How to optimise retail bank branches to remain competitive in an increasingly digital landscape

Traditional bricks-and-mortar retail banks are currently facing a unique - but exciting - challenge. As digital-only challenger banks are rising in popularity, incumbent banks are having to invest heavily in digitalisation to remain competitive. However, is there an opportunity to optimise their bank branches to support their long-term strategy?

With the benefit of not having high real estate costs, digital-only banks can offer their customers competitive interest; however, the power of the branch should not be underestimated. Recent research has shown that the majority of UK banking customers still require regular face-to-face interactions1, but the way in which consumers interact with their bank branches is changing. The challenge for traditional players is to ensure their bank branch footprint is optimised to meet these needs, whilst remaining profitable.

The challenger: The digital bank

Following the Financial Services Act in 2012, new online-only banks, such as Monzo, N26, and Starling, have entered the UK banking market. With their user-friendly and ‘gamified’ apps, these banks have appealed to the new digital-savvy generation. In addition to giving customers the ability to manage their money at their fingertips, digital-only banks offer tempting exchange rates and travel options to jet-setting millennials. As a result, one in four people under the age of 37 now uses a digital bank2. With reducing market share, traditional banks are seeing pressures on their branch footprint – both in the services they offer, and the costs they are incurring – driving the need to reduce overheads whilst also remaining competitive against these nimble banks.

The opportunity: The traditional retail bank

As well as introducing new competitors, the wave of digitalisation means that customer expectations are changing, along with the way they use retail bank branches. Customers are now demanding ‘anytime, anyplace’ access to their balances and simple services via digital means, reducing the need for physical branch visits. However, for services which are more personal, such as advice, most customers will still prefer face-to-face engagement at a bank branch. In a market-leading move, Metro bank has responded to their changing customer demands and now keep their branches open later during the week and on weekends. So, how can traditional retail banks keep up?

The answer: Data

One size does not fit all. Changing customer needs means that the use of bank branches is also changing, but customer needs are not the same everywhere. In order to make the best strategic decisions, traditional banks must know their data, know their customer and, importantly, listen to their customer.

Knowing your data

Although banks have a deluge of data, many organisations don’t truly understand what data they have, what form it is in, and where it is located. Complex and poorly integrated legacy systems are a global, industry-agnostic problem in the current rapidly evolving digital age. Investing in a new, integrated and organised system will help to prepare retail banks - and companies more generally - for the future by ensuring high data quality and ease of utilisation. Without understanding the form of their data, banks are unable to identify any gaps or missing information relating to their customers and the use of their branches, inhibiting them from making truly data-centric decisions around their bank branch strategy.

Know your customer

Retail banks are already collecting large amounts of customer data; about their behaviours, their preferences and their needs. However, most banks are not fully utilising this wealth of information to improve their customers’ experiences. In other industries, such as retail, large companies such as Burberry utilise their customer data to offer instant in-store recommendations to certain customers, making for a more personalised experience. Starbucks uses data on their customers’ regular drinks purchases to speed up queue times in store and create a smoother customer interaction. For retail banks, understanding who their customers are and their consumer habits is imperative to developing an optimal bank branch strategy.

Listen to your customer

Once banks know their customers, it is then important to take action to ensure that they are offering their customers what they need. By utilising customer and location data, such as high-quality demographic data, banks can intelligently shape their bank branch strategy to truly reflect their current and future customers’ wants. For each individual branch, it is important to understand: what services are being used; are these services combined with digital channels; who is using the branch, and when? Having sight of this will allow banks to assess what their branch footprint looks like, and how to develop, or reduce, this footprint according to customer requirements. Russian retail giant X5 already use a sophisticated technique based upon location and demographic data to recommend new store locations and predict revenue3 and as a result, the forecasts produced using this approach have reportedly had an accuracy of over 90%, leading to both fast and future-proof decisions. By adopting a similarly customer - and data-driven approach - retail banks may well be able to future-proof the high-street banking branch.

Although traditional retail banks are making moves to become more customer-centric, few are truly embracing data-driven decision making in terms of their branch footprint, and consequently reaping the benefits.

With leading retail banks planning to close over a 1000 physical branches between 2018-2019 (Which?, 2019), it is has never been more important to make well-informed strategic decisions. By putting customer data and insights at the forefront of the decision-making process, retail banks will ensure that they are optimising their footprint in the most cost-effective and customer-centric way.

Authors: Tony Farnfield and Helena Fawcett 

1 McKinsey and Company, 2017