Bank 3.0

Why Banking Is No Longer Somewhere You Go But Something You Do

Brett King

• Publisher: Wiley
• Year: 2012
• ISBN:
  9781118589649
• Edition: 1
• Topic: Economics
• Subtopic: Banks & Banking
• Index: Economics

The first edition of BANK 2.0 —#1 on Amazon's bestseller list for banking and finance in the US, UK, Germany, France, and Japan for over 18 months—took the financial world by storm and became synonymous with disruptive customer behaviour, technology shift, and new banking models.

In BANK 3.0, Brett King brings the story up to date with the latest trends redefining financial services and payments—from the global scramble for dominance of the mobile wallet and the expectations created by tablet computing to the operationalising of the cloud, the explosion of social media, and the rise of the de-banked consumer, who doesn't need a bank at all.

BANK 3.0 shows that the gap between customers and financial services players is rapidly widening, leaving massive opportunities for new, non-bank competitors to totally disrupt the industry.

"On the Web and on Mobile, the customer isn't king—he's dictator. Highly impatient, skeptical, cynical. Brett King understands deeply what drives this new hard-nosed customer. Banking professionals would do well to heed his advice."
— Gerry McGovern, author of Killer Web Content

Part 02

Rebuilding the Bank

3 Can the Branch be Saved?

4 Onboard and Engaged—The Ecosystem for Customer Support

5 Web—Why the Revenue Is Still So Hard to Find . . .

6 Mobile Banking—Already Huge and It’s Just Getting Started

7 The Evolution of Self-Service

8 I Trust the Crowd, More Than I Trust the Brand

Chapter 3

Can the Branch Be Saved?

Ask yourself this: when did you last venture into a branch as a customer? No conjecture, anecdotes or speculation here—just cold hard facts. Do you go every week? Perhaps every month? Have you even been into a bank branch in the last 12 months? Did you really want to go into the branch, or was it necessary only because of the bank’s own process or policy? How important is the branch day to day in the banking experience?

The reality is that if I go regularly to a bank branch today, I am in an increasingly tiny minority. The branch, in many ways, has become the least important channel for day-to-day banking for the broader customer base. Why? Simply because it is comparably inefficient, difficult to get to, and just not as relevant in today’s hustle-and-bustle, hyperconnected world, where value is measured in speed to market and responsiveness.

When I talk to bankers about change and the opportunities new channels present, I point out that statistically support for day-to-day branch banking has been waning for the last decade, but support for mobile and internet has been skyrocketing. Instead of focusing on the opportunities that mobile and the Internet present to engaging prospects and customers, many bankers feel compelled to launch into a defence of the long-term viability of branch banking. That’s entirely understandable. Branches have been at the core of banking for a very, very long time.

The root word for “bank” comes from the Italian “banco”, the word for bench. This is because the money traders at the ports of Genoa, Venice and Naples literally used to sit on a bench near the port or marketplace, providing financing to traders and business people.

“The [money changers] in Lombardy had benches in the marketplace for the exchange of money and bills. When a banker failed, his bench was broken up by the populace; and from this circumstance we have the word for bankrupt.”

—Thomas Herbert Russell, in Banking, Credits and Finance

The oldest bank in the world today is Monte dei Paschi di Siena, founded in 1472 (recently bailed out I might add1), and its original branch still stands in Sienna today. The oldest branch in the United States is the Bank of New York, founded on 9 June 1784. Materially, these branches don’t look that different from most of the modern branches we see in use today. But branches were designed back in those days as “cash distribution” points. The primary activity was depositing and withdrawing cash. Despite the fact that consumer behaviour around cash has significantly changed in the last 30 years (largely due to cards and ATMs), the branch generally still lags as a dominant “transactional” banking place. With transactional behaviour rapidly shifting, this puts existing branch networks under pressure.

In 2011 Bank of America announced it was closing up to ten per cent of its branches (up to 600 possible closures), HSBC USA sold off 195 branches to First Niagara (which then resold half of them), and, as JPMorgan Chase digested the acquisition of Washington Mutual, we saw 300 branches go the way of the dodo. JP Morgan Chase announced in June 2011 it was planning on opening some 2000 branches. It was no surprise, given the economic downturn, that Chase back-pedalled on those plans in its Q3 earnings call and then again in its Q4 earning call, bringing the number down to 1100, then 900 branches. The number of bank branches in the US peaked in 2010 and has been falling since—of course it remains to be seen whether this is the start of a trend, or simply a statistical anomaly.

In the United Kingdom, the Royal Bank of Scotland, Northern Rock, Lloyds and HSBC are all reducing branch numbers. Lloyds has been trying to sell 632 of its branches now for close to 12 months at the asking price of approximately £4 billion, but has been unable to find serious interest. In the UK we have seen one branch closing every day since 1990,2 or more than 7000 in the last 20 years—that’s almost half of the 16,000 odd branches in 1990.

