In our currently tenuous economic environment, opinions about how to manage retail banking and, specifically, the branch system vary dramatically. In recent months, we have heard one regional client talk about the need to close 10% to 15% of his branches while another has taken on a major branch investment. The Economist recently published a special section titled “Retail Renaissance” while the online publication Optirate at the same time published a commentary wondering, “Will the bank branch ever return to profitability?”
How do banks navigate through what appears to be a very unclear future to maximize retail profitability? This is a particularly important problem for regional and community banks, most of which are dependent upon retail banking, have significant branch investments and lack the ability to exploit alternative channels effectively, at least in the near term. In short, they need to figure out how to squeeze revenues from the branch for as long as possible.
The good news is that while a generational shift away from branches is indeed occurring, that change is happening slowly. The branch will remain a critical channel for most customers for at least the next five to 10 years. During that time, banks will need to improve their alternative sales capabilities and/or “prove” the value of the branch to a new generation of more tech-savvy and less loyal targets. Even more importantly they need to capture as much retail revenue now from the branches they do have. Too often both senior management and consultants focus on expensive technology investments with an impact three to five years out (if ever) rather than on the very tangible near-term organization, staffing, and cultural changes that could result in improved metrics within a few quarters.
Rosebud, Ore.-based Umpqua Bank, which this article’s co-writer worked for, can serve as a model for how to prepare for this transition. Here are some of the issues Umpqua grappled with:
Is it a store or a branch? When Ray Davis, Umpqua’s president and CEO, began to refer to his branches as “stores” he was indicating that Umpqua was in the retail service business, by which he meant that he was selling “banking products and services to the public in our stores.” Following Umpqua’s lead, many other banks have adopted the store terminology and also emulated Umpqua by renaming their branch staff as “Universal Associates” (UAs). However, only the words have changed; most have failed to change how they do business or the type of employee they select and retain.
Umpqua’s branch-to-store transformation actually required major changes in branch design, the use of technology and community outreach. For example, Umpqua pioneered open architecture in the branch and added features such as business TV and an Internet café with its own brand of coffee. While many banks have copied aspects of this approach, few developed welcoming environments that you would wish to spend time in. Years ago, a retail banking consultant who studied shopping patterns learned that pedestrians actually speed up when they walk by a bank branch. Few banks have created a reason for a customer to slow down when passing a branch/store.
Too many banks are also using technology to cut branch costs rather than to increase staff time to engage with the customer and the community. Yes, machines such as Teller Cash Recyclers increase cash handing efficiencies, but they also improve customer service quality and enable staff to focus on higher value sales and service tasks. As Umpqua did a decade or more ago, we see banks bringing touch screen and video conference technology into their branches to provide product information as well as designating space for non-profit and community meetings.
A caveat to this last feature, however. Many banks now promote volunteerism as a way to connect bankers with the community. Such initiatives are good both for the community and the bank, particularly today when the industry needs significant image improvement. However, these activities will appear hollow unless backed up by community-focused lending and other services.
What’s your staffing model? Innovations in branch design and technology will have little impact on a bank’s success unless senior management challenges past approaches and supports cultural change. Today, the phrase “staffing model” suggests using computer programs to eliminate staff and increase reliance on full-time equivalents (FTEs) to avoid hiring full-time employees with full benefits. What we mean by staffing model involves management selecting employees for the long term who practice a sales and service culture, redesigning current jobs to increase the branch staff’s impact and instituting compensation and recognition programs that support an emphasis on differentiating the bank from its competition.
Let’s begin with current branch staff focus and capabilities. The economic downturn and the current heightened regulatory focus have pushed executives toward compliance rather than sales. Regional managers, instead of being centered on the customer, are too often focused on operational issues and internal meetings and reports. Similarly, branch staff has grown up in a risk management and service-oriented culture, not sales.
In his book Leading for Growth, Davis writes about the need to change people in order for the bank to move forward: “Sometimes it comes down to the fact that they aren’t up to the job, but more often it has nothing to do with their job skills – it’s their people skills, their values, or their personalities that presents a problem.” Too many banks try to retrain employees who are inappropriate for a more proactive sales and service culture. Tenure may or may not be appropriate for universities but it certainly isn’t appropriate for banks that want to grow.
The role of the UA requires a different skill set and level of commitment than seen in the typical bank staffer. The UA can handle any customer need, including teller work, new account openings, small business issues and operational questions. The value to the customer is that any UA can answer questions or assist with transactions. The UA benefits from knowing the bank in depth and handling a variety of tasks. Related to small business, a major retail focus, many branch bankers almost literally dive under the table when a small business question arises, preferring to route the customer to a near-by dedicated phone or suggesting an appointment with a specialist at a later date. That approach may have worked in the 1980s but not now.
In addition, UAs are given the discretion to make business decisions and operate as empowered employees. Decisions can include the ability to waive a fee or to match a competitor’s rate for full relationship households. This requires that the staff be well trained on how to manage this area. Banks like Umpqua follow a “trust-but-verify” approach – that is, management reviews waiver reports on a daily basis.
Creating excellence in staffing requires both performance monitoring and a reward system. The best retail banks measure service quality at the branch and departmental levels. Transparency is also critical; we advise publishing a ranking that recaps the scores achieved by each location based upon various criteria, including customer surveys, mystery shops, sales effectiveness ratios and customer retention. Every location should know its ranking from first to last on a monthly basis. The scores then translate into the potential for a monthly team incentive award.
Many banks have internal reward programs. But the top banks operate with consistent programs that demonstrate the importance of excellent performance. Some do not need to be monetary in nature. Umpqua’s programs include monthly service excellence awards that involve both dollars and recognition on the company’s Intranet.
There can be no doubt that systemic changes will alter the nature of retail banking. Demographic shifts, stronger and more targeted non-bank competitors, increased transparency and stakeholder advocacy and tougher regulations are all factors aligning against retail and overall bank growth. Appropriately, senior managements are in various stages of addressing these issues. However, at the same time, an opportunity may exist to slow down the rate of migration from the branch and perhaps even achieve revenue growth. We believe the way to do that lies in fully exploiting today’s branch (or store) opportunity while, at the same time, preparing for a different future retail landscape.
Now retired, Mr. Carey was formerly the head of retail banking at Umpqua Bank. Mr. Wendel is president of New York City-based Financial Institutions Consulting, Inc. Both can be reached at firstname.lastname@example.org.
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