Looking into the Future of Retail Banking—Part One

A few minutes with DBSI's John Smith

The modern bank branch is undergoing a metamorphosis.  Mobile banking is becoming more prevalent, in-branch transactions are declining and banks are facing increasing pressure to develop additional revenue.    Today's bank branch is being forced to adapt—and quickly.

To get a better grip on the rapidly changing retail banking world, I reached out to an expert in the field—John W. Smith.  John is the CEO of DBSI, a leading branch design firm based in Chandler, Arizona.  For the past 17 years, DBSI has been instrumental in helping countless financial institutions modernize their branch networks.  John has an interesting and thought-provoking perspective on the future of retail banking. I hope you enjoy his thoughts as much as I did.

For years banks were doing everything in their power to drive traffic away to other channels—from ATMs to mobile, and on and on. But now, we're starting to see banks trying to bring customer back to the branch. So how can banks accomplish that?

When I looked at that question or hear it coming from you, my first impression is "I'm not sure I would put it that way." I don't think they're intent on driving them away, just that they're trying to find a lower cost means to service their clients—yet make it more convenient at the same time.

So then I would think about...what's the real question? And I think the real question is what retailer—and I believe the banks are retailers—what retailer wouldn't want more face-to-face interactions? How better to make a personal connection than with a line of product or solution that makes sense. So that's what I think they're trying to accomplish.

What are three ways that banks can bring customers back into the branch?

One is "Let them know you exist." So here's some statistics for you. There's 1.1 million retail stores in America and when we get visitors to our "ideation center," I ask them all "What retailer or retailers stands out to you when you're driving to work, when you're on your way back home or driving around the city?" And there's always a pause. There's a scratching of the head. No one can name more than two. I mean, never. They never can come up with more than two. And it's usually a variation of the two.

So there are 1.1 million stores and most people can't name two that truly have curb appeal or sell themselves 24/7. So that can easily be fixed and I think the key is, it can be a massive differentiator just to let your consumers know you exist. So you've got to be able to sell your curb appeal, your store, if you will, 24/7. So I think that's number one.

I think, number two, is they need to be allowed to test drive. So what I mean by that is truly interact with products. So if you think about Apple stores, everybody brings up Apple as that main retailer that gets it and who wouldn't right? They're immensely successful; their profit per square foot is higher than any retailer in America.

But if you go into an Apple store, what are all the consumers doing? They're not picking up boxes and reading labels. They're actually interacting with the products themselves. It's the ultimate test drive. They're seeing how it can fit their need and they're seeing how easy it is. If they have a question, there's someone right there on the spot to help them understand. It's the test drive experience, which I think is pretty cool.

And then, number three is they should be given value. So the consumer need is evident. If you look at savings rates, they're horrifically low. If you look at debt accumulation, it's horrifically high. So there's clearly a need for advice.

So bankers can help their clients through their life journey more effectively. They simply need to connect the dots to the solutions and then execute to that because it's really fuzzy right now. Let them know you exist, allow them to test drive, and truly give them value to their need.

Who is the customer that they're trying to get back? And what's the target demographic that you see for branches?

And this is probably not a surprising answer, but I think it varies by bank or credit union because their strategies—even credit union to credit union—are going to be a bit different.

If you think about millennials for a moment, they typically don't have much money now, but they will via increased earnings over time or inheritance. But they can still be vastly profitable through fee income. And they will have needs, right? They're going to buy a home soon, buy an automobile, start a business, etc. So they're going to need some of that commercial support.

Then you go on the exact opposite of the millennial and find people that have a higher net worth strategy. So, why do they have that? Well, the bulk of investable assets...the bulk of them, 85% or more, are actually in investment banks or 401ks or 529s or those kind of things. They're not typically in the consumer bank or credit union. So the potential for those guys; if they could attract that clientele is massive, but it takes a focused plan.

So those are just two examples of the left side and the right side trying to pull in different demographics.

You're on the cutting edge of retail banking design.  You're in on the ground floor with bankers talking to you every day about what they want.  So what are some of the trends that you're seeing with branch designs?

I think branch transformation is at the top. So why is that? Well, 65% of an FI's cost in tied up in their stores; I'm referring to the "store" as their branch and ATMs.  So if you don't optimize this channel, that cost could truly be an albatross, meaning it could take you down. And then you look at trends in retail as a whole—hotels, quick service restaurants, airlines, pharmaceutical, and of course, retail. Every one of them has recognized the need for this change way before banking.

Now, they've taken strong actions to optimize and enhance their stores. And FI's are seeing that right now. They're seeing all the other retail do that and do it well. Get lots of wins for it. So now, they're going "How do I do it? What's the right approach for me?"

So what does that even mean? Stores that advise and educate and help you onboard to a more convenient way to bank, create a differentiation experience. Do it all, of course, at lower costs. So that's what they have to do. That's kind of top of the list.

I think an extension of that, which is part of branch transformation, is the micro-branch and shared tenancy. Getting smaller—getting closer to the consumer. Pulling in traffic because traffic is already going to another retailer, but you're so close and so adjacent that it will drive traffic to you—all at typically 25 to 50% less cost.

So a shared tenancy, what I mean by that is guys have built 5,000, 6,000, 7,000 square-foot locations, branches. And they simply don't need that kind of square footage. But they're stuck in an asset that they bought or they've still got six more years or five more years on a lease. What are they going to do?  Well, let's carve up the space. Let's find the tenant that will pull in traffic so it brings more traffic to your services. And obviously, we'll pay some of the bills so you get a double win.

Then you've got mobile, of course, right? But how do you get real adoption? And what we see is someone will put in because they have to, they'll put in mobile check deposit, online bill pay. All the normal mobile and online solutions. They just have to do it. They've got to keep up with the Joneses.

The tech-savvy people will jump right in. They get it, right? But that's only 15% of the market. How do you best help the remaining people? The folks that are skeptical that have fear? That frankly is the bulk of the market. How do you help them understand the convenience of that?

Well, they've got to be shown how to effectively on-board. It's not done through a brochure. It's not done because you have a popup on the website. They don't look at that stuff, they don't believe in that stuff. They actually have to be truly on-boarded. And then, they're your biggest fans. Because the tech-savvy people don't run around and tell everybody how wonderful it is. They assume everybody else knows already. The non-tech savvy tell everybody because they're so interested that they've learned this new way of banking.

And lastly, I think it's proactive and predictive analytics. So what I really mean by that is essentially smarter software. Smarter software will let them know, to the products and tech that's in the branch today. What's actually being used? Is it being used optimally? Is it sick? Is it healthy? When should service be provided and why? There's just a bunch of equipment and tech in the branch today. Most all of it doesn't let you know anything. So if you're going to buy and spend a fair amount of money, make sure that you're getting the most out of it and predictive and proactive analytics are driving that.

Can you give me an example of shared tenancy?

Yeah. So we worked with GECU. They're a credit union based out of El Paso, Texas. And we were typically designing a building and optimizing branches that were around 5,000 square feet.  The latest one we did was 3,200 square feet. 1,600 of which, so half, was the credit union. The other half was a teahouse. Tea is kind of the new coffee. It's near a strong retail environment and a campus.

So the tea house will bring in just as many consumers as the credit union. And the people that come in to buy tea; guess what? They need banking services. The people that come in for banking services; guess what? They buy tea and sandwiches and stuff.

So they're driving traffic to one another, a win. And each of them is doing it at a 50% less cost than they would have typically. That's what I mean by "shared tenancy." It's a tremendous strategy that I think is certainly a trend.

This interview is continued in Part 2.