Bank Branches: Big, Expensive Security Blankets

In response to my NetBank post (and to John Dawson’s comment), Chris Whalen commented:

The issue with Netbank is the cost of customer acquisition. Branches acquire customers. Neither of you addresses the high cost of advertising, marketing etc needed to replace the customer acquisition function of branches in an Internet model.”

 

Mr. Whalen and I actually agree that cost of acquisition was a problem for NetBank. But to Mr. Whalen, it was NetBank’s biggest problem, and it was caused by a lack of branches.

My take: It’s not that simple an explanation. For sure, NetBank had a prohibitively high cost of acquiring checking account customers. But NetBank had no problem acquiring lending customers at a reasonable cost. They just weren’t very good customers.

But Mr. Whalen’s comment that “branches acquire customers” needs more consideration. There are two problems with this statement: 1) It’s too general (from a product perspective), and 2) It’s no longer true (even for the products where it once applied).

While one might argue with the statement given how it’s worded, the underlying thought was certainly once true. The branch was where people went to open bank accounts (whether they were deposit accounts or loans).

The reason? There were no other alternatives.

Branch proponents will be quick to point out that online apps have been around for a number of years now, yet the majority of account apps still come in from branches.

There are three reasons why the Internet hasn’t replaced branches as the “customer acquisition channel”:

1) Security fears. Many consumers have (often unfounded) fears regarding submitting account apps online. For some reason they think that filling out a piece of paper and giving it to an employee with 4 months experience at the bank is safer than filling out an online application. Whatever. They also still have a hard time making deposits into an ATM.

2) Confusion. The typical bank has what? Seven or eight different checking account plans? And how many mortgage alternatives? And different rates for different terms on savings accounts and CDs. How’s the average consumer to decide between alternatives? Most financial services firms’ Web sites still don’t do a great job of helping customers figure out which product is best for them. So they go to the branch where somebody who participated in last week’s 3-hour product training class is there to help.

3) Online apps suck.
OK, not all of them. In fact, they’re getting a lot better. But for a long time, online account apps (especially for loans) were long, confusing, and if a prospect had a problem or a question, getting online help was just not very helpful.

Bottom line: The inability of the Internet to supplant the branch as the acquisition channel of choice has very little to do with the inherent superiority of the branch, and everything to do with the inferiority of the online channel.

In effect, bank branches are just big, expensive security blankets. Sometimes customers’ first resort, sometimes the last resort they turn to when they have a problem that needs to be solved, or a question that needs to get answered.

If banks didn’t screw up as often as they do, if they did a better job of helping customers make products choices, and if online security concerns weren’t an issue, than banks wouldn’t need branches to acquire customers.

Meanwhile, firms like ING Direct, HSBC, and Emigrant have to be scoffing at the “branches acquire customers” statement. These three have done have a great job in the past few years of acquiring customers — without branches — by making online account opening as easy as possible, offering an uncomplicated set of products, and (by and large) without screwing up very often.

Prosper and Zopa are doing how much in loans? How many branches do they have? Zero.

The branch defenders will ask how profitable these online firms are.

They might not be profitable — right now. But: 1) Few startups are profitable from the start, and, more importantly 2) Who says the large retail banks with all their branches are profitable?

The reality is that for many established brick and mortar banks the cost of building branches is a sunk cost. These costs have long been depreciated and aren’t factored into the bank’s cost of acquisition anymore. And on top of that, who know hows the banks allocate the costs for branch personnel. It’s just as likely that those costs are included in the cost of service, not the cost of sales.

But the banks’ cost of acquisition has to be going up — especially for those who are continuing to build branches. According to Javelin Research, in the past 12 months, among Gen Yers who applied for a credit card, 42% did so online, 31% of those applying for a checking account did so online, and 24% applied for their loan online. The corresponding percentages for all consumers was 24%, 14%, and 14%. With younger consumers (under 40) accounting for a disproportionate percentage of demand for financial products, the shift from the branch to the Net is finally underway.

This leaves me with two conclusions:

  1. Branches wouldn’t have helped NetBank one iota. They might have helped NetBank sell checking accounts, but only in a very limited geographic footprint. But more importantly, it’s unlikely that they would have changed the firm’s lending policies.
  2. Investing in branches today isn’t a smart investment for any bank. Maybe — just maybe — there are people out there willing to hang out at a bank branch, drink coffee, get wireless access, and chat about their financial services needs. It might work for ING Direct. But for majority of brick-and-mortar banks? No way.

