A CONFUSING CONTRADICTION?

Over the past twenty or so years, it seems financial institutions have been pursuing contradictory goals as it relates to branches.

It's as if they are confused or conflicted about the role of the branch office.

On the one hand, while the number of banks has declined, the number of retail branches has increased. In fact, according to a 2004 FDIC white paper on branching, during the period 1994 to 2003, the number of banks declined by 29% while the number of branches increased by 15%. (See sidebar for white paper details.)

Yet during the time the number of branches has been increasing, banks, and to a lesser degree credit unions, have been busy convincing customers to avoid the branch for routine transactions. Customers are urged to use ATMs, request cash back when using their debit cards at the point of sale, use the full spectrum of online banking services, scan their checks and deposit them online, and most recently, consider using the new mobile banking services.

So what's going on here?

Why the need for branches, let alone more branches?

Perhaps the answer lies in two very important areas to banks and credit unions – both sales related:

1. The need to consistently establish new relationships via account opening.
2. The need to cross-sell more products and services to existing customers.

In reality, banks have become more focused on selling inside the branches. They are attempting a major transition from transaction processing to an almost exclusive focus on selling.

According to a 2007 study by the Aite Group LLC of Boston, 96% of new accounts are opened inside the branch with the remaining 4% opened online. While they predict the online percentage to be 13% by 2010, this means 87% of new accounts will still be opened at branches.

Unfortunately, it's possible that many consumers might perceive this transition as receiving mixed messages from their bank or credit union. After all, I'm not aware of any concerted effort on the part of bank marketers to inform consumers of this change in the role of the retail branch.

Most likely the reason for this silence is the long-held belief by consumers that bank and credit union branches are for transacting business and not a place for selling products and services. Most consumers aren't comfortable in a professional selling environment – particularly inside a bank branch.

In fact, look how long it has taken banks and credit unions to instill a viable sales culture inside a branch. Billions of dollars have been spent on a variety of sales training programs and sales incentives to achieve this long-sought sales culture.

Even today, it's an elusive goal for many banks and credit unions.

And as the role of the branch is changing, so is its look and feel.

THE FALSE START

The assault on the traditional branch had its origins in the early 2000s as banks like Washington Mutual introduced its radical new Occasio branches and Umpqua introduced its dramatic new retail look.

Other banks quickly jumped onboard this branch redesign movement. Included were children's play areas, freshly brewed coffee, free Internet access via in-branch desktop computers, Wi-Fi, and large screen TVs set to the business channel all day. Some banks even attempted selling their own brand of coffee along with branded merchandise in special sales areas.

WAMU's new branch design was so unique that senior management succeeded in obtaining a patent to protect it from being copied by other banks. Patent # 6,681,985 was granted in June, 2004.

But just as quickly as this new design craze began, with the exception of Umpqua, it quickly stalled for reasons unknown. Perhaps it was the cost of redesign. Or maybe the lack of immediate revenue improvement or increase in market share that caused the brakes to be applied.

Whatever the reason, most consumers continued entering branches that had changed very little over the years.

Although the move to radically alter the look and feel of the branches was on hold, the rapid changes in retail banking thanks to the Internet and online banking technology took more and more consumers out of the branches. Online, customers are now able to:

• Order checks
• Check balances and transfer money between accounts
• Pay bills
• Scan checks for online depositing
• Apply for loans
• Check for current rates
• Obtain product and service information
• Look for ATM locations and branch hours
• Contact the bank via email
• Join in a live conversation with a bank employee

This exodus which started in the 1970s with the introduction of remote teller devices known as ATMs, and the rapid growth of direct deposit because of the Automated Clearing Houses, accelerated rapidly thanks to the Internet and related technology.

Adding insult to injury, the innovative Occasio branches pioneered and patented by Washington Mutual are being dismantled and reconfigured to the more traditional look and feel by new owner JPMorgan Chase Bank.

Ironically, in a spate of late 2008 articles Chase management cited the need for more of a sales environment for these newly acquired branches. Their branches need small sales offices where specialists can meet with customers in private to sell commercial loans, investment products, and traditional banking accounts.

But what if there is more to branching than merely selling?

THE BRANCH AS A VIABLE MARKETING CHANNEL

At ACTON Marketing, over the past several years we've spent a significant amount of time discussing the role of the retail bank and credit union branch.

While providing a sales environment might be top on the list, we've identified at least six purposes or reasons for brick and mortar branches. We believe branches have value far beyond their use as sales offices.

1. To provide an effective sales environment to expand market share, increase share of wallet, and achieve the optimal cross-sell ratio for each customer.

2. To support the brand by providing tangible brand presence throughout each market area.

3. Continue supporting the branching needs of our aging boomer population for the next couple of decades.

4. Facilitate the institution's community involvement which is an integral part of its corporate halo.

5. Support consumers' expectations about the tangible existence of money. The trillions of dollars of paper money and coins must be stored somewhere for quick access by millions of American citizens.

