rb i new 104 chapter 1

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85© Retail Banking Academy, 2014

RETAIL BANKING I

RETAIL BANKINGACADEMY

Chapter 1: A Historical Evolution of the

Bank Branch

This chapter provides a historical account of the evolution of bank channels that was written by Peter Soraparu* and that comprised a foreword to a La!erty management report titled Bank Branch of the Future.

Since their earliest iterations, banks have had o"ces from which they served their customers. Most banks, especially larger ones involved with commercial customers, found that they needed more than one o"ce, often following their customers down literal and #gurative business paths.

The essence of banking – accepting deposits and facilitating commerce, usually by lending money to creditworthy borrowers – determined the types, numbers and locations of bank o"ces. O"ces beyond the principal locations of banks became known as branches, and those branches served as commercial satellites of the main o"ce hub.

As population centres of various industrialising countries began to shift in the late 19th Century, with people moving from rural settings to urban sites, banks began to alter their physical delivery strategies as well. Banks in cities such as London, Paris, Amsterdam, New York and Boston were opening multiple branches in middle- and upper-class neighbourhoods in addition to their o"ces in the commercial town centres in an e!ort to attract the personal deposits of people who had more advanced #nancial needs than just exchanging cash for goods and services. Paper drafts or cheques drawn on accounts at those banks were being accepted as payments by some merchants, and some banks even began advancing small credit facilities to individuals.

All of these transactions and interactions between banks and personal customers were done face -to-face, and most often they were completed in a bank o"ce that was constructed according to the bank architectural norm of the time – large lobbies with lots of pillars, marble, brass and wrought iron, and usually with an impressive vault somewhere in plain view on the main $oor. The banks’ availability to their customers was always limited, with o"ces opening mid-morning and closing by 3pm at the latest. Banks sometimes extended opening hours one evening each week until 6pm, but most often if a customer needed to speak to his banker, it had to take place during normal working hours.

* Senior executive vice president and head of the Relationship Banking Division (retail banking, commercial banking and SME banking) at American Trust & Savings Bank in Dubuque, Iowa USA. This foreword was written in May 2012.

Course Code 104 - Channels

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Serving the ‘small man’

The most experienced bankers would not bother with personal (soon to become known as ‘retail’) banking customers. They devoted themselves to their commercial and corporate customers, making sure that their growing needs were met in rapidly expanding industrial-based economies.

Of course, they were beginning to understand that most of the business they did with their new retail customers, even when those customers might be operating a small business or shop of their own, was accepting deposits. Retail customers were usually seeking safety for their hard-earned money and did not expect signi#cant returns on deposited funds. Banks could then lever those retail deposits into commercial loans on which they were charging whatever interest rates the borrowing market would bear.

So retail customers were usually shunted o! to the side or the rear of the o"ce, certainly kept away from the main view of the commercial bankers and their very important customers. There were a few banks that began to embrace a new way of thinking about retail banking customers, though, and created a more welcoming atmosphere, both in location and design.

But most banks in population centres in the early 20th Century really did not care what their retail banking customers were thinking. They were for the most part content to let post o"ces, building societies, savings associations or cooperatives handle the mass market. Their physical delivery remained embodied in imposing structures that did not invite interaction.

In fact, in England, the number of bank branches had increased signi#cantly through the 1920s, as had the market penetration of banking o"ces. England had the largest bank in the world at the time (Midland Bank). There was still a fair degree of popular concern over whether English banks were indeed serving the #nancial needs of what was referred to as ‘the small man’ – the British periodical, The Economist, said in its 19 October 1929 issue (just 10 days before the Wall Street Crash) that there was much truth in the observation that ‘the small man, living in the provinces, is neglected’.

Retail becomes core business

Economic depression in the early 1930s brought both failures and consolidation to the global banking industry, and in some ways slowed progress on the growth of the physical distribution channels of banks. But banking reforms applied new focus to retail-banking models, most notably the enactment in the United States in 1934 of the Glass-Steagall Act, which prevented commercial-banking organisations from engaging in investment-banking activities.

That meant that banks were forced to concentrate on ‘core’ banking business, and whether commercial banks liked it or not, retail banking was slowly becoming a core business in the United States.

One of the reasons for that was another outgrowth of post-depression banking reform in 1934, the establishment of the Federal Deposit Insurance Corporation. Deposits were #rst insured for up to US$2,500 (temporarily as of 1 January 1934); the insured deposit limit was formally increased to $5,000 on 1 July 1934. After nearly 6,000 banks and thrifts had failed the year before, e!ectively wiping out the savings of millions of people, it was important to instil new con#dence in the banking system for ‘regular’ customers. To date, no FDIC-insured depositor has ever sustained a loss in connection with a bank failure within the limits of the stated coverage (now $250,000 per ownership category).

