The Death of Bank Products has been greatly under exaggerated

This is an excerpt from my new book Augmented: Life in the Smart Lane

Since 2005 I’ve been predicting the decline of branch banking. For almost 10 years I fought bankers who decried my assessment that branches would cease to be the most important channel in banking, to be replaced by farmore efficient mechanisms for revenue generation and relationship. Today the discussion is increasingly resorting to a sort of desperate plea — “but branches aren’t going to die completely, are they?” No one is saying branches will grow.

The United Kingdom, the United States, Spain, and a host of other countries are seeing the lowest number of bank branches in decades. For the UK you’d have to go back 60 years to find lower numbers of bank branches than we have today, and 2014 saw the use of bank branches fall 6% in a single year — the biggest reduction ever. In the US banks like BofA, Chase and Wells have cut more than 15% of their branches in just the last 4 years, bring their branch levels back to that of the early 1980s. In Norway in March, DNB announced the closure of more than half of their bank branches and the laying off of more than 600 staff. HSBC in India announced similarly that they will be closing more than half of its branches in India, and laying off hundreds of staff.

While the US has only seen declines of 1–2% per year in branch numbers, branch footprint may be a much better indicator of the waning support for branches. Wells Fargo has reduced their branch square-footage by 22% in just 6 years, and for BofA it’s one-fifth of their branches that have already disappeared in just the last 5 years.

We don’t know how to grow without [branches]… But, we have taken the total square footage of the bank from 117 million square feet at the time of the merger with Wachovia in January of ’09, to about 92 million square feet today, and we’re continuing to go down from there.”
John Stumpf, Wells Fargo CEO — interview

The reason we’re reducing branch numbers and square footage is obvious — customers just aren’t using branches as much as they used to. They don’t need to. It’s not a branch design problem; it’s a customer behavior problem.

When it comes to customer behavior, however, the greatest challenges for banking are yet to come and they aren’t channel-based, they’re product-based.

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Enough already with the "Branch of the Future"

Whether it is Bank of Queensland with their Hipster Branch launch, Citi’s famedApple-Store Branches, NAB’s Crowd concept, Unicredit “Branch of the Future” in Italy and Bulgaria, PNC’s Tellerless Branches, smaller regional players likeSouth Shore Bank and ConestogaBankWerx, or the launch of Video-Interactive Teller’s for TEB, Ion Bank, Banca Popolare and others, we seem to be hearing about new ‘Branches of the Future’ constantly. However, withdeclining branch activity across the board in developed markets, is the very term branch of the future part of the problem?

When BankWerx launched their new ‘branch of the future’ the press reported that they were offering free Wifi, phone charging stations and free coffee to engage prospective customers. Then these guys opened up next door…



There was an excellent recent talk by Jon Blakeney from i-AM Associates discussing how bank branches should be about todays customer, not the bank branch of the future. “No one has ever asked us to design the restaurant of the future” said Blakeney in his recent Next Bank keynote, and in that statement alone we identify one of the key hangups that banks have over changing distribution models.

With branches having been so central to the distribution model of banking in the past, it’s obvious that many banks will struggle to let go of this mode of revenue delivery, at least until such time that branches become clear loss leaders. Thus, for now there appears an inordinant amount of effort being put into ‘saving’ the old distribution models with a rethink, reboot or refresh – a future iteration that might restore the old behaviors of customers.

The problem is that the economics of branching is struggling as footfall declines (see Going, Going, Gone!), and while in some emerging markets branch traffic is still increasing on a net basis as the middle-class grows and large numbers of unbanked are becoming “banked”, the overall outlook for branch networks is still trending negative. Just as it has been on a net basis for most storefront retail of other easily digitized products such as books, music, movies, etc (see Celent data below).

The problem here for banks though, is one of focus. Branch activity largely is not declining because the branch is simply designed poorly, has too many tellers or teller stations, ordoesn’t have enough technology embedded – it is declining because customers just don’t need to visit branches like they used to. Banks should be cognizant of the fact that while refreshing branches will help with some segments of existing customers, and might reduce overall network cost, it’s not going to reverse consumer behavior trending away from branches.

The looming issue is new revenue. According to Javelin Strategy and Research, by 2015 Gen Y income will already exceed that of Baby Boomers. By 2020, their income is projected to exceed that of both Baby Boomers and Gen X. That’s just six years away. 78% of these Gen Yers cite Mobile Banking as the single most important factor for choosing a bank. But the problem for banks is simple – mobile doesn’t produce revenue. For leading banks they might generate 10-15% of their revenue via online today, but the bulk of revenue is still recognized in the branch (often incorrectly so).

How do we transition?

We’ve got all this real-estate, what do we do with it?

There are three key questions or issues on the changes impacting distribution methodology that continually come up:

  1. How do we get customers back in the branch?,
  2. What do we do with all this real-estate we’ve got, and
  3. We’ve got 5 year contracts with all these landlords, we just can’t unwind our presence that quickly

The first two questions often obfuscate strategy because the primary problem is not fit of the branch to the business, but how to fix under performing branch networks. The last becomes a business case issue – is it worth closing or downsizing a branch. Granted when most of those real estate contracts were signed there was a great deal more skepticism over the risk to branches.

However, the core metrics of branches need to be honestly assessed against the potential for future revenue. Those core metrics need to start with the simple measure of average number of annual visits per individual customer per year. This is the core measure of engagement that we often miss when looking at future branch potential on revenue.

Show me the money baby, not the friction!

