Retail banking has been the backbone of community bank funding and franchise value building for decades. Common wisdom said: Commercial banking generated the revenues and retail banking funds it. This prevailing view rendered banks helpless when technological innovation demanded more from the retail business, well beyond the branch. From ATMs to mobile banking, and now to Real Time Payments and Zelle, the cost to serve consumers continue to increase.
At the same time, revenue from the business have been constrained by changes in consumer behavior and bank selection, competitive pressures and regulatory requirements. Account maintenance fees were hit by Free Checking and never fully recovered when the pendulum starting swinging back and free checking was replaced with fee-bearing accounts that offered ways to eliminate the fees (direct deposit, etc.). The debit card, a cornerstone of retail banking fee income, became nearly a profit wash through Durbin. NSFs are fading away faster than we can revise our NSF policies.
Another major change that has impacted the profitability and relative importance of retail banking is the deposit glut most banks have experienced. Deposits have grown faster than loans, buoyed by PPP and government support. PPP yielded a slew of new business banking customers who brought with them stable, interest-free deposits, so the balance between pure retail deposits and other deposit sources has shifted.
Retail banking is, and always will be, an important line of business for community banks. But we cannot afford to continue delivering our stellar service through expensive and ubiquitous branches. Plus, as our customers are becoming more ensured to technology, their channel preferences have also evolved. Branches are important, but so are digital channels for routine transactions. Continuous investments in rising table stakes only works when revenue streams are stable or growing. We are not seeing that in retail banking.
The retail banking business model is broken. We need to strip our thinking to the studs and envision and rebuild the business to fit the next decade or two, rather than continue to make marginal cosmetic changes to our delivery system. However, look at the all-in value creation of Retail banking when considering the rip and remodel approach. Absent that, the change won’t meet the threshold suggested below. That means include the franchise value component of the retail business in addition to its current income, as well as contribution to brand presence, customer experience and servicing other lines of business.
There are too many moving parts today – from RTP and FedNow to the emergence of cloud-based core systems to a shift from core provider-driven system selection to best-of-breed etc. etc. – to develop a fully detailed roadmap and follow it. At the same time, it is feasible, desirable and important, to reimagine your retail business in terms of the experience you aim for and the fulfillment of your brand promise. Define your “true north” and do not shy away from aspirational goals. And then pick one major component to the vision and do something. It could be building your RTP product offering; or shifting customer behaviors to digital channels through positive inducements; or meaningfully modernizing your branch network through closures and alternative delivery points. The opportunities are endless.
I am hard-pressed to identify a bank that has wholly transformed its retail business. There are, though, institutions that have mapped out their vision for the business even a decade ago, then made incremental changes to realize that vision over time. The overall results has been stunning. Chase is an example of that approach, having committed itself early to a digital delivery system. Chase embarked on the journey with a campaign to encourage cash deposits in ATMs, which not only increased customer engagement but also meaningfully impact their trust in technology. Chase continued to intrigue its customers with additional, convenient and unique digital features, starting with the mobile check deposit and continuing through dozens of incremental innovations which, in time, increased digital engagement and new customer acquisitions manifold. Chase now gains more than its fair share of new account acquisition, and its operating costs for the retail business have been more than halved, both due to the shift in its approach to the retail business.
It is important to note that the bank did not abandon its commitment to branches. It simply became more selective regarding branch deployment while making the digital access channel more attractive through continuous improvement. It is also important to note that the success of this journey did not depend on the bank’s vast resources and technology know-how, but rather on its commitment to a patch, followed by methodical implementation of incremental changes. Nearly all of my readers can do the very same, even if their core vendor won’t cooperate.
Paralysis due to uncertainty is not uncommon. However, we are at a moment in time where certainty is impossible to achieve. Creating an aspirational vision and working toward it is today’s call to action. DO SOMETHING!