By the mid-1930s, the largest bank branch network in the United States belonged to the Bank of Italy, which became Bank of America in 1930 and had more than 300 branches throughout California. The Bank of Italy had started its business in San Francisco in 1904 when its founder, Amadeo Giannini, decided to form a bank to serve immigrants and other regular customers that he believed were being neglected by larger commercial banks. This approach gave the organisation a reputation for bucking the banking norms of the time.

In the 1950s, the banking industry was going through an interesting and paradoxical period – the total number of banks was decreasing, while the number of banking o"ces was increasing at a meteoric rate.


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Most of that expansion took place in large markets, but some local banks in smaller markets followed suit. The increasing choice that #nancial consumers were seeking was beginning to appear in the banking channel, but not as completely as it might have. As usual, alternative providers stepped in to #ll the void.

Rise of the Post O!ce

Even as some banks began to expand their e!orts to allow their customers to bank using the local mail system, some local mail systems were expanding their reach into #nancial services. The rise in numbers of post o"ces was even more impressive than the growth in number of banks in some countries – there was a post o"ce in every town, and they all shared the same common, very recognisable, brand. In the UK, the Post O"ce Savings Bank o!ered small savings accounts through its branches that ‘common’ people throughout the country accessed. It o!ered a way for the government to re-fund itself on a regular basis, and it was willing to pay a decent return to its postal patrons for saving with their local post o"ce. Through to today, the Post O"ce Savings Bank delivers a convenient form of basic banking.

In the Netherlands too, post o"ces expanded the availability of banking services throughout the country, although the outcome was slightly di!erent. The National Postal Savings Bank (NPSB) was a signi#cant retail banking presence for the Dutch, and it prospered for the better part of 100 years. It was in the latter part of the 20th Century that the government privatised the NPSB, and, through a series of mergers and acquisitions, it formed the retail foundation of ING.

In Asia, there are several post o"ce banks that boast a long legacy and that are still thriving today:

Japan Post Bank has been that country’s de facto retail banking leader; it became the world’s largest savings bank

China Post spawned the Postal Savings Bank of China, and for all the talk about foreign investment in that nation’s banking system as its economy opened, the Postal Savings Bank remains the largest retail depository in China

Korea Post has a dual identity, serving its own retail-banking customers’ #nancial needs and also accepting deposits for some of that country’s banks, making its post o"ces in e!ect additional branches for those banks

Post o"ce banking has served a vital role of #lling out the physical delivery channel for retail-banking customers in many parts of the world, and has proved that a local presence is indeed an attraction for those customers.

If an analogy to all politics being local can be made to the banking business, then banks (and large banks especially) must understand that the ways they deliver services to their retail banking customers must become personal and local. But what exactly are those customers seeking from their banks, and how do they rate the various channels that banks o!er?

It is illustrative to assess the attitudes of today’s retail banking customers to the di!erent channels that are available to them. How do they like the array of channels on o!er?

It may be somewhat surprising to see that bank branches still retain a high degree of satisfaction among retail banking customers in 2011, even among the relatively more immediate channels that are accessible. That high satisfaction rating should demonstrate to banks that they must continue to deploy a physical channel that allows customers to interact directly with bank sta!.

Branch banking takes hold

As has been discussed, in the mid-20th Century, banks were truly appreciating the value of retail deposits, and a new wave of growth and competition among retail banking providers was underway.


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In the US alone, the number of new bank branches nearly quadrupled between 1950 and 1970, providing a much greater degree of local convenience. In developed economies around the world, the population was far more mobile. This made delivering local convenience more challenging for banks, as the very de#nition of ‘local’ was changing, making it di"cult to manage. Shifting cultural characteristics in$uenced behavioural changes among retail banking customers. Consumers had choices, sometimes for the #rst time, between national or global providers of goods and services and long-favoured local providers.

One of the more interesting, and more dynamic, industries during this period was the fast-food restaurant category. McDonald’s was a pioneer in the ‘fast food’ restaurant industry, especially when it came to counter delivery. Although it was recently surpassed by Subway in terms of having the most outlets across the world, McDonald’s has done an excellent job of maintaining the consistency in channel delivery that set it apart early on from its competitors.

