Bank Board Letter — April 2014
Glen Fossella

Celent recently reported that despite the declining foot traffic, banks are ramping up plans to expand their branch networks over the next four years. The report found, by asset size, the percentage of banks intending to open branches:
• Less than $1 billion: 69 percent.
• $1 billion - $50 billion: 64 percent.
• More than $50 billion: 50 percent.

These numbers represent something more than the simple addition of locations — for instance, smaller institutions felt the brunt of the recession and shut down in waves, yet nearly 70 percent plan to open branches over the next four years. Even midsized banks are leaning toward opening more branches than the largest institutions. And while in-store builds are growing, most planned deployments look to be full-size branches. If Celent’s estimates of declining bank traffic are correct — and there is no evidence to dispute them — then many financial institutions are accelerating toward a brick-and-mortar wall.

But what if retail banking is not a zero-sum game? If the goal is not simply wallet share but mind share (and associated fees) around a broader set of financial services, including investments, insurance and other financial products, then the traditional branch is a significant asset versus indirect competitors. In this scenario, current and emerging branch technology can provide the leverage to turn this asset into a competitive advantage.

Historically, bankers intended advances in technology to curb branch traffic. When the first automated teller machines were installed in the 1960s, branches did not close down (contrary to premature speculation). In fact, ATMs simply provided a new level of convenience and expanded the transaction volume outside the branch and outside traditional banking hours. When online banking was introduced in the late 1990s, there were similar prognostications that people would no longer need branches. Instead, online banking simply removed additional barriers between banks and their customers. These two significant technological advances came with much fear and speculation, but from 1960 through the end of the 20th century, the number of physical branches increased from 10,000 to more than 80,000. However, there is no denying that the branch transaction curve has turned the other way, and retail bankers need to change their approach.

One such approach is borrowing the “dollars per square foot” metric from retailers; successful bankers are recognizing this as an alternative way of measuring branch value. The uber-example of a retailer that has mastered this approach to its business is Apple. By renovating older stores and adding more open floor space, the consumer electronics powerhouse increased selling room and condensed transaction space, subsequently increasing store traffic and revenue. When one considers why consumers flock to Apple stores — to learn what is new, deal with product complexities and maybe even overcome fear —the comparison to branches is not such a stretch.

Today, branch technology is being applied more often to shrink the back office and teller counter, and put the space savings and time savings to better use. While spreading fewer transactions over fixed costs is a burden, automating and compressing transactions is a benefit. Multifunction scanners, cash recyclers, self-service kiosks and other technologies are making it possible to reshape branch operations, drive down costs and give back square footage and staff time that can be used for richer and more complex customer interactions.

As with any major shift in strategy, the benefits are only experienced if managed correctly, and evolving wisely takes planning, foresight and patience. Former Apple executive Ron Johnson joined J.C. Penney and, in an effort to revive its business, applied many elements of Apple’s approach at his new position. However, Apple’s evolution was a result of a comprehensive strategy that recognized the specific needs of the business. Johnson’s attempts to duplicate his Apple success while at J.C. Penney were misguided, without much consideration for how a similar restructure — on a much smaller timeline — would impact business.The changes implemented were rushed and forced on the business, with a public failure as a result.

Similarly, about 15 years ago, a particular bank conducted a cold-turkey switchover to video banking within the branch. Customers felt forced into adopting the technology and the bank lost business and brand integrity, not to mention the significant resources that had been dedicated to purchasing and implementing the technology. Did the bank put operational considerations ahead of the customer?

Ultimately, the winning strategy for bankers opening more branches will be centered on richer and more complex customer interactions. Increased traffic, mind-share — and wallet share — will be the byproducts of this effort. Effective application of today’s branch technology can enable the strategy by automating and compressing transactions, putting the resulting space savings and time savings to use for the customer, and maximizing the dollars per square foot.

Glen Fossella is chief operating officer, CTS North America, a market leader in providing branch automation technology to the financial services industry. For more information, go to