Academic journal article The McKinsey Quarterly

Branch Banking Is Not a Dinosaur

Academic journal article The McKinsey Quarterly

Branch Banking Is Not a Dinosaur

Article excerpt

Despite what Bill Gates says, it's an archaeopteryx

And like the first bird, each branch is going to have to learn to fly again

First step: unbundling manufacturing and delivery economics

Conventional wisdom on the future of bank branches has see-sawed so many times in the past decade that you need a score card to keep track. The ATM and telephone boom of the 1980s appeared to herald the end of the branch. In the United States, usage of ATMs has grown to almost 700 million transactions per year, and over 40 percent of households use telephone banking.

Paradoxically, however, the geographic acquisition strategies of Norwest, BancOne, NationsBank, and others seem to be celebrating the importance of physical distribution. According to Payment Systems, Inc., 69 percent of households still visit branches at least once a month. Moreover, small businesses, which account for one-third of retail bank profitability, continue to be heavy branch users.

Then again, today's multimedia boom appears to be sounding another death knell for branches. Forty percent of US households own personal computers, and 54 percent of those have modems. These households have access to full online banking through Microsoft Money, Quicken, and other services. Big branch closures at Chemical and PNC, among others, seem to confirm that branches are, in the words of Bill Gates, "going the way of the dinosaurs."

Undoubtedly, branch networks are too big. The numbers speak for themselves: at over 250 million square feet, US bank branches occupy more space than all the nation's general merchandise department stores put together. If every man, woman, and child in America were to step into a branch at the same time, each would enjoy at least a square foot of breathing room. Several factors will drive the rationalization of branch networks: the high density of most current networks, particularly postmerger; the shrinking role of bricks and mortar in meeting customers' transaction needs; and the ineffectiveness of traditional branches compared with more focused physical distribution formats.

But the truth is that branches are not dinosaurs destined for extinction. In evolutionary terms, they are more like the first bird, archaeopteryx. They are going to have to transform themselves to adapt to the changing environment, and many will vanish, but large numbers will survive the current upheavals. Online services, ATMs, direct mail, and phone channels will indeed grow, but physical distribution will remain a crucial aspect of personal and small business financial services delivery.

Dramatic changes in branch banking will manifest themselves not so much in the total number of branches as in what those branches look like and what happens in them day to day. The "plain vanilla" branch will disappear, to be replaced by a variety of new flavors such as supermarket branches, investment centers, and ATMs offering expanded services. Some of these innovations are already in evidence at such banks as Huntington, Citibank, and Wells Fargo. In the new environment, branches have entirely different economics; customers do different things in them; and employees have new roles and responsibilities.

Turning the branch of today into the branch of tomorrow will not be easy. It will take a long time, much experimentation, and great effort. Pioneering banks are demonstrating that the skills to make this transition cannot be taught in the abstract. They must be acquired in the real world through actual experience of changing branches one by one. Indeed, a decade from now, the dominator retail banks will be not those with the largest customer base or the most geographically dense branch network, but those that are skilled at making this transition quickly and economically.

Many channels, many products, many customers

The goal for banks' senior management is to turn today's "all things to all people" branch networks into highly differentiated systems for distributing multiple products. …

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