fifth Third’s new markets such as Atlanta, it will take longer to restructure its network in existing markets as older branches slowly come offline, he adds.
Zink also notes that some markets don’t lend themselves well to the hub-and-spoke model. In metro Chicago, for example, most of the grocery stores already have exclusive agreements with other banks for in-store branches.
Fifth Third had a goal of opening 50 or more branches a year but the financial crisis slowed that pace; the company opened only 23 branches in 2009. Zink said Fifth Third will likely open a net 30 branches per year for some time to preserve capital.
The traditional stand-alone branch may remain king for a long time in some parts of the country. Cristie Richards, senior vice president of retail banking for Salt Lake City-based Zions Bancorp, says western markets are not nearly as dense as those in the Midwest, which means that clusters of branches are not necessary to achieve significant market share in a particular community. Zions therefore prefers that each of its branches have the full range of products available to customers, she says.
Zions closed most of its in-store branches last year, in fact. While profitable, they were not generating enough loans or selling other financial products, Richards says. “Clients never accepted that they were full-service branches, regardless of our marketing efforts,” she says.
After Zions closed the 21 in-stores, the bank added 10 new stand-alone branches in nearby locations. Richards said that both loans and deposits have increased at those branches compared to the in-stores. Zions did keep six in-store branches, mainly in rural communities, because customers there on average are buying more products and services at those locations, she adds.
At some point, experts say, the nation’s economy will improve and banks will resume branch growth. Kevin Blair, president of St. Louis-based NewGround, notes that while some markets such as Chicago and Las Vegas are over-branched, others such as Houston, Denver, Miami and Nashville remain relatively under-branched. He predicts that much of the industry’s future branch expansion will come from regional and large community banks as they try to catch up with the mega-banks.
Ms. Kuehner-Hebert is a freelance writer based in San Diego, Calif.