The real trick, though, is providing a viable alternative revenue stream through mobile, tablet and web. For that we need a compliance leap – we need compliance on board with digital onboarding of customers, or at a minimum a reduced application/documentation workload for both new and existing customers.

A single view of the customer, and a progressive or tiered KYC approach. In a report issued in June of 2011, the Financial Action Task Force (the global AML standards body) suggested banks and FIs look at this as a solution for better AML compliance, lower costs and for improved financial inclusion. However, the tiered KYC approach also allows for better revenue delivery in real-time and via mobile.

Banks like Fidor are already using this progressive KYC strategy, allowing you to open an account via Facebook initially.

Remember, one of the core reasons we still prefer the branch as banks, is the preference by compliance teams for unique, signed application forms for each product application – this model must die. It simply does not fit with the future of revenue delivery.

Revenue delivery via mobile is inversely correlated with compliance friction. The more unnecessary friction I put in the process, the more unlikely it is that I will ever realistically compete with the branch in respect to revenue delivery.

Building the Bank of the Future

The Bank of the future is all about engagement and relevance. A branch of the future strategy is an effort to retain relevance, but it misses the key point that engagement in-branch is in decline for other reasons. Beyond a spike when a new branch layout is launched, I’ve not seen any data that shows signifcant improved engagement over time – you can bet if we were seeing this trend then the branch of the future enthusiasts would be yelling it from the rooftops.

Here’s the thing – I know we need new branch layouts that remove tellers. I know we need service points, and that they’ll likely be much smaller footprints, but replacing older larger branches so there’s no perceived drop in service. I know complex product revenue will still come through the branch. But we should be talking about building the bank of the future, and not just the branch of the future.

Within just a year the branch will be the least visited and least engaged channel in the channel mix for retail banks in the US, UK, Germany, France, Australia, etc. If your primary distribution or revenue strategy is improving the efficiency of your lowest performing, least engaged channel – then you’re doing it wrong.

I know many of you will argue that it’s still about revenue – that most of the revenue comes through the branch. How can we change that without investment in engagement outside of the branch? That’s the key problem with focusing on a branch of the future strategy – we avoid the real work that needs to be done. In doing so, we might just jeopardize the entire future of the bank.

Why Kids don't sign, and banks shouldn't either

In a recent UN/ICAO commissioned survey on the use of signatures in passports, a number of countries including the UK recommended phasing out the long held practice because it was no longer deemed of practical use. More significantly, however, is the emerging trend that has some parents, educators and lawmakers espousing their concern – when asked to sign most kids these days are simply writing their name – the art of the signature may soon be a lost art. A recent report in Gulf News disclosed that this is a global problem with kids in Canada, Tokyo, Hong Kong and elsewhere moving away from written signatures because they live their life through technology, but without the need to sign.

There’s been an outcry of sorts over the last few years at the fact that most schools are no longer teaching our children cursive writing. Many consider the increasingly lost art of cursive writing a necessary life skill, not at least because a good written signature really requires it. As early as 2006, researchers observed a dramatic decline in the use of cursive script. In fact, it was in 2006 that of the 1.5 million students in the United States who completed the SAT exams, 85% of them did not use cursive writing, but printed their essays in what we’d typically call block letters.

Cursive writing itself is an artifact of a bygone era. A time when writing with a quill required keeping the quill on the paper to prevent blotting or the problem of leaving a big drop of ink behind as you lifted the quill. The word cursive derives from the 18th century Italian corsivo literally meaning “running”; i.e. running words. While the Romans are generally first credited with the use of cursive writing, the Italians of the 14th century renaissance made it into a veritable art form.

In the 19th and early 20th century all children were taught cursive script, and left handed school children were even forced to write with their right hand to prevent them from dragging their hand across the still wet ink. Although the ballpoint pen was patented in 1888, it wasn’t technically viable until the invention of so-called “solid ink” much later in 1945. By the 1950s the ballpoint had replaced the quill in most classrooms. Despite this innovation cursive writing remained an artifact in the classroom for almost 40 years after the disappearance of the quill. But is it that signatures are failing because we’re not teaching our kids cursive writing anymore?

The signature as an artifact has been a staple of society for the better part of a millennium, but the signature itself dates back to the year 439 during the rule of the Roman Emperor Valentine III. When it came to signing a contract or important documents like the Magna Carta, or the Bill of Rights, the signature was the unchallenged standard when it came to a unique identifier. Considered unique and difficult to copy, individual signatures were like your legal fingerprint. The obvious question is, can a signature based on a method of identification employed 1600 years ago still be the best method of identification we’ve got?

When this was written, signatures were the most reliable form of identification used

When this was written, signatures were the most reliable form of identification used

Signature required?

One of the reasons students around the world today lack the basic skill of a signature these days is that they rarely have to use one until they enter the workforce. In fact, all of the basic services these guys use today simply don’t require a signature for opening an account – Facebook, Google, iTunes, Snapchat, Instagram, Mobile Phone Accounts, etc. If they have to open a bank account or rent an apartment, they might be required to provide their John Hancock.

But let’s get real.

Signatures aren’t actually an effective form of identification anymore. Have you ever seen someone in the checkout line ahead of you get rejected at the store for a bogus signature? How could the staff tell? A pal of mine, Dave Birch, actually signs all sorts of fake names when he’s asked to sign, but never uses his actual signature – why? He reasons if he finds a transaction where someone has actually used his name on a credit card receipt, then he immediately knows it’s a fake.