In Australia, branch activity peaked in 2007 with 13,648 points of presence, and had decreased by seven per cent to 12,828 in 2011.3 However, expectations are that this trend will continue and perhaps steepen.

Many traditional bankers will tell you that customers choose a bank based on branch network or the location of a branch near their home or work. That assertion simply doesn’t stack up today. Seventy-five per cent of Standard Chartered’s customers, surveyed online in over 40 countries, said the Internet was their first channel of choice and it drove their selection of retail banking partner; only 12 per cent chose the branch as their primary contact point. AlixPartners released a study4 in February 2012 that estimated that 50 per cent of customers would be using mobile banking as their primary channel by 2016, but the more interesting factoid was that 32 per cent of customers in the US who switched banks in 2011 did so to get access to mobile banking. So people will move banks to get access to mobile or internet banking. Would they do the same to get access to a branch? Unlikely, especially if they’re only visiting the branch two or three times a year.

The problem is this. The myopic focus on branch banking is simply a distraction. If you were building a bank from scratch today and you were attempting something the scale of HSBC, BofA or Chase and you weren’t a diehard traditionalist, I can guarantee you wouldn’t be thinking of deploying anywhere near the number of branches these banks have in their networks today. You’d do it very differently, just simply based on the economics.

Just so we clear the air. You shouldn’t see this as a vehement attack on branches or as an attempt to advocate a total branch-less experience. As my pal Chris Skinner (Financial Services Club in the UK) so aptly puts it, we’re looking at the emergence of a less-branch experience.

How are progressive banks dealing with this? Well, you might argue that they’re not closing swathes of branches . . . yet. That might be the case, but I recently met with a major Canadian retail bank which has a strategic plan for the rapid deleveraging of the majority of its branch network. It is scenario-planning for a 50-per-cent-plus reduction in its physical distribution network within the next five years. That’s aggressive, but it is definitely worth modelling or at least thinking about if you’re thinking about the changing behaviour of customers. After all, banks are in the business of risk mitigation (I’m often told), so what is the risk of not having a branch deleveraging strategy? Perhaps you should ask Borders or Blockbuster that question.

This uncertainty around branch function, cost structure and capability serves to illustrate the key differences in goals between the institution and the customer. The institution sees the branch increasingly as a vital revenue centre whereas in the past these were more accurately classified as cost centres. Thus, this has largely been the focus of the institution over the last 20 years—improvement in branch profitability. Customers, on the other hand, expect service from a branch, and expect it because they “pay for it” with account-keeping fees, over-the-counter fees, and other such levies. In respect of sales, customers are already shifting their primary decision-making process to a digital research and engagement model. If they can complete a task online, many will. Branches that exist today because compliance forces customers into the channel to sign an application don’t offer compelling value.

For an exchange of “value” to occur between the institution and the customer, both parties need to be getting something out of this real estate. What is the value exchange platform for the branch today?

Let’s forget that branches were “always at the core” of banking historically. Let’s imagine what it would be like to build a bank today, in a very different environment from the 1700s when modern, branch-based banking emerged in the developed world. Then let’s think about the role of branches in the future of banking.

Always banking, never at a bank™

Yes, I thought this catchphrase was so good, I actually trademarked it, but that’s another story . . .

As discussed in Chapter 2, with the shift to digital being apparent in many industries today (music, media, newspaper, books, retail, banking, etc.), it is clear that consumer behaviour is changing rapidly. The key to understanding this shift in the banking sector is that primarily banking is about the utility of our money.

We need banks. Why? They keep our money safe, (most of the time) they give us interest or improvement on our assets, but they also enable us to send it across the planet, pay other people in a business or retail setting, and get our cash when we need it—basically the utility of money. When it comes to financial services and the products banks sell to their customers, whether it is a mortgage, a credit card, a government or corporate bond, life insurance, or a merchant account, the outcome is either one of enabling or protecting our life financially.

So, at its core, banking is about utility, facilitation, or protection. Now I know there’ll be some who want to spin this to talk about value-add, the advisory role, etc., but the end game is either facilitating a transaction (this includes credit offerings) or the management of assets. Banks very rarely create real value beyond the transaction platform or asset management, at least for the majority of retail customers (private banking is a little different). The value of the bank for the average retail consumer is primarily utility. Let me illustrate.

We don’t buy a mortgage—we buy a home. The mortgage facilitates this purchase or life stage.

We don’t purchase a credit card—we go shopping or travelling. The card facilitates our travel or store purchases in an efficient, secure way, so we don’t have to carry around large bundles of cash.

We don’t buy a car lease—...

Table of contents

• Cover
• Contents
• Title
• Copyright
• Dedication
• Acknowledgements
• Introduction
• Part 01: Changes in Customer Behaviour
• Part 02: Rebuilding the Bank
• Part 03: The Road Ahead—Beyond Channel
• Glossary
• References