Retail is in the detail: how banks need to re-energize retail franchises

Citation

Gentle, C. (2008), "Retail is in the detail: how banks need to re-energize retail franchises", Journal of Risk Finance, Vol. 9 No. 1. https://doi.org/10.1108/jrf.2008.29409aaf.001

Retail is in the detail: how banks need to re-energize retail franchises

Retail is in the detail: how banks need to re-energize retail franchises

Financial institutions that own retail banks are facing a major challenge: how do they reinvigorate their franchises? As the retail market matures, many banks are struggling to grow their customer bases and revenues.

With intensifying competition driving down prices and increased switching between providers, customers are more price-sensitive and less loyal than ever before. Retail financial institutions are struggling to connect with their customers. It is not enough simply to acquire customers with an attractive new rate. Banks must now work hard to retain customers, generate more revenues from them, and increase the number of financial products sold to each individual. Cross-selling additional products is also significantly more challenging when customer loyalty is lacking.

New thinking is required if banks are to reinvigorate their retail proposition successfully. Financial institutions should seek to change the basis of competition by creating a value-added proposition that attracts and retains customers by leading on service rather than price. To reconnect with customers, the fresh proposition should be based on the principles of convenience, value, and service. We suggest in the battle for customers – and their hearts and minds – the key instrument will be the branch.

So, how can banks win with branches?

Forward-thinking banks are attempting to change the basis on which they compete. They are seeking to provide customers with a new, value-added proposition. Such propositions are tasked with reducing banks’ dependency on price-based competition and providing customers with a higher quality service. Leading providers will drive this change by re-energizing their branch networks.

The costs of running a branch-banking network compared to direct-banking alternatives (e.g. internet-only and call centre operations) challenges the viability of the branch-banking model. For the 13,194 branches in the UK, we estimate costs at £10.5 billion per annum, generating revenues of £13.7 billion. Clearly the network can still carve out a profit, but cost-to-income ratios at the branch can drag down the overall performance of the retail bank. As branches essentially have fixed costs, they must improve cost-to-income ratios by increasing revenues at the branch. This is well worth their while. A 10 per cent increase in revenue could drive an increase in branch profitability of up to 40 per cent.

The challenge for retail banks is therefore twofold:

1. 1.

   they must create a proposition for which customers are willing to pay; and

2. 2.

   they must increase revenues at the branch without ramping up costs in the process.

This process is likely to be highly significant in sifting the leaders from laggards in the retail banking arena.

Window of opportunity

Despite the growing influence of direct banking, our research shows that the branch remains the key point of contact with the customer. Three-quarters of customers have a preferred branch that they think of as their regular branch. And most purchases still occur in the branch. In fact, some 86 percent of current accounts have been arranged in the branch. The branch should be a key focal point acting as the physical manifestation of a bank’s proposition. Further, to be completely compelling it must be delivered as part of a multi-channel approach.

Going forward, direct banking is likely to penetrate the customer base more deeply. This could further weaken the relationship between customers and financial institutions, and as price-comparison sites such as www.moneysupermarket.com become more popular, it is likely to create greater price-sensitivity. Our research suggests retail financial institutions have a five-year window in which to change the branch usage and the propensity of customers to buy additional financial products. The new proposition must be established before direct-banking channels make branch networks an expensive liability rather than an asset.

Banks have around five years to create, embed, and engage customers with a new differentiating proposition. Our work around the world tells us there are three key drivers of mass-market customer behavior – convenience, value, and service. Each proposition should be crystal clear to the customer, differentiating the organization based on a combination of these drivers. The branch is likely to remain best placed to deliver the right mix of convenience, value, and service, and is therefore the key channel through which banks are likely to turn the tide against the commoditizing forces of direct channels, lock in customers, and increase sales.

Are branches ready for the challenge? Can they deliver a value-added proposition? Having been viewed as little more than a cost center for many years, the branch has suffered from underinvestment. This legacy means that many banks’ portfolios of branches are poorly placed to offer convenience, value, and service. Turning the branch from a cost centre into a powerful income-generator and the focal point of a value-added service is a significant challenge. It requires nothing short of transformation.

Six disciplines – a checklist for success

A walk down any main/high street reveals that banks are being outgunned by retailers in the sophistication and relevance of their customer propositions – further raising the bar of consumer expectations.

We provide two frameworks that can help retail institutions achieve a fit-for-purpose branch network.

First, all improvements to branches must serve two objectives. Changes should serve to streamline internal processes for cost efficiency, and differentiate external, customer-facing processes for higher-quality service delivery. This framework should serve to help branches provide better service at lower cost.

Second, and more importantly, we have identified six disciplines required for branch transformation. These are:

1. 1.

   people strategy

2. 2.

   customer service process design;

3. 3.

   branch economics;

4. 4.

   property strategy;

5. 5.

   product and sales development; and

6. 6.

   security and risk planning.

Under each of these disciplines there are a number of implementation priorities needed to transform branches. Each discipline is mutually reinforcing. Those that execute partially on this agenda will not create a compelling proposition that can retain customers in the long term. In order to win with branches, banks need to complete a fully executed transformation across all six disciplines. As a result, branch networks can become not only valuable assets, but also the leading channel underpinning a new customer experience based on the principles of convenience, value, and service.

Set out above are the key challenges facing banks in re-energizing their retail franchises. Avoiding commoditization, improving customer retention, and creating cross-sale opportunities are key goals in growing revenues – and when revenues grow, so too does shareholder value. To achieve these objectives, a value-added proposition is needed based on convenience, value, and service, and the creation of tailored products and services.

In delivering this vision, it is clear that banks will need to mobilize a multi-channel strategy. However, direct banking is not in an ideal position to drive forward a proposition based on deeper customer relationships and superior service, so the branch will be the key channel to carry forward value-based propositions.

Against this top-down approach, there are some bottom-up challenges to delivering this vision. The lack of investment in branches over the decades has created a historical legacy of underperforming branches, unmotivated and de-skilled branch staff, and inefficient processing. The cost of maintaining and turning around the branch network to make it perform and rise to the new challenge is therefore significant. The huge size of the costs and the slowing of economic activity make this one of the burning issues of the moment for retail financial institutions.

While many banks have set out on a path to branch transformation, arguably few will have taken a total approach to transformation. A simple refreshing of the brand and a refurbished branch network are likely to leave banks struggling to succeed. Only through the consistent implementation across all six key disciplines of branch transformation underpinning a unique, differentiating, and compelling proposition is a financial institution likely to win with branches.

Chris GentleDeloitte & Touche LLP, London, UK