American Banker

A retail idea Americans can borrow from Europe

With bank balance sheets listing and profits sinking, the pressure on industry executives to reduce costs and boost efficiency has been ratcheted up.

By Philippe Debacker and Bertrand Facq

First published on agosto 26, 2008
min read


With bank balance sheets listing and profits sinking, the pressure on industry executives to reduce costs and boost efficiency has been ratcheted up. One idea topping many retail banks' list of ways to cut costs is closing high-overhead branches and encouraging customers to shift their transactions to automated teller machines and Web sites. But banks cannot shrink their way back to growth and prosperity. Consumer banking margins began tumbling even before the subprime lending woes—by more than 20% since 2001. There is a better way. Borrowing a page from the playbook of top retailers, European bankers are beginning to transform traditional branches into attractive "stores" that sell products that are packaged and priced to appeal to the customer segments they are best able to serve. Their North American counterparts may want to follow the Europeans' lead. The compact outlets have a smaller, lighter footprint than the ponderous, full-service branches that banks can no longer afford. Construction and operating costs are less than one-quarter of those of a standard branch. But savings are only one factor favoring lean retail. The biggest one—and a major challenge for banks—comes from taking a different approach to customers that uses bank "shops" to connect with them where they live and work. For instance, banks are converting stand-alone branches into hubs for their distribution networks. Instead of operating on a parallel track alongside newer forms of e-banking, lean-retail branches are the centerpiece of a distribution channel that offers customers many points of entry. Some sites may offer a full array of personal and small-business services, generating more business than conventional branches in half as much space. Others may be boutiques specializing in credit or personal investment products, located strategically near target customers in neighborhood shopping districts, for example. Face-to-face contact with customers in the new outlets—branch stores or shopping-mall kiosks—creates opportunities for banks to augment services they provide through remote ATMs, call centers, and Web sites. On its home turf in the Netherlands, ING is adding small-format locations that tailor their product and service mix to local demographics. In emerging markets, like Poland, Ukraine, and India, a fast-expanding chain of Self Banks give customers ready access to cash and simple credit transactions through smart ATMs. The pocket-sized outlets also have financial advisers to help customers navigate new investment and loan choices. Another challenge for lean-retail banks is to focus on sales, not transaction volume. According to a Bain & Company analysis, the percentage of European bank transactions conducted at branches plummeted from 45% in 1995 to just 20% in 2005—a trend that has been mirrored in the United States. As customers rely on ATMs and online accounts for deposits, transfers, and withdrawals, branches are freed from having to process and secure piