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(originally published by Booz & Company)


A Better Way to Make Branch Banking Pay

For today’s consumer banks, reinventing local branches as a hub to attract and retain customers is essential to profit and growth.

Drugstore soda fountains, penny candy, and five-and-dime stores may be gone for good, but one relic of a friendlier local service era is making a comeback: the branch bank. After 20 years of letting of their costly-to-operate branch banking systems wither away, U.S. consumer banking leaders such as Bank of America (BofA) and J.P. Morgan Chase, and aspiring national competitors such as Washington Mutual are coming to a location near you.

Booz Allen Hamilton research shows that up to 90 percent of customer relationships are won or lost in branches.
The recent wave of bank megamergers all include big bets on  future growth in consumer banking, with the help of strong branch networks. J.P. Morgan Chase’s merger with Bank One, announced last month, creates the second largest bank in the U.S., and a retail network of 2,630 branches in 17 states. The merger, analysts say, will give J.P. Morgan Chase the scale it needs to compete in consumer markets with the likes of Citigroup and BofA. And turning branches into sales offices staffed by relationship managers who advise customers and pitch them multiple products is likely to be one of the first post-merger moves.

In October 2003, Bank of America’s $43 billion purchase of the FleetBoston Financial Corporation reaffirmed BofA’s strategy to accelerate revenue growth and bring higher profits by investing in its branches. Before the merger, BofA had planned to spend $1.2 billion to open 550 new branches by 2005. Post-merger, it will build its branch network to more than 5,000 locations along the East Coast and from Texas to California.

Banks spend heavily on CRM systems to predict customer defections, but a vigilant branch staffer can just as effectively keep customers from leaving.
Booz Allen Hamilton research in 2003 shows there is a good reason for this revival of branch systems: They are significant growth engines for retail banks. Indeed, up to 90 percent of customer relationships are won or lost in branches. Moreover, the study found a high correlation between branch visits and sales.

But can the large retail banks revive the branch system without letting it become a costly drag on their 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.

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

In one recent client study, Booz Allen 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, suggesting that branches can be a first line of defense in retaining customers. Customers often provide predictable clues before they close their accounts: In our study, some made accelerated loan payments or sold an investment property; others complained about the branch operations. Banks spend heavily on customer relationship management (CRM) systems to predict customer defections, but a vigilant branch staffer can just as effectively use the personal touch to solve a problem and keep a customer from leaving.

Reinventing the Branch
It is not enough for retail banks simply to open up more branches that run like existing ones or to redesign them to resemble hip retail stores. The successful branch bank of the future must:

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  1. “How the Auto Industry Should Embrace CRM,” by Steven Wheeler, s+b enews, 5/01/02, Click here.
  2. “Scrambled Egg: The Making and Breaking of an Online Bank,” by Victoria Griffith, s+b, Second Quarter 2001. Click here.
  3. “The Internet’s Impact on Retail Banking,” by Bill Burnham, s+b, Third Quarter 1996. Click here.
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