05/15/2010 10:38 am ET | Updated May 25, 2011

BANK 2.0: Branch-Banking is Alternative, Internet and Mobile are Mainstream

Since the introduction of internet banking, day-to-day customer banking behavior has been rapidly changing. Whereas in the mid-80s you might have done 70% of your banking through the branch, cash and checks; today, most of our retail banking interactions occur through electronic channels. For some segments, like senior passbook holders in Hong Kong, pensioners in the U.S., and SMEs in Indonesia and India, branch-banking is still the preferred channel of choice. But increasingly, while the branch is still being used, it is not being used as the preferred method of banking by the majority of customers.

The American Banker's Association has been tracking this shift for some time. While 21% of customers in 2009 still cited the branch as their preferred method, 25% chose the internet. The more telling statistic is that the branch as the preferred method has gone from 36% to 21% in just 3 years - that is a decline of 41% in 3 years for the branch as the 'preferred' method of banking. With mobile internet banking adoption skyrocketing and check usage in question, we can expect this rapid decline to continue over the next 3-5 years. The fact that in some markets branch visits have increased, is not a significant statistic considering the rate at which they have increased in comparison to utilization of direct channels.

source: ABA - Preferred Banking Method 2007-2009

HSBC has found that 45% of their premier customer base (their high-value, preferred-banking retail segment) in Hong Kong were online and using Internet banking on average 10 times per month. Between 2002 and 2007, Internet banking grew 174% in the UK. In Japan, over two thirds of consumers use Internet banking regularly, according to a survey by gooResearch in February of this year. (Some of the data is translated here.) 38% of the survey group reported using Internet banking more than 3-5 times per month (about 6% said more than 10 visits per month), and about 22% of the sample size reported using mobile phone based banking more than 3-5 times per month.

Research suggests the #1 driving force behind this increased adoption of internet and mobile-based banking, regardless of geography, segment or market, is the convenience factor. It's just too easy to log on to your bank as compared with driving down, finding a parking spot and standing in line at the branch.

Thus far, however, revenue is trailing adoption rates significantly. How could it be that more than 40% of customers for most banks in developed economies cite Internet banking (and other direct channels) as their preferred method of banking, and transaction volume through Internet outpaces branch-banking by a ratio of more than 4-to-1, and yet 80% of revenue still comes through the branch? How can it be that these same customers visit their "Internet" bank 5-10 times per month, and the branch only 3 times a year, and yet 4 out of 5 products they apply for through the bank are sold through a branch? The revenue factor is constantly cited by traditional bankers in support of the branch, but there are three reasons for this trailing revenue versus adoption rate data:

1. Your "home" branch gets allocated the revenue by the system

At most banks, IT systems still record the customer as being 'allocated' or 'attached' to a branch. This is most likely the branch you first visited to sign up for your account. If you've moved to another city or location and visited a new branch to ask for your account to be moved over to that branch, it has changed. But at most banks, you are 'owned' by a single branch as a business unit.

Thus, when a personal loan is applied for online, or you deposit money in a fixed income account, many banks record this as a 'sale' for the branch you are attached to regardless of which channel it came through.

2. The final compliance step is in-branch

On many occasions you can't actually complete the application for certain products online. There are various reasons for this. For a mortgage product, for example, a bank might want to cite documents associated with the land purchase. For investment products that carry risk, you need to sign a document to show the regulator that you weren't coerced into making an investment and that you understand the risk. So while 90% of the leads today for new mortgage products might come through the internet or call center, the final sale is still recorded against a branch because that is where you did the last piece of the compliance process.

3. Most banks are awful at selling online

Despite the increasing adoption rates, the increased usage of the internet channel by customers, the flagging branch usage, and the increasing revenue through online channels, most banks still consider the internet as an alternative to the branch or as a cost-reduction strategy for transactional banking. The branch is seen as the premier sales channel for customers -- and it is. But it just isn't the only channel for sales.


If banks honestly supported the internet as a sales channel, measured existing sales with better granularity as to where the revenue actually came from and used customer behavior as a leading indicator of where the money should be spent, our online and mobile banking experience would be far better than it is. For now, most bankers are still perpetuating a system that rewards physical distribution networks over direct channels because they are out of step with customers. With social media continuing to exert pressure, very soon the branch will play a minor role in the actual sale.

Today, the branch is an alternative choice for the majority of customers. The branch, while retaining a role as a premier sales engagement channel, is still day-to-day a secondary choice. With the rapid rate of mobile banking adoption we can expect the role of the branch to be further diminished as part of customer's day-to-day banking needs.

So what happens next? When we get an accurate picture of sources of revenue, many branches will no longer be viable from a business case perspective. At the very least, they will have to change form and function. As banks realize that behavioral shift can not be arrested and real revenue is suffering due to lack of support, we will start to see a land grab for better positioning of product online, through mobile, other direct channels, utilizing social media, third-parties and partners. This means straight-through-processing, automated credit risk assessments and better offer management through electronic channels will become absolutely critical. The organization structure needs to change too; the branch can't dominate strategy, products must be manufactured for all channels, and compliance needs to find better ways of enabling digital engagement.