To the question of the “high cost of advertising”, this is not an issue. Is online advertising more expensive than TV or print? Not a chance. Even the large banks are shifting their ad dollars online.

In an analysis I did back in January, I found two banks that stood out from the pack in terms of asset growth/advertising dollar: HSBC and Bank of America. Between 2005 and 2006, HSBC decreased its TV ad spend by almost one-third, and its print ad spend by more than one-quarter, while increasing its online ad spend by 445%. The result: $1,650 in additional assets/ad $.

Bank of America, a more traditional brick and mortar bank, also shifted its ad spend as well towards the online channel. While its total ad spend only rose by 3%, the amount it spent on online advertising went from 10% of the total to 18%. And it was the 2nd highest ranked bank in term of asset growth/ad $.

P.S.: Where does the death of the branch leave personal connections between customers and employees? There’s no doubt that these connections help to solidify relationships. But if it’s “the employee you turn to because you know she’ll fix a problem if it arises” kind of connection, this isn’t the kind of relationship you want.

Amazon has strong relationships with many customers, and it’s a good bet that not more than a handful have ever met an Amazon employee. The firm builds great relationships by being good at what it does.

Banks don’t need branches to acquire customers and develop relationships. They need to do a better job of doing what they do — providing financial products and services.

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9 thoughts on “Bank Branches: Big, Expensive Security Blankets

  1. Hi Ron,

    I certainly do agree with you about Amazon bulding stronger relationships with their customers than the average branch bank that I know does. And the amazing thing about this is that Amazon does this without brick and mortar.
    Or should I say thanks to the fact (this is where The Long Tail comes in I suppose) that they don’t have to cope with that so they can focus on giving their customers what they want: Easy access, fast delivery, lots and lots of interesting stuff, good recommendations, relevant information, reviews, many ways to find the product that you are looking for etc.etc.

    But all this would never have worked without the killer app ‘trust’. And Amazon- an internet only business- does know how to build that too. They know their customers and take them seriously, so they don’t push sales too much and still are selling in every way they can.

  2. Amazon has done a good job of building a strong brand that encourages consumer loyalty. So many CU’s claim service is our number one priority and that the people in the branches drive that service. Can a CU build a brand so strong that it stands alone online?

  3. I cant help but think that a ‘branch’ could work much the same as the check-in kiosks at many airports these days.

    What better way to educate customers but to have them guided through an online application form with a bank representative via a kiosk. Not only would the institution save on application costs (1 representative assisting X people completing applications) but consumers would have to use the online applications. This is essentially how the check in kiosks were introduced and as a result they have become the new standard for checking in.

    I don’t see how institutions ever expect to have greater take up of online applications if they are still prepared to stick to the existing model of completing applications for customers.

  4. I am a very loyal Amazonian. But Ron I don’t think you can compare Amazon with banking. Why? Because banking has 100 plus years of history of “in person” transactions. Reputation and tradition are their enemies….

    They didn’t have Amazon stores everywhere only to close them and force us on-line. They built the thing to be virtual from the get-go and they built it brilliantly.

    An entire generation (hell – three generations) were used to having a branch on every corner. It’s going to take time to get good and get comfortable with “virtual” branching.

    I think the INGs, ZOPAs and Prospers of the world are paving the way…because they DON’T have branches. It’ll be harder for the B of A’s to convert the branch groupies.

  5. Ron, Well said! This could well be my single favorite banking blog post of all time. Your “bank branches are big, expensive security blankets” should be in every delivery strategy presentation for the next 10 years.

  6. @Robbie: Answer to your question: yes. See Tim McAlpine’s post on affinity positioning.

    @Anthony: Great points.

    @Denise: If you ever make it to Boston, I’ll take you to the Brattle Book Shop, which was established in 1825. That makes it …. uh…. about 200 years old. 100+ years of in-person banking transactions is not an excuse.

  7. Funny how ING and other online banks are building bricks and mortar presences, while traditional banks are trying to figure out how to create an online, ING-type model. Feels like that “grass is always greener” saying.

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