6. To provide a physical backup for financial transactions in the event of a major emergency such as prolonged Internet downtime.

We'll cover each of these purposes in a bit more detail below.

THE BRANCH AS A SALES OFFICE

One of the earliest documented branch sales training efforts dates back to 1982 with the introduction of the free checking and free gift turnkey marketing program. Sales training with dedicated trainers was an integral part of the program. Throughout the '80s, thousands of small and medium-sized banks signed on to this program with its emphasis on staff sales training and mystery shoppers to ensure the training was working.

This program continues today in many financial institutions around the country.

But what really precipitated the need for a move to a sales culture was the massive savings & loan crisis of the 1980s and into the early 1990s. During this time nearly 750 savings and loans failed and were acquired by banks all around the country. The end result was a much more competitive banking industry resulting largely from consolidation and the emergence of large regional bank holding companies.

Senior management at many banks realized it was no longer business as usual where branches were used primarily for transacting business and taking orders from customers for new and additional accounts as needed.

While we don't have an exact year, in the late 1980s, a few banks began moving toward a full-blown sales culture inside the branch. At the time, it was believed a brief retraining effort supported by incentives was all that was required to make the shift from order taking to selling.

This shift to a sales culture caught fire in the decade of the 1990s as a growing number of third-party vendors started aggressively calling on bank management to promote their turnkey sales training programs. Over the decade millions of dollars were spent by banks and credit unions on sales training.

Aiding the move to an integrated sales culture was the proliferation of the Internet and desktop computer terminals throughout the branch. The computer not only served as a source of sales training programs, it also became a sales tool for the branch sales staff.

This move to a strong sales culture continues in the first decade of the new century.

An excellent example of creating branches primarily to serve as sales and service offices can be found at Sacramento's newest bank – Golden Pacific Bank. Entering the bank's first branch, located in the heart of downtown Sacramento, you immediately notice the absence of the familiar teller window area.

With its retail look, the branch has a number of desks where small business and retail customers and prospects can sit down with bankers to discuss their banking needs. In addition to the desks, branch visitors discover comfortable arm chairs for drinking free coffee, watching the large-screen TV, or simply visiting with friends. Free Wi-Fi is also available in the branch. According to CEO Kirk Dowdell, "This is the concierge approach to banking." A virtual tour of the branch is available here.

This is the first of several branches planned for the greater Sacramento area. Dowdell's goal is to become the region's largest community bank, focusing primarily on small- to medium-sized businesses and the more affluent retail customers.

The primary reason Chase is converting Washington Mutual's famous Occasio branches back to the traditional branch layout is to facilitate selling. While offering retail banking, Chase branches also cater to small businesses, merchant services, and private banking customers where more privacy during the sales process is a necessity.

On the other hand, not all bank and credit union branches are well-suited to a sales culture. For example, most grocery store and Walmart branches are not conducive to selling. Generally, they are too small to afford private selling spaces. And there is little privacy due to the constant stream of shoppers passing by these branches.

These are primarily transaction-oriented branches while providing great brand reinforcement opportunities.

THE BRANCH'S ROLE IN BRANDING

Each branch with its commanding physical footprint bearing the bank or credit union name in huge, brightly-colored letters helps establish and sustain the brand in the minds of consumers.

Today, as you drive around your community you encounter at least one financial institution branch every few blocks. And frequently you'll find competing branches clustered at a busy intersection.

It's tough to find a strip mall without a branch and most large shopping centers are home to several competing branches. In other words, financial institution branches have become ubiquitous – much like gas stations in the 1950s – 1970s.

And in most communities, these branches are supported by an array of outdoor marketing channels including massive billboards, transit signs, and branded ATMs everywhere.

Now imagine the negative impact on branding should all these branches, ATMs, and billboards disappear if banking existed only in cyberspace.

While we have no empirical proof of this next statement, it's safe to say that if you conducted a consumer survey in your local market, asking people to name the first five banks and credit unions that come to mind, it's doubtful the online bank ING Direct will appear on the list.

Out of sight…out of mind.

While they may be expensive branding tools, branches play an integral role in building and maintaining your brand.

BOOMERS LIKE VISITING THEIR MONEY

While a majority of boomers feel comfortable using the Internet for shopping, ordering movies via Netflix, communicating with the kids via email, and checking their balances online, many of them still prefer checks and cash to debit cards while they avoid using ATMs.

While those entering retirement years will be comfortable knowing their social security payments are being directly deposited into their local checking accounts, many of these same folks are reluctant to make withdrawals at the ATM.

Spend any amount of time in a branch today and you'll notice the majority of visitors tend to be in the boomer group. They're standing in line to get their cash for the week or to deposit some checks they've received. CD maturities also bring a lot of seniors into the branch.

With the leading edge of boomers just entering their retirement years, the need for safe brick and mortar branches will be around for at least a few more decades.