It’s hard to believe the entire banking system is held together by something as basic as a signature today. In fact, it isn’t held together very well. The United States is the last remaining country to have not adopted the EMV Chip and PIN standard, and thus still relies on signature at the Point-of-Sale. Which is why despite accounting for just 25% of all card transactions globally, the US has more than half the card fraud for the entire world – yes, that’s more than the rest of the world combined. The signature patently doesn’t work to stop card fraud. So what about for day-to-day bank account operations?

When was the last time you actually had to sign a withdraw slip to get cash at a bank branch? Yet, in my experience 9 out of 10 banks still require a signature card to open a bank account today – why?

Signatures are risky!

The fact is that I can verify someone’s identity through much more reliable methods than using a signature card or signature verification today. Just looking up someone’s profile on LinkedIn or Facebook, their social security number (if you are in the US) combined with an identity document (drivers license/passport) and facial recognition, are vastly superior data points to a signature on a piece of paper. In fact, the amount of data I can bring to bear to verify an identity today means that if a bank is still relying on a paper application form with a signature, they are simply absorbing a much greater level of risk than is necessary. Yes, you read that right. A signature card and a paper application form mean you are absorbing an unacceptable level of risk as a bank.

Clearly the customers of the future are not big fans of a signature – they’re not writing checks (or cheques). They’re not working with banks that use signature cards generally either. Their life is based on a digital persona, and real-time digital access to their phone or bank account is increasingly based on biometrics that are much better fraud prevention measures and identity verification methods than a cursive writing-based signature. Why insist that these kids still sign their college application, mortgage application or bank account opening form in this day an age? It just doesn’t make sense.

If you don’t believe me – sign your next credit card receipt as Mickey Mouse and see if the merchant accepts it…



Oh, and if you detach yourself as a bank from the need to sign an application form? You can deliver revenue via the smart phone, more easily than you can in a bank branch, and that is going to be huge the next few years!!



In 5 Years, 50% of revenue will be digital

Where’s the revenue going to come from?

Mobile use is exploding in the banking scene. If you are a retail bank today in the developed world and you don’t have an app for your customers, you are increasingly becoming an exception. Certainly almost every bank in the world today has some form of Internet website and Internet banking capability. However, for most banks, the web and mobile are considered costs – platforms that certainly improve service levels, and lower costs of servicing customers, but that are a net cost to the business.

That’s ironic, because today we have entire businesses that have been built off of the back of revenue from web and, more recently, mobile. If you take the market cap of Alibaba (expected to be north of $150Bn at IPO next year), Amazon ($165Bn), Facebook ($125Bn) alone you already have more than half a trillion dollars in value that is generated by pure-play online commerce.

The disruptive nature of pure-play web retailers has been well documented, and now researchers are starting to quantify specific effects such as so-called Amazon “showrooming” where customers go to traditional retailers[1] to try a product, but buy it on Amazon for price. Modality shift of purchase, for example, the shift in music or book buying behavior, has been as equally disruptive from traditional business models and revenue. This year iTunes turned 10 years old, and in that time music sales in physical storefronts has plummeted by more than half[2]. In 2012 1.4 Billion digital singles were sold in the US alone, which is 7 times the number of CD’s sold in-store during the same period. If you are a record label and you don’t have a digital distribution plan, you’re screwed.

Showrooming has emerged as a threat to physical retailers business models

Most retail banking leads I talk to express that their primary concern is that total revenue will suffer, if either support for branch wanes from a consumer perspective or if the bank pulls back on branch budgets or investment. The reality is, however, that in most developed economies there is already clear data showing reduction across the board for branch activity whether it is transactions per month, average number of visits per customer per year, or indeed the most critical measure, revenue per product line. We now understand that for products like Mortgages or Account Opening[3], that web is a key driver for even branch revenue, accounting for 2/3rds of branch traffic for those products.

Most retail banks still overwhelmingly seek to drive to branch as a the default conversion measure for advertising and marketing activities. Married with compliance requirements that often still require in-branch IDV or KYC, and you have a ton of false positives for the remaining branch activities that still produce revenue.

What we know is that just like bookstores and music stores, once the instinct of opening a bank account switches from going to a branch, to downloading to your phone, the physical storefront experience is at threat. Which makes the need for web and mobile revenue absolutely critical for a retail bank.

Ok, so then why are banks historically really bad at delivering revenue online and via mobile?

The historical use of web

For the companies and organizations that published the first, early websites back in the early 90s[4] – the web was a publishing platform. However, by 1995 companies like and others were experimenting with what we started to call “Brochureware” – information on products and services that would drive sales. In 1995, many companies were starting to drive revenue via web, including the likes of, WH Smith, Tesco, Virgin Megastores, Interflora, Dixons, PC World and others. The web was now a fully fledged sales channel.

However, Retail Banks never quite saw the web that way in the early days. Primarily because you couldn’t sell bank products and services unless you were a bank, and there just weren’t that many pure-play Internet banks that were built independently of branch networks. So the primary use-case for the Internet became “Internet Banking” – basically a cheaper way to allow customers to transact and do day-to-day banking stuff, instead of requiring them to come into a branch or pick-up a phone. For most banks this was about “channel migration” or reducing the cost to serve customers.

This is why most bank websites in the 1995-2000 timeframe were essentially gateways to a login facility for access to ‘secure’ Internet banking. It is also why the IT team owned web at this stage of the platform’s evolution – because the primary requirement of web was functionality, transactional stability and security. Not revenue.