Are retail banking customers similar to fast-food restaurant customers? Is consistency in food delivery more or less important than consistency in #nancial solutions delivery? If there are lessons to be learnt from the fast-food restaurant success of McDonald’s, perhaps consistency is the key – but not only in channel delivery, also in the consistency of the solutions delivered. The basic elements of the McDonald’s menu have not changed much over the years, and the customer experience is relatively the same no matter where in the world a customer might visit a McDonald’s restaurant. How many retail banks can say that, either about their solutions or the stability of their customer experience?

The early 1980s really were the years during which retailers began spreading their #nancial services wings. In France, Carrefour introduced a payment card in 1981 and began o!ering insurance services in 1984, and in the US both Sears and JC Penney were o!ering current accounts in their stores (through banking subsidiaries) by 1985.

In Western markets, as banks continued their expansive e!orts, they were beginning to seek more meaningful di!erentiation through their physical locations. However, as banks built impressive arti#ces to serve their customers, it did not always translate into better delivery channels.

Banks were faced with the challenge of catching up, and #nding new answers.

The alternative channels arrive

By the middle and late 1960s, banks had mostly exhausted the potential uses of their physical channel. What they did not realise is that the solution was on the desk in front of them. Putting the telephone to work was a good idea, but it became an even better idea when the transfer of larger amounts of data over telephone lines became possible. And when the growing use of computing power at banks became part of the mix, the enhanced technologies enabled banks to calculate workable solutions.

One of the earliest of those new technology solutions was the automated teller machine (ATM). One of the reasons for the development of the ATM was its potential to replace the rows of human tellers in bank lobbies. The success that banks enjoyed with their deployment of the new ATM technology lasted for several years, and in some quarters the question arose whether ATMs might even replace the physical channel that banks had employed for so long: branch o"ces themselves.

They discovered that the best use of ATMs might not be to replace tellers. Rather, banks determined that o!-siting of ATMs was an extremely e"cient way to extend their physical channel delivery through e!ective integration of a new electronic channel. This was especially true in those markets that limited the growth of bank o"ces. Younger and more open-minded customers were the #rst to embrace fully the banks’ new delivery system, but the ease of use o!ered by the machines attracted customers from all demographic segments.

Many people were initially reluctant to share information with a machine, and banks mounted


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promotional campaigns to persuade sceptics that ATMs were safe, and e!ective. But within 10 years of the #rst ATM installations, the machines had gained signi#cant traction in the banking industry and among retail banking customers, and global deployment of ATMs advanced into the hundreds of thousands.

As banks were determining the proper mix of delivery channels, technology investments and approaches to customer interaction, customers were realising that there were expanding options for managing their personal information needs. In many ways, life was becoming more convenient than ever with the simple applications of new technologies such as personal entertainment and personal computing, which led on to personal banking.

The branch today

After all of these years of evolution, where is the bank branch today, and where is it heading in the future?

Let us #rst examine how today’s retail bank branches are adding to the pro#tability of their organisations and the #nancial lives of their customers.

Most of today’s retail banks around the world have embarked on a rationalisation e!ort around both their individual branch o"ces and their branch networks. The impressive banking edi#ces of the past have given way to much more pragmatic designs, becoming extremely utilitarian in their use of space and signi#cantly more customer-friendly in providing access to both human and automated delivery of banking solutions.

Contemporary branch networks are much less likely to be the sprawling, countrywide expanses that they were in the 1990s; rather, they are much more likely to be a collection of strategically sited sales and service centres that are formulated to bring the latest and greatest array of #nancial services to a much broader area than they have in years past.

Banks have attempted unique branch designs, even in times of retrenchment and expansion, but the #nal arbiters of the success of those designs have been their customers. In-store deployments, most often in food retailers, have placed bank branches in and around customers and prospects who are engaged in non-banking activities.

Two recent models appeared in the northwest United States during the past decade – one by the large (now-failed) thrift Washington Mutual (WaMu) and the other by the burgeoning regional banking powerhouse, Umpqua Bank. WaMu’s o!ering was called the ’Occasio’ branch and featured an interior design that eliminated traditional teller windows; instead, all platform banker desks had cash drawers to serve transactional customer needs, and the cross-trained sta! rotated to greet customers as they entered the branch and met any #nancial need they might have.

Umpqua’s entry into the branch sweepstakes is a co!ee house look, relegating teller windows and banker desks to the rear of the one-storey space. The focus is a sleek seating area that could easily be confused with a stylish $at, o!ering free internet access, tea and co!ee and encouraging customers and non-customers alike to relax, perhaps read a book and contemplate the bank’s #nancial and non-#nancial o!erings. In the evening, the space becomes a neighbourhood gathering spot, showing #lms and booking guest speakers.

