Don't end branching to compete digitally. Just do it better

Bad news for the retail sector continues to roll in. Traditional retailers are panicking as shoppers more and more shift their purchases from brick-and-mortar stores to online venues. The industry’s struggles are a cautionary tale for banks, which are also experiencing a digital transformation. But the good news for financial institutions is they still have time to avoid a downturn of the magnitude now facing large retailers.

According to a report by National Public Radio, more than 3,100 store closings were projected by retailers for the first quarter of the year, and almost 90,000 retail workers have lost their jobs since October. The Limited, BCBG Max Azria and Radio Shack have filed for bankruptcy. The situation is so dire that a new phrase has been coined to describe shopping centers devoid of stores and shoppers: zombie malls.

The retail situation, however, should come as no surprise. Online shopping has been growing for years. It was inevitable that e-commerce would eat into the sales at legacy retailers. Likewise, a surge in online banking and has led, not coincidentally, to the decline in bank lobby traffic.

David Ryder/Bloomberg

Sure, bankers haven’t witnessed the same free-market bloodbath going on in the retail sector because the financial services industry is highly regulated, which restricts market entry and exit.

But regulations can only slow down market forces, not stop them. In five years, the tumult upsetting the current retail environment could spread to banks in the form of zombie branches. Therefore, let’s learn from retailers’ experiences and get ahead of issues that will arise in an increasingly digital world.

Don’t dump your old branch model

In his book “Branch Today, Gone Tomorrow,” Brett King famously claimed that branches would soon die. He was wrong. New research shows that while consumers love mobile banking, they also want branches where they can open accounts, resolve issues and request advice. A 2017 J.D. Power study found overall satisfaction among those who visited a bank branch within the past 12 months was 27 index points higher (on a 1,000-point scale) than among those who did not visit a branch (824 versus 797, respectively). Satisfaction scores are even higher for millennials. A decline in lobby traffic may dictate reducing the number and size of branches; however, customers who use multiple channels, including branches, are more engaged, more loyal and more profitable than digital-only account holders, according to a study by Accenture.

Build consistent customer experience across all channels

Consumers expect the same seamless and personalized transactions from their online bank as they receive from Amazon and Netflix. So don’t treat online banking like an add-on channel. Mobile banking is banking, and banks must treat customers to the same personalized brand experience on each of their two, three or four devices as banks treat their in-person customers. Furthermore, interactions should build on each other to strengthen relationships. That’s not happening today, but it should. A recent Celent study found that the vast majority of bank customers cannot carry an application from one device to another. They must start over.

Quit trying to be all things to all people

Consumers are heading to specialty stores in record numbers. Discounters such as Dollar Tree and Nordstrom Rack are attracting value-oriented buyers. Home Depot and Lowe’s pull in do-it-yourselfers with good prices and seasoned advice. Specialty stores tend to provide better in-store experiences, more knowledgeable staff and curated products. The lesson for banks is to fiercely focus on the needs of specific customer segments. Pick out a niche for your institution. Perhaps it’s based on demographics or lifestyles, or is focused on particular products. Then, offer the expertise and custom products that others can’t duplicate. For example, perhaps your region has a need for a discount financial services provider.

Embrace new technology to improve customer experience

Of course, banks — like traditional retailers — cannot compete without adopting a more tech-savvy footing. In the retail sector, for example, Walmart — the brick-and-mortar powerhouse — has posted promising online sales results, no doubt trying to compete with Amazon.

A more digital approach today means a lot more than just having an online presence.

Artificial intelligence, which is picking up speed in the retail environment, can also help banks revolutionize customer relationships. Instead of viewing AI as cost-efficient substitutes for employees, consider AI as value-added services that make for more satisfying interactions. The success of Amazon’s Echo and Google Home prove consumers want technology that relieves them of everyday chores, for instance. In banking, robo-advisers and chatbots show immense potential; however, the delicate dance in applying AI to banking is to ensure customer relationships are enhanced, not degraded.

Rethink your branch concept from the ground up

Meanwhile, online retailers are also trying to beat traditional stores at their own game. The hottest trend in e-commerce is, in fact, building physical stores. Take Bonobos, for instance. Bonobos began as an online men’s clothing store and has morphed into a hybrid sensation that marries online with physical stores. With about 40 physical shops, which Bonobos calls “guideshops,” customers are measured and serviced, and pay for their clothes, locally before the goods are delivered to their door, free of charge.

The biggest online retailer is also looking beyond the internet. Amazon recently opened Amazon Go, a grocery store in Seattle without checkout lines that uses sensors to add purchases to a customer’s Amazon account.

Banks took a different path, starting out with physical locations. But they could apply a similar strategy of integrating digital and in-person channels, for example by using online chats with the faces of employees customers will see at the branch or highlighting resolution specialists at each office who follow up with online requests to ensure satisfaction.

Disruptors like Amazon are rethinking the retail store from the ground up. In banking, this reminds us that a financial institution’s priorities should not be on building sales offices, but on rebuilding branches around the customer. That is the game plan to avoid making your brick and mortar obsolete.