As regulators begin to weigh in on branch closures, banks are re-examining their branch networks and thinking about what distribution model can satisfy customer needs effectively.

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Bank branch closures have accelerated over the course of the pandemic. According to consultancy firm McKinsey, banks in developed markets have closed 9% of their branches in 2021, the largest reduction in five years. This has raised concerns for regulators, who are now stepping in to curb the rate at which branches are shuttered. For example, the UK Financial Conduct Authority is again reviewing its guidance for how banks manage branch and ATM closures, with the consultation ending today.

In its recent report, ‘Best of both worlds: Balancing digital and physical channels in retail banking’, McKinsey explores the transformation seen in retail banking as a result of the Covid-19 pandemic. It found that, overall, retail banking sales declined by 10% in 2021, after branch activity collapsed in 2020 and growth in digital channels did not fully make up the difference.

While in 2021 more than 40% of core retail banking sales originated digitally, the 4% increase in digital sales wasn’t enough to compensate for a 15% decline in the still-larger branch channel when facilities became inaccessible during lockdowns. Therefore, “the widely discussed increase in digital sales as a percentage of total sales owed more to branch declines than to actual digital gains,” according to the report.

McKinsey also looks at willingness to use, preference for and actual use of digital channels. Its research found that customer willingness to consider digital channels exceeds 70% in every geographic region and age category, which provides much scope for migration. However, results vary across products and regions.

For example, although willingness to open a new current account digitally hovers around 75%, only 30%-35% of customers express an actual preference to do so digitally, and only 15% of such accounts are opened digitally. The report states: “Banks have yet to fully embrace this demand: less than 30% of banks globally have introduced new digital acquisition journeys for their public website or mobile apps.”

The report also tackles the burning question: what is the long-term role of branches? McKinsey research found that 37% of banks saw their share of active branch users jump in 2021, with no meaningful decline in call centre active users.

Clearly, there continues to be customer demand for personal interaction. Attitudinally, 28% of customers continue to prefer to meet servicing needs at branches – a share that jumps to nearly 50% for sensitive and/or complex situations such as fraud and advice on financial difficulties.

“While each institution must arrive at a unique model for physical channels, a common theme has emerged: the inversion of the distribution pyramid,” says the report. “Branches and call centres no longer dominate as the catchall channels fulfilling customer needs, leaving digital to fulfil a subset of activities for a subset of customers. For an increasingly mainstream cohort, mobile has become the go-to, with physical channels becoming brand ambassadors focused on truly complex, empathy-centric situations.”

To make the most of physical channels, McKinsey’s tips for banks include:

  • Optimise for microclusters, resisting a one-size- fits-all approach – use data analytics to create optimal strategies at a micromarket level;
  • Shift from reactive to proactive demand – successful banks need to ensure that branch employees are focused on high-value activities by proactively filling staff calendars;
  • Digitally enable the human experience – banks that enhance the physical experience with dedicated features in the bank’s mobile app can boost customer satisfaction by 60% through a blend of physical and digital;
  • Reset frontline-staff roles – update the roles and organisation set-up for branches and call centres.

According to the report: “Institutions that act promptly can expect to reignite growth and distance themselves from slower-moving competitors. Success depends on creating truly unique-to-digital experiences in harmony with improving and enhancing physical channels with digital elements. These banks will provide a ‘phygital’ human experience that contributes significantly to the satisfaction and trust that customers across demographics are still seeking.”

Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight

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