As bank marketers saw all these e-Commerce businesses growing they demanded access to the bank’s public website platforms to market the brand and sell specific products, but even in 2000, fully five years after Amazon had launched their online bookstore, banks were still only able to rustle up primitive product brochureware. Primarily this was a compliance and process problem. There was simply no way to accept a product application digitally via a web form. Many banks I worked with at this stage either printed out web forms and submitted them to the product teams who handled applications via the branch network, re-entered them in to the same systems the branch teams used, or simply asked customers to ‘fax’ the form to their branch. E-Commerce didn’t really exist for banks at the turn of the century.

When it comes to digital then, we’ve had the web grow up fractured. The public website was owned by marketers who could push messages and campaigns out via the website, but were heavily restricted in terms of what could actually be sold. The assumption was still you would read about a product online and then visit a branch to apply.

Whereas, the secure online banking website was owned by the IT guys who were there to ensure a stable and secure transactional banking experience, but were not measured on a revenue basis. So for the first 6 or 7 years of most Internet banking portals, revenue remained absent. In fact, for many banks today revenue is still absent from behind the login. Which is ironic, because up to 95% of day-to-day web traffic ends up clicking on the login button.

Banks are almost the only businesses that deal with digital this way today. Every other retail business, with the exception perhaps of some utility companies, see the main function of the web as delivering revenue. Banks have always fought this instinct based on the risk of cannibalizing their branch network or on the basis of compliance resistance.

Imagine if Amazon built their websites with the same approach as banks today, you’d have a website that would allow you to look at the entire book catalog, but when you wanted to buy a book would generally force you to visit a physical book store. For existing Amazon customers under this modality, the only real thing you could do online behind-the-login perhaps, would be look at the books you’ve previously bought. When you think about it this way, banks have really screwed up digital when it comes to revenue.

Airlines like Delta or British Airways now generate upwards of 80% of their revenue via digital today. In my opinion, that is what banks could be doing today if they simply enabled revenue digitally.

Solving the revenue problem

When it comes to revenue in the coming pro-digital channel era, no revenue is really bad revenue. It makes no sense to favor branch-derived revenue over revenue from mobile, web, tablet or other channels like an ATM, unless you are desperately trying to justify the ongoing existence of the branch itself. You might argue potential for fraud is a reason for physical IDV and in-branch bias towards revenue, but that still assumes that the identity thieves can’t compromise a physical identity and that the best channel for a customer will always be a branch.

By the end of this decade, just 7 years away, based on the decline in branch activity today, retail banks in the US, UK, Australia, Germany, France and Spain (to mention a few) are going to have to deliver at least half of their revenue via web, mobile and tablet to remain viable. For many banks their lateness to the party on this front means that they will have to outsource acquisition to partners that are already well connected with digital communities of target customers, and competent in positioning offers and products. This will actually serve to further increase the cost of acquisition for basic products from where it stands today, and further erode margin. Not good from an industry perspective.

For revenue to be delivered efficiently the silos will have to disappear. The compliance team will have to start working as consultants to the business to legally unlock revenue opportunities in real-time, or based on the needs of customers that emerge. The campaign marketers who have long battled to raise product awareness and kick that customer into the branch funnel, will find themselves with decreasing CPM effectiveness and decreasing budgets, those budgets having moved to more responsive product experiences or customer journeys.

The key skill sets in this new world will be the data scientists that understand when, why and how customers use bank products, and the storytellers that can place the product or service in the customer’s life when and where they need it. Not pull me into a branch, so I can jump through the risk process.


[1] See – Placed: Aisle to Amazon Study, February 2013.

[2] Music sales in-store declined from $11.8 Billion in 2003 to $7.1 Billion in 2012. However, inflation adjusted, that accounts for more than a 50% decline in physical music sales in the last 10 years – source: CNNMoney –

[3] See – Web Shopping for Branch Sales, Novantis, August 2013

[4] See Wikipedia Article “List of Websites Founded before 1995

Branches have a strong future as alternative channels

Back in 2008 I started talking about the BANK 2.0 concept and the consumer behavior shift that would result in the bulk of customers in developed economies abandoning branches over the coming decade. The pushback to this concept was fervent with most bankers calling it a ludicrous suggestion, others being not so kind. In 2011 when I wrote my second book BRANCH TODAY GONE TOMORROW I tried to quantify this shift in terms of branch closures in the US market and calculated that between 30-40% of all US branches would close in the coming decade. 

Two recent research pieces, although not the first to highlight changing branch behavior, have started to quantify the speed of this change. The first, a report from Celent, was released this April and based on transactional activity estimates a 30-40% decline in US branches over the next decade. The second, a teller line series from FMSI tracks the rapid change in transactional activity and the decline in teller utilization down some 45.3% since 1992, or more importantly down 28% since just 2007. FMSI has been doing this teller line series for 20 years, and the change is as much as about the decline since 92 as the statistics that show a fairly clear indication of over-branching based on per capita data.

What reduction in transaction activity means

The primary reason in-branch transactional activity is declining is simply that retail consumers no longer need to visit branches for much of their day-to-day banking activity. The popularity of internet banking from the early noughties and the rapidly climbing popularity of smartphone based banking has shifted the epicenter of day-to-day banking. When customers don’t visit a branch as much, then we see a resultant decline not only in transactional activity, but cross-sell, up-sell and general revenue sourced through the branch.

