Bank branch transformation is becoming an increasingly important part of financial institutions’ efforts to reduce expenses and adapt to changing customer behavior. With low interest rates putting pressure on earnings, banks are examining operating costs while reconsidering the size, location, and purpose of their branch networks.
At the same time, growing adoption of mobile banking, online banking, ATMs, and other self-service channels is reducing customers’ reliance on tellers for routine transactions. These changes are encouraging banks and credit unions to rethink traditional branches and focus more heavily on services that benefit from personal interaction.
Lower expenses drive banks earnings
One of the key drivers of US banks’ earnings during the quarter were lower expenses. The prevalent zero-interest-rate environment is acting as a drag on bank earnings. US banks (KBE) (FNCL) earn lower returns on their assets, as well as lower interest-based income, when interest rates are low.
In order to boost profitability in a low–interest rate environment, banks are reducing expenses by restructuring their businesses and focusing on their core businesses.
Banks Rethink the Role of the Branch
As banks and other financial institutions evaluate their branch banking strategies, many are taking a long, hard look at their branch reconfiguration efforts. Consequently, the topic of branch size placement are top of mind for today’s banks and credit unions, as banking customers increasingly embrace digital banking and self-service channels for many of their day-to-day transactions. The trend for increased use of mobile and online banking and ATMs at the expense of teller visits will likely increase, as will the expansion of the role of branches as information and advice centers and places for increased engagement between banking customers and financial institutions.
The continued shift toward digital and self-service banking is likely to have a significant impact on how financial institutions structure their branch networks. As fewer customers depend on tellers for everyday transactions, banks and credit unions have an opportunity to reduce operating expenses while redesigning branches around the services customers still prefer to handle face-to-face.
Bank branch transformation does not necessarily mean eliminating physical locations. Instead, branches can evolve into centers for financial advice, product information, and deeper customer engagement. By combining more efficient branch networks with increasingly popular digital channels, financial institutions can respond to changing customer preferences while also addressing the need to control costs in a challenging earnings environment.
Overview by Ed O’ Brien, Director, Banking Channels Advisory Service at Mercator Advisory Group
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