Face-to-face future for European retail banking

The established model of branch-based customer relationships is fading and being replaced by multichannel, technology-focused solutions. At the same time, a tough economic environment and increasing regulatory pressures have led to increased attention on costs.

Together, these changes comprise a significant challenge for the strategic management of retail banking services; however, for those prepared to respond effectively, they also present extraordinary opportunities.

An online survey of 100 European retail banks by Efma and McKinsey shows a fast evolution of the retail banking lifecycle across Europe. The experience of banks most exposed to the dynamics of change provides crucial insights, and from the findings, banks across Europe are using branch transformation to improve cost-income ratios by 10-15% over the next three to five years.

Probably the most important driver of change is the adoption of communications technology by consumers and resulting expectation that those tools should be compatible with retail banking services. Specifically, internet and mobile-phone penetrations are higher than expected. This shift implies a requirement for the role of the branch to evolve, leading to more focus on advisory services.

For banks, this increases the urgency of renewed engagement with staff through education and training. With variations across regions, branch visits across Europe are expected to decline by 20-50% by 2016, reducing the branch's role in the provision of products and services.

The activities most likely to be severely affected are transactional banking (cash deposits, withdrawals and credit transfers) and sales of basic products such as current and savings accounts, personal loans and credit cards. These will increasingly be managed through alternative channels such as ATMs and online banking. As retail banks move to reinvent business models, the focus will shift to the adoption of more profitable advisory services, and to ensuring the branch network is optimally designed to deliver effectively.

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The changing face of the branch network implies a new role for staff, and a reassessment of skills focused on advice. Some 20% replied that this is a top-three challenge for the next three to five years, likely to be manifested by less reliance on generalist in-branch advisers for complex products and a move to more expert staff, trained for the sale of mortgages, pensions or investments.

In redefining the role of the retail branch network, banks plan to increase operational and salesforce efficiency, and many banks will put in place programmes to increase advisory capability over the next 12-24 months.

Those banks already engaged in improving operational capabilities are focused on reducing administrative times (lean, centralisation); improving performance management (targets and process times); and increasing automation for services like cash transactions and address changes.

Some 69% of survey respondents have either implemented these changes or are in the process of doing so, while more than 50% have implemented or are working on improving capacity management, alongside more use of straight-through processing, which, for example, can reduce branch visits through automation of payment transactions.

Learning from different markets

Successful branch transformation programmes in Europe could improve cost-income ratios by 10-15%, with revenues rising by 10-15%, costs declining by up to 10% and levels of customer satisfaction improving. McKinsey believes banks that successfully capture emerging opportunities get three things right: they optimise branch networks to better match supply and demand; they seek to differentiate formats; and they act to boost in-branch sales while improving customer service.

On a regional basis, the survey revealed four distinct stages of branch transformation. At one end of the spectrum, Northern European banks face saturated markets and faster-thanexpected adoption of digital channels, leading to policies of rationalisation, while Eastern European banks are seeking to expand branch networks to gain market share.

Regional development across Europe can be benchmarked to levels of branch density and internet penetration.

With a low density of branches per inhabitant and high internet penetration, Northern European banks are in the 'branch transformation' stage. This is evidenced by saturated markets in terms of branch coverage, falling customer visits due to the full adoption of direct channels, and a declining need for cashier services as consumers adopt multifunctional ATMs for cash withdrawals and deposits.

Plus, Northern European banks expect branch visits to decrease by 40-50% by 2016, with the share of cash deposits performed in branch declining from 67% in 2011 to 38% in 2016.

Northern European banks are also leading the way in reducing counter staff, with 20% of respondents having done so and 80% currently doing so, easily the most radical rationalisation programme in Europe.

This stage is also characterised by efforts to transform the branch network into an advisory channel.

With a medium density of branches per inhabitant and a medium internet penetration, Central European banks are in the 'proactive customer migration to direct channel' stage. This stage is typically initiated when consumer adoption of direct banking channels passes a certain threshold and banks possess sufficient direct banking capabilities.

Banks in Central Europe expect branch visits to decrease by 20-30% by 2016. To migrate customers to direct channels, banks are looking to take initiatives such as imposing higher fees on services delivered through branches, active encouragement of direct channel use and increased marketing.

Mastering this dynamic requires banks to actively guide customers, without compulsion, to new direct banking channels and to reinvent branch formats to maintain meaningful interactions.

With a high density of branches per inhabitant and low internet penetration, Southern European banks are in the 'back-office rationalisation' stage of transformation, alongside early 'proactive customer migration to direct channel'. Back-office rationalisation is via a reduction in non-customer-facing staff (through the centralisation of back-office tasks) and can be launched when banks have sufficiently large networks to realise economies of scale, or face external or internal cost pressures. In this region, managing cost pressures due to difficult macroeconomic conditions and tighter regulation is one of the top three challenges they face in effecting branch transformation.

More than 40% say they will focus on cost reduction in the next three to five years. And Southern European banks plan to reduce branch and staff numbers by 13% and 8%, respectively, by 2016.

59% of respondents are implementing an initiative in that regard. Successful banks will be able to keep dedicated account managers for customers while automating branch processes, and thereby shift branch capabilities from administrative to client-facing.

With a low density of branches per inhabitant and low internet penetration, Eastern European respondents are still in the branch expansion stage, with early back-office rationalisation and engaging in opening additional branches and creating alternative channels. On average, Eastern European banks plan to increase branch numbers by 22% by 2016, and more than 47% of Eastern European respondents are implementing or have implemented those initiatives.

The new branches are likely to be increasingly automated ATM-only branches, and are less likely to be fullservice branches, as Eastern European banks aim to reduce the proportion of the latter from 67 to 56% by 2016. At the same time, Eastern European banks are cutting staff by 10% to reduce advisers per branch, which is relatively high compared with other parts of Europe.