We’re going to see a lot more of these in the next few years

While there is often the passionate assertion by bankers that while customers might stop visiting the branch for transactions, they’ll still come back to buy and seek advice, the data is showing a firm correlation between declines in transactional activity and specific product revenue. Once retail banks get better at sourcing revenue online and through mobile, then the current friction which often insists customers present themselves in the branch to execute revenue, will further dissipate, further reducing the need to frequently visit a bank space.

Overall, however, the dynamic in branch banking is shifting in the short-term very quickly. The traditional transactional banking support structure that is transaction heavy, has no place in the future branch space which has become largely transaction-less. While small businesses who rely on cash will still require a place to deposit cash, the majority of cheque deposits, wire transfers and such will vanish from the branch space. So what will customers who visit the branch be doing there?

There will be two primary reasons for a visit to the branch in the future. The first will be to seek advice on a complex product or a product configuration, where it will be just simpler to engage with someone face-to-face, although as customer experience and interaction design improves many product onboarding processes will become simpler and easier to navigate through digital channels. The second will be that I have a sticky problem as a customer that I simply haven’t been able to resolve myself as a customer through digital or the call centre.

It simply means that when I visit the branch in 2018, you had better have your very best staff on the job and ensure that you solve my problem on that first visit with a high level of competency. Upskilling existing teller staff may not work to bridge the skill gap here – you need a very competent service person, more like a concierge at a Four Seasons hotel than a current teller.

The branch as an alternative channel

The good news is that while there will be a reduction in branch traffic and branch revenue that results in a reduction in branch economics and results in mass closures of branches, still a good half of the existing branch network will remain. The branches of the future will be somewhat based on a hub and spoke approach with the flagship store in the primary geographies, surrounded by satellite support branches that are more like a small service center or a specific use-case sales center (e.g. a pop-up mortgage specialist branch near a large property development). This will result in a shrinking of square footage allocated to the total branch network over time also. But many branches will remain.

There are still a large enough segment of customers, centered on baby boomers, who are quite comfortable using the branch today that are unlikely to dramatically change their behavior. While this shrinking demographic will represent only a very small fraction of the customer base by the end of the decade, many of them are asset rich and therefore make a good business case for ongoing branch support.

For new customers, there will still be a significant percentage (less than half) who are either taken into a branch by their parents, or who choose to open an account in a branch themselves. Like Apple store aficionados, while they’ll get their account (iPad equivalent) at a branch, they’ll not generally come back to the branch for their other products (think Apps). It’s tough to argue for increasing branch budgets when many Gen-Y customers may only visit a bank branch two or three times in their entire life, but there will be enough of this account opening demand that certain brands will be able to sustain smaller branch networks based on this initial customer activity trend.


The death of branches probably started in 2010

There’s a strong statistical argument to be made for disruptive technologies that change consumer behavior. I’ve argued the impact of this on branch banking extensively starting with Branch Today, Gone Tomorrow, and more recently in Chapter 3 of BANK 3.0, but I’m still faced with significant resistance in the retail banking industry at large. While there is growing evidence for a grass roots change in bank behavior, it’s not uncommon to see quotes or responses like this still in the banking sector:

Ten years ago the consultants said to us that we had to scrap our branches and go straight to the internet, but I had heard those kinds of statements before with the credit cards and ATMs…I’m old enough to remember.”
Alfredo Sáenz, CEO Santander (The Economist, May 19th, 2012)

I think that this sort of comment is effectively hiding your head in the sand, ignoring the signs. Thus, I thought I’d share a statistical view of the triggers that result in the deconstruction of traditional distribution systems, and look at the evidence we can already see in the retail banking space to give some specific metrics around which branches need to go and when. This is hard data demonstrated in a way that reinforces that banking is no different to any other business facing changing consumer behavior. If you still believe branches will survive en masse, you need to at least read this for your own peace of mind.

One other warning. This is a lengthy, detailed post for obvious reasons…

Core behavioral shift

The argument at the core of anticipating widespread disruption to the physical distribution channel within retail banking is to examine changing behavior around the branch, and if there are any patterns we can learn from in other industries. In industries like music, books, video rental, and others we see historically the same triggers and shifts, along with the same reluctance to accept the inevitable changes that this brings. In each industry we’ve seen majors like Tower Records, Borders, and Blockbuster (see Wikipedia’s List of Defunct Retailers of the United States to see the full effect of disruption in distribution) faced with the same core shift, and an inability or unwillingness to change their distribution model to match changing consumer behaviors. In the retail banking market, we’re seeing the same reluctance to believe that anything will be fundamentally different with passionate arguments that the ‘branch will survive’. What is typically at the core of this imperative for change?

In each disrupted business or industry we see a paradigm shift in distribution initiated by a technological breakthrough that changes buying habits. These paradigm shifts are sometime convergent as in the case of the iPod and iTunes, but correlate with a core product model such as the shift from buying entire Albums, to just buying (or downloading) Singles. In the case of books the core buying behavior is characterized as eBook versus Hardcover or Paperback, but the eBook wasn’t really a serious competitor in the buying behavior stakes until Amazon launched the Kindle ‘eBook reader’.

At the core is an emerging behavior that demonstrates a trade-off between buying convenience and the need to ‘touch and feel’ the brand or product in-store. Often the new product provides a substantial price benefit because of lower distribution costs also, but not always. Great new product mechanisms show that convenience and ease of use will often even trump pricing disadvantages (such as in the case of a booking fee for cinema tickets).

