The Right Way to Make Branch Banking Pay

Drugstore soda fountains, penny candy, and five-and-dime stores may be gone for good, but one relic of a friendlier service era is making a comeback: the local branch bank. After 20 years of letting costly branch banking systems wither, such national consumer banking leaders as Bank of America Corporation and J.P. Morgan Chase & Company (which is merging with the Bank One Corporation), as well as regional players such as Washington Mutual Inc., are coming to a location near you.

Our research in 2003 showed there’s a good reason for this revival — branch systems are significant growth engines for retail banks. Indeed, up to 90 percent of customer relationships are won or lost in branches. Moreover, we found a high correlation between branch visits and sales.

But can the large retail banks revive branches without letting them become a costly drag on profits? Absolutely — but only if they reinvent the management model so it can profitably deliver what demanding consumers expect: choice, convenience, and customization.

In the customer-centric “federation” business model we propose, the branch is the hub of an integrated multichannel banking framework designed to maximize local responsiveness. On the basis of our work with several clients, we estimate that banks using the federation model can expect to see revenue increases of between 35 and 65 percent per branch, depending upon their market potential and current performance.

In 2003, we collected data and conducted on-site observations of branch operations that show the enormous value of the branch. For example, there’s strong evidence customers favor branches over other channels for purchasing financial-services products. Our survey of channel preferences showed that 12 percent of customers seeking a home loan obtained information over the Internet, but 49 percent closed the sale in a branch.

In addition, our research found that 90 percent of a super-regional bank’s new customers were acquired in a branch. Equally important, almost all accounts were closed at a branch, with customers providing predictable clues about their intentions: Some made accelerated loan payments or sold an investment property; others complained about the branch operations. This means branches are one of the best lines of defense in identifying and appeasing dissatisfied customers.

But it is not enough for retail banks simply to open up more branches run like existing ones or redesign them to resemble hip retail stores. The successful branch bank of the future must be more like a financial-services resource center: For example, financial advisors conduct seminars after hours on such topics as managing debt or making the transition from “paycheck-to-paycheck” banking to saving and investing. For customers who are already accumulating wealth, the branch offers products and “light” relationship management. Branch customer service representatives handle simple product sales and know when to refer customers to a branch-based specialist. Customers who work with specialists experience the value of consulting a banker. The benefit for the bank: It gets closer to customers when they are planning and setting priorities, not just when they’re shopping for products.

To deliver advice and consultation services economically, branches must offer a set of standardized packages of products and advice for customers, targeted for different life stages or for immediate needs. Banks can repackage products and information they have on hand, focusing on the 80 percent of the customers who need support as they plan for college tuitions, maximize retirement savings, and so on.

Operating a branch economically also requires aligning customer focus with the profile of the micromarket being served. This profile is typically determined by the age and income of customers along with such factors as population concentration, the branch’s proximity to business centers, and customers’ ethnicity. The micromarket should drive management decisions regarding branch staffing, skills, product configuration, and customer sales/retention targets.

Further, branches must be the hub of a multichannel offering. Call centers and the Web are fine for routine transactions, but the branch is the best place for customers to get personalized information and attention and conduct complex banking activities. It is also the best channel for encouraging customers to en-trust more assets to the bank as their needs change.

For many large banks, the pursuit of scale has come at a huge price — loss of control over local capabilities and costs. Booz Allen’s federation model strives for more efficient centralized management and greater responsiveness to micromarkets. Central controls at corporate headquarters help the bank exploit product, infrastructure, and administrative scale, but the branch manager, who knows the local market, is empowered to make resource, incentive, and pricing decisions locally.

Applying Booz Allen’s federation model is not merely a matter of making organizational adjustments. Nor is it franchising. By giving each branch responsibility for managing its own P&L and retaining some centralized management, branch managers can run their own businesses, and they can leverage the brand and infrastructure power of the institution. If branch managers are offered the right incentives through performance-based compensation and perquisites, we believe they will work harder and smarter to make their branch more competitive.

To implement the federation business model, action is required along four dimensions:

• People. Hiring, training, and certification of frontline employees; significantly improving branch management; making major modifications to incentives.
• Internal Benchmarking. Understanding branch performance; aligning to micromarkets; increasing readiness for change.
• Geographic Specialization. Determining local resource needs and basing the sales focus on demographics, purchasing behavior, and the local growth trajectory.
• Structure. Setting up mechanisms to coordinate local versus central decision rights; refining roles and responsibilities within the branch network.

The days of the branch bank as we’ve known it are over. But something better is emerging in the
multiproduct, multichannel bank federation.

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