Not every bank has either the capacity or the customer base to support Umpqua’s enigmatic (and successful) approach. Branches are being built or retro#tted with smaller footprints and fewer sta!. Integrating technology with e"ciency, retail banks are aiming to manage expenses better while still meeting customer needs.

But will this approach work?


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The branch of tomorrow

The answer to the emergent new modelling of retail bank branches lies both #guratively and literally in the hands of retail banking customers. For in those hands are, increasingly, the powerful and e"cient microcomputing devices that are called smartphones. The computing prowess of these smartphones will shape the future of retail banking branches.

Retail banking has often been able to concurrently $y ahead of the available technology of the day and also struggle to achieve the most basic delivery of products and services. Home banking was heralded as a replacement for branch banking during the late 1980s, when personal computer penetration rates among the banking public hovered around #ve percent; during that same period, banks routinely received customer satisfaction scores that sometimes dipped to those same relative levels.

Flash forward a generation, and mobile banking has had more than its share of the #nancial services buzz in the #rst decade of the 21st Century, but in the last three years, lift o! has indeed occurred. The traction for mobile #nancial technology has emerged much more quickly than it did for the previous hot technological advance – online banking via the PC.

Having said that, it would be illogical to think that all bank branches will be displaced by mobile devices over the next several years. After all, there will still be some need for limited cash transactions and a more signi#cant need for face-to-face advisory and interactive services for consumers and small businesses in convenient locations… does that sound familiar?

Tomorrow’s bank branches will be smaller versions of today’s principal delivery vehicles; the 500 square metre o"ces will likely shrink to 100 square metres, and laptops will become mobile phones. Plastic cards will become chips embedded in those phones, and bank notes will become radio waves. It may sound like science #ction, but banks must begin plotting their technology migration strategies today to succeed in the future retail banking environment.

Take the case of ICICI bank of India as reported in Visible Banking in December 2012.

104.1: ICICI Bank embracing new technology


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The bank’s strategy revolves around engaging customers with the brand at their convenience.

ICICI Bank is always among the #rst banks to explore new technology strategies, maintaining its competitive edge. In 2012 the bank announced the creation of a Facebook application that allows customers to view their bank statements on Facebook.

Facebook has over 65 million active users in India, making it a great way to get customers engaged. Facebook gives ICICI Bank another channel to interact in real conversation with prospective customers and fans. The objective is to attract younger customers to the brand.

ICICI Bank has also established a presence on Twitter, creating a way to listen to its customers.

NS Kannan, ICICI’s CFO, states that the bank launched a unique application that allows registered users to check account details on social media. They have built a 950,000-strong Facebook community within 10 months.

The bank also has a YouTube channel for advertisements, interviews, product videos, and a chance to share all these with one another. The channel acquired more than 100,000 views in less than a year and has shared information to other social media platforms.

By using social media as listening posts, the bank builds relationships with its customers. According to Kannan, the bank has improved customer satisfaction and increased positive brand perception through social media.

Key Stats

Facebook has over 65 million active users in India

In 10 months, ICICI bank built a 950,000-strong Facebook community

The bank’s YouTube channel has acquired over 100,000 views in less than a year

At the same time, bank branches are going through a thorough facelift from imposing Roman marble columns to becoming welcoming centres of social activities that include, of course, banking.

As reported in the Economist (19 May 2012): “In the middle of Paris, the ornate iron and glass doors of BNP Paribas’s $agship ‘concept store’ look out directly onto the Opéra. Away from the chandeliers and down a carpeted corridor you will #nd bright red, green and yellow beanbags, more white benches with iPads and rooms with couches and $at-screen televisions.

“Here we are in the lounge,” says Nathalie Martin-Sanchez, who oversaw the creation of the branch. “The customer can see an adviser while having a co!ee…it is designed to encourage more proximity, more interaction, more personal contact.”

This is a laboratory where the bank can test ideas such as getting customers and their #nancial advisers to sit side by side or letting customers speak to specialists on a video link.”

Here is an example of a bank branch with a design for the future: Capitec in South Africa.


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104.2: Bank branch with a design for the future

Online banks, meanwhile, are trying to build a physical infrastructure to supplement their online o!ering. The new, bright orange ING Direct Café near San Francisco’s Union Square serves co!ee from Peet’s, a speciality Californian co!ee roaster, and freshly made snacks at reasonable prices. But as well as asking how you want your latte, the baristas also inquire politely if you would like to talk about money or open a savings account. To reinforce the sense that this is not a bank, there is a rule against transactions. If you try to deposit a cheque, you will be given an envelope to post it to a processing centre.

We now consider an important question in bank channel management – how do customers choose a bank channel? This is the focus of Chapter 2.


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