In each instance of buying behavior shift we see early adopters first out of the gate on the new technologies that allow different buying or consumption, we then see both traditional consumers and retailers voice extreme skepticism around the import of this new emerging behavior, and finally we see rapid adoption of the technology over 3-5 years resulting in a irreversible upheaval of traditional distribution systems. This cycle of adoption and industry realization might be likened to the Kübler-Ross model, commonly known as the “Five Stages of Grief”, the only difference being that by the time the industry at large accepts the core consumer behavior shift a few major brand names have usually, already gone the way of the Dodo.

Those that have gone before us

The cycle of disruption can be articulated in the following simple manner. We start with Physical Products in a Physical Store supporting the traditional distribution structure. A new distribution platform (such as the Internet) comes along and changes early adopter buying behavior – we still buy a Physical Product but it comes through a Digital Store. Finally, the product (where possible), is abstracted to a digital form (Digital Product) which is Digitally Distributed without the need for the traditional stores.

Physical Product-Physical Store -> Physical Product-Digital Store -> Digital Product – Destroys Physical Distribution

To support this process we need both changing consumer behavior, and the paradigm shift of an emergent digital product. While Amazon has disrupted book sales massively through the Kindle, they can’t affect the same rapid level of disruption on clothes, shoes and electronic goods because those products can’t be fully digitized. When you digitize the product, it eliminates the majority of physical stores required for distribution over time because consumer behavior shifts away from visiting the physical store as the primary buying behavior. Whereas, when a physical product is retained, there is more of a split along buying preferences (e.g. in-store versus digital store) and the same shift takes longer or levels out.

The Typical Pattern of “Store” Disruption


The other interesting side effect of the disruption cycle is that in industries where the physical distribution layer is destroyed, incumbents rarely survive as the dominant distribution players. Look at books where the likes of Borders and Angus & Robertson failed in the last two years, Barnes & Noble still struggles to survive and Amazon absolutely dominates hardcover, paperback and eBook sales across the United States (and to some extent globally). Amazon is now the largest distribution player in book sales bar none – because they owned the new emerging distribution platform, i.e. the digital book and reader combined with the digital bookstore.

Continued on Page 2….

Two big predictions

Ron Shevlin (@rshevlin) and Jim Bruene (@netbanker) and I have been back and forth Ron’s article today on so-called NeoChecking Account and the news of the GoBank ( launch here in the US Tuesday.

Firstly, let me just say that seeing the likes of GoBank enter the market is great news for consumers and once again proves the viability of the evolved category-killer bank. While GoBank has chosen to use their recently acquired banking license (see, their GreenDot prepaid product was originally launched in the “Program Manager” style they referenced in their press release yesterday. However, the back-office model that GreenDot uses to support their GoBank roll-out is not as critical as the distribution strategy of de-linking checking accounts from day-to-day banking accounts. While GreenDot’s stock is down 8% today (at the time of print – I believe that ultimately this strategy will pay off in spades for GreenDot.

This non-checking, debit account strategy is the same approach that Simple pioneered, and the same model as our friends at and Bluebird deploy. It bodes well for the new category of ‘bank account’ that is highly utilitarian and not fully-loaded without outdated checking costs or overdraft fees. A bank you can use day-to-day. For those that read my blog regularly you’ll know that I’ve been discussing this fundamental shift in distribution strategy for some time and whether you call it a “Near Bank” (as Dave Birch does) or a NeoChecking account as Ron Shevlin does, this marks a fundamental re-classification of the basic bank account. An account that is classified not by it’s underlying product structure, but by it’s utility.

That’s why at Movenbank we’re going even further. We believe the basic bank account of the future will not only not have checks (or cheques), but it will reside on your phone which operates as your primary payment device. Thus it will also not have plastic. I’m sure GreenDot/GoBank, Simple and Bluebird will come to the same conclusion and optimize their experience for mobile payments and feedback in the future, but for now that distinction of the mobile-first bank account hopefully will remain with Movenbank for some years.

So let’s get to those two predictions:

1. The last personal check in the US will be written sometime in 2018

2. Sometime in the next 24-48 months a stock analyst will downgrade a major bank stock for use of checking accounts and excess branch capacity

Here’s my logic.

US Check Decline is readily predictable

According to the Federal Reserve Bank (US) in 2000 16.9 Billion commercial checks were written annually. By 2010 that had reduced by an incredible 55% to just 7.7Bn checks annually. However, the early impact of P2P payments and mobile has already seen a further 33% reduction in check use down to a estimated 5.1Bn by the close of 2012. With the decline rapidly increasing in speed from a 9.6% drop in 2009, to a 23.9% drop in 2011, we can expect this only to speed up. On a simple trending basis then, the last commercial check to be written in the United States will be signed in either 2017 or if you are really optimistic in 2018. Unless consumer behavior reverts to 20th century norms and the check comes back into fashion – yeah sure…

Check use in the US is undergoing rapid decline

Thus the checking account is already dead, most banks and CUs just don’t know it already. So positioning a basic account without checks does not only make sense today, it should be your mainstream day-to-day account offering, especially for the Y-Gens coming to your brand.

Stock market analyst shift is inevitable

The biggest measure of a commercial bank stock with a dominant retail play remains both annual revenue, capital and loan book (ability to generate future revenue). What will become clear as the modality and acquisition of the basic bank account shifts (lower paper KYC hurdles, less friction, more online and mobile enablement) is that “account opening” and the ability of cross-sell/up-sell to lead to future revenue will be closely examined. At that point, lower friction engagement models and cheaper distribution strategies will be seen as better growth levers than traditional friction-heavy, branch processes. Any banks carrying excess stock where distribution processes could have already been moved to mobile, tablet or online engagement at much lower costs, will be penalized hard.