THE BRANCH HELPS SUPPORT THE LOCAL COMMUNITY

Here are just a few ways that bank and credit union branches help support the local community:

• Branches provide local employment.

• Branches add stability to the community.

• Branches help local businesses with loans, deposit products, and an array of merchant services.

• Branch employees give their time to support a variety of community groups and activities.

• Branches provide meeting rooms for local community groups.

• Branches can be a safe haven for certain ethnic groups where the entire family visits the branch and the younger members interpret for the older, non-English speaking elders. They feel welcome and at-home in these branches.

• Branches provide the venue for branch employees to hold a variety of informative seminars and training sessions on everything from first time home buying to planning for retirement.

• Banks and credit unions help sponsor a significant number of local events and activities throughout the year.

Imagine the impact on your local community should all bank and credit union branches close immediately.

THE BRANCH SUPPORTS THE TANGIBILITY OF MONEY

As long as we have hard currency in the form of coins and paper money, bank branches are an integral part of the perceived storage and movement of our money supply.

Even in today's Internet age and the shift of funds online, a majority of consumers still believe that branches are repositories of huge amounts of cash and coins should they be needed for any reason.

Imagine if no branches existed. Consumers' faith in hard currency would quickly be called into question.

In fact, most likely panic would ensue.

THE BRANCH IN CASE OF AN EMERGENCY

Even though all branches are dependent on the Internet today, should there be a national or regional emergency, it would be critical that consumers know their local bank branch would be open to help facilitate transactions using manual backup processes.

Availability of cash is very important to people during times of emergency.

As we become more dependent on cyberspace for banking transactions, banks need to become more cognizant of the need for disaster plans to remain open should the Internet go down for some period of time. At a minimum, some means of dispensing small amounts of cash become a necessity both for area merchants and residents.

Remember, federal law still prohibits branches from being closed more than three days in a row. There's a reason behind this law and it's the same reason why branches would have to remain open should the Internet crash for longer than three days.

As stated above, branches support the availability and tangibility of money.

While their look and feel may be slowly changing – more rapidly in some areas – their presence is as important, if not more so, than ever.

Given the continued importance of the local bank and credit union branch, we can expect branching to be with us for the foreseeable future.

THE TRANSITION CONTINUES

While branches may come and go as the economy struggles to find a firmer footing, we can expect a continuation of innovative new branches across the country.

At the present time, a few banks and credit unions continue marching forward with innovative branch designs.

Senior management at Umpqua Bank, headquartered in Portland, Oregon, continue their leadership position in transitioning from traditional branches to branches resembling neighborhood coffee shops, retail boutiques, and cyber cafes. Refusing to settle for one particular design, the folks at Umpqua continue experimenting with size, layout, look, feel, and experience.

Appropriately, each new branch is designed to fit the neighborhood in which it is located.

On December 11, 2009, Umpqua Bank opened its newest branch in Northwest Portland at 467 NW 23rd Avenue. Referring to it as a "boutique" approach to store design, this neighborhood branch occupies only 1,500 square feet and can be built much faster than a traditional branch. A photo of the inside this new branch is available in the sidebar to the right.

One of the most interesting bank branches is located right in ACTON Marketing's home town of Lincoln, Nebraska. In the sidebar to the right you'll see a photograph of Union Bank's drive-up branch located in the town's historic railroad depot.

At least two other banks are taking a slightly different approach to branch design.

In October, 2009, Capital One partnered with Starbucks to open a co-branded branch in Manhattan while on October 20, Citizens Bank opened a branch inside a local Dunkin' Donuts store in Bellingham, Massachusetts.

Only time will tell if these co-branded efforts will be successful.

While banks tend to receive more media coverage, a few credit unions have also been on the leading edge of branch design.

New York-based Visions Federal Credit Union has been introducing customized branches in its market areas for the past 12 years. A branch resembling a lodge was opened in 1998 in a Pennsylvania community where fishing is popular. Another branch located in wine country resembles a winery. And a recently renovated branch in Binghamton, at University Plaza, targets Gen Y students at the nearby university. Included in the design is a Music Café with headsets hanging from the ceiling.

A number of articles on the future of credit union branches have appeared online at the Credit Union Times website. Two articles worth reading are:

3/10/2010 – "Branches: Knowing When to Hold 'em, Knowing When to Fold 'em"
6/23/2010 – "New Branch Design Can Evoke A Country Club or a Rollercoaster Ride"

The bottom line when it comes to branch design is that a number of factors must be considered before arriving at the appropriate design. These factors include:

• The target audience
• The product and service line being offered
• The neighborhood where the branch will be located
• The brand being supported
• The service delivery model being used
• The availability of space
• Senior management's appetite for managing innovation
• The funds available for branch redesign and renovation.

When an innovative new branch opens in your community, be sure to drop by for a visit. It's always interesting to see what innovative minds can come up with when it comes to making banking more fun and user-friendly.