I predict that 2014 will be the year we see a financial analyst downgrade a major bank’s rating based on excess branch capacity for this reason.

It’s all connected by changing consumer behavior and engagement.

Whichever way you look at it, 2013 is a hell of a year for bank innovation.

Banks can’t compete with digital for advice

There’s a long held premise that branches are great channels for advice, that this is the one differentiation that bank branches provide that the Internets could never compete with. There are three problems with this assertion that should rightly challenge the superiority of the branch channel in bank operations today:

Customers rarely get advice in a branch

The average customer walks into a branch to get a task completed. Whether that task is cashing a cheque, wiring funds overseas, looking at refinancing on their home or applying for a credit card, that task is generally the purpose and focus of a visit to a branch. When a customer comes in focused on a task, then they are not of the mindset where they are generally willing to hear unsolicited “advice” from the teller or banker, because they want to get in, execute and get out.

Qualitatively when you research customer interactions in-branch and ask customers when the last time they received ‘advice’ in their bank branch, most can’t ever remember receiving any sort of advice in the branch space.

Check out this YouTube video with customer comments to that effect


This is counter-intuitive for branch bankers who believe that this is what customers are getting in-branch. However, the metrics for the bank officer are to try to upsell or cross-sell a customer who comes in for a basic transactional interaction, they are not to give unsolicited advice to help a customer with their money or financial health. In that respect, customers are very clear about advice that is caged or camouflaged as a cross-sell proposition – to them it’s an attempt at a sale, not advice.

What a banker might call advice – the cross-sell and upsell – is not advice from a customer perspective. True, unsolicited advice that helps the customer without expectation of revenue is very rare in the branch space because there is simply no metric in the system that allows for this.

The advisor no longer benefits from information scarcity

The concept of advice in-branch is predicated on the principle of information scarcity. The branch officer will know something about banking or financial services that a customer won’t – he’s an expert. However, even in the private banking space today, where advisory requires the ability to juggle multiple asset classes, thousands of potential products, the pendulum is swinging toward more informed customers who are challenging the advisor.

Take a scenario where you have a 2nd generation private banking client interested in the energy sector and green energy. The client comes into the bank to meet with their private banker to discuss this emerging industry and look at investment opportunities. They’ve indicated interest in this area for some time and have subsequently spent the last 3-4 weeks researching the field and options, so when they come into the review meeting with the relationship manager, they’re extremely well informed.

This is the way we used to give advice…

The private banker launches into a discussion on a selection of appropriate funds or structured product options across asset classes, which capture the bank-led approach to the field of green technologies and investments. But the client has come up with something left of field. They’ve found that investments in solar silica (the refined quartz product use in the production of solar cells) and geothermal technology is underleveraged and offer significant opportunities.

The private banker has never even heard of solar silica. So he brings in the commodities specialist – who likewise has never heard of solar silica. There is no specific geo-thermal product, but some ETFs that have a slice of geo-thermal investments.

At this stage, the client has become the advisor. While the private banker can help with execution, they are forced to now go and research the options and assist the client with their buying decision, rather than advising them on an asset class or a product.

This type of interaction is increasingly common, and it turns the head on the old advice model. With 5-Exabytes of content created every two days the likelihood that an advisor will have access to information that a client or customer doesn’t have access to today, is increasingly unrealistic.

The best advice is time sensitive

While the concept of advice is a constructive and affirmative one, the biggest question is can you get me the right advice when and where I need it? The concept that advice is best given in the branch, precludes the reality that the most acute needs often present themselves contextually whether in the form of a life goal, a problem, a hurdle, a crisis, or simply a decision.

Let’s look at the core of day-to-day financial decisions. Everyday a consumer is making decisions on what money to spend, what money not to spend, what product or not to purchase, and what money to allocate to my savings. The very concept of advice is that the “bank” should help you make wise financial decisions that contribute to your overall financial health. However, given the dynamics of the retail financial services industry, the last two decades have seen banks flock to credit offerings that offer higher margin, even if that is at the detriment of the customer’s overall financial health.

Call me cynical but bank solutions need to be aligned with and never in opposition to the financial health of our customers. Customers should not be plagued by countless fees, escalating interest and penalties. Nor should representations be made to them that banking services are ‘free’ when the hidden costs are anything but free. This is anything but ‘advice’ based banking.

The pendulum needs to swing back to helping customers and help is best given when and where I need it. Not waiting for that day once or twice a year that I come into a branch to get something done or fixed, and the teller has a sales metric to cross-sell or up-sell me a credit product I can’t really afford. That’s not advice.

This is where PFM is really going to come into its own. Real-time personal financial management is advice at scale, potentially. Help me live my financial life well, everyday. That’s real advice…

How to Transition to the new Branch Reality

I guess with a title like Branch Today, Gone Tomorrow it’s no surprise that a lot of people think I’m anti-branch. I’m not anti-branch, I just don’t drink from the branch kool-aid fountain that goes something like “if only we could find the right formula we’d reverse this trend of not visiting the branch and customers would flock back to our physical space”. I think most Bankers and Credit Union executives, instinctively feel there is a change in the importance of the ‘channel mix’, but as often as I hear questions about how quickly this is going to occur, I hear executives talking about how customers used to behave. “But don’t customers need to come into a branch for lending products; to talk to a loan officer about more complex products?” This is a legitimate question in the old world, but it’s light on today in respect to the facts, which don’t actually indicate the branch is central to lending.

The fastest growing lending institutions in the country right now aren’t the big banks, community banks or even credit unions. The fastest growing lenders certainly aren’t mortgage brokers. The fastest growing lenders in the United States at the moment are actually peer-to-peer social networks, namely Prosper and Lending Club (thanks to @netbanker for this gem). In terms of percentage growth of loan book, you’ll be hard pressed to find any FDIC insured institution doing better. In fact, I’d wager that a 375% increase in Loan Originations in the last 18 months, coming off the back of the Great Recession as the global financial crisis is being called, is one of the most impressive new FI growth stories you’re likely to hear globally.

Lending Club growth thru April 2012

Last time I checked, neither Prosper, Lending Club or Zopa had any branches…

Why customers think they want branches
Now my point here is not to argue that P2P Lending is better, it is to argue that the perception that to sell a complex product you require bricks and mortar, just isn’t supported by the data. To be fair, however, there is actually some valid behavioral data at work here that comes out through qualitative research supporting the role of the branch for legacy customers. That is, that there are still plenty of customers who say they want a branch – that doesn’t mean they will visit it, but they like to have them around. In Branch Today I examined the data and reasons for the recent rapid decline in branch activity, both from a visitation and transactional measure, but the question is why some customers still say they want to visit a branch?

There’s really only three things that drive a customer to a physical branch:

  1. I need a physical distribution point to deposit cash (primarily for small retail businesses)
  2. I need advice or a recommendation for a product or need I don’t fully understand, or
  3. I have a humdinger of a problem that I couldn’t solve offline, so I’m coming into the branch to get relief.

Branch bankers hang on to #2 for dear life, hoping that this will somehow keep customers coming back, helping justify those massive budget line items dedicated to real-estate; sadly it just isn’t happening that way. And yet, when you ask customers what determines their choice of ‘bank’ relationship, often the convenience or availability of a local branch, remains a stalwart factor.

Since the mid-80s, branches the world over have generally been transformed into streamlined cost/profit centres. The industry has attempted to reduce cost and improve efficiency to optimum levels and in this light customers have been forced to trade off between either big bank efficiency and utility, or the personalized service of a high street, community banker interaction without all the bells and whistles.

Despite this drive for efficiency there’s still a lingering psychology of safety in physical banking place and density, which stem from long memories over epidemic ‘runs’ on the banking system during the great depression. So what remains are two core psychologies that play to the need for physical places which reinforces the safety of a “bank” where they’re going to entrust their cash :

  1. I recognize that I visit the branch less and less for banking, but I’d like it to be there just in case I need to speak to someone face-to-face about my money or I have a problem, OR
  2. The more branches you have, the less likely you’ll go under in the case of a ‘run’ on the bank

But who is going to pay for the space?
The big problem with this, of course, is that as customers more commonly neglect the branch in favor of internet, mobile, ATM and the phone (call centre), the economics of the real estate and branch staff is no longer sustainable. So how do you have a space that still ensures the confidence of those customers that require the psychological ‘crutch’ of a space they might need to go to, but who aren’t willing to pay more for the privilege and won’t change their day-to-day banking habits back to the branch because the web and mobile are just so much more convenient?

The answer is two-fold.

The Flagship Store
If you need to instill confidence in the brand, then the best way is to build a new, large square footage space that screams new-age, tech-savvy branch banking with coffee and comfy chairs! Think the opulent Airline loyalty lounges that started to emerge in the late 80s. Think Virgin Megastores or the “Gold Class” cinemas of the 90s. Think Apple Stores today.

Brand spaces that inspire confidence. Enable a connection with your customers. Spaces that tell customers you’re all about service, advice and solving their banking problems – not about tellers and transactions.

Jeff Pilcher at regularly covers the best of these new Flagship and Concept Stores, so head over there if you want some examples to work from. However, this is not exactly going to lower your bottom line around distribution. If anything it’s going the other way. Knowing that you’re going to have to downsize, the average FI will only be able to support a handful of Flagship stores in key, high-traffic, high-visibility location. So how do you equalize the ledger?

The Satellite Service Space
Supporting the Flagship stores at your secondary locations (i.e. anywhere that is not your best, most densely populated geography) will be very simple, cash-less brand presence stations. These will be small spaces in prime traffic locations like shopping malls, without any teller space, but the space to service the pants of a customer who needs that advice or help with a sticky problem. If they want cash, there will be an ATM. If they want to deposit notes or checks, the ATM can do that too, or you might incorporate a dedicated check deposit machine in the space too. In fact, the bank representative in the space could just use his iPad for that – although it’s better to move them to the ATM and go no transaction in the service space.

A good example of this sort of space would be the likes of smaller UPS franchise stores, or the BankShops of the TESCO variety in the UK. Small footprint of no more than 300-500 square feet, but enough space to represent your brand and tell customers they can still come and see if you if they need a solution.

Spaces don’t need to be big to provide service

The ratio of flagship store to satellite spaces will probably be at least 10 to 1, if not greater. You don’t need every branch to be “big” in the new reality; to give your customers a level of comfort that you are safe enough to put your money with them. In fact, as the likes of UBank, ING Direct and Fidor show, for some customers you don’t need any spaces. But for those that still want a space ‘just-in-case’ then this strategy is a great transitional approach.

One day soon, within the next decade, we’ll need less than half the branches we have today. But as we make that transition, the need for a space to be an available component of service and support remains a key component of what we call financial SERVICES. It just doesn’t have to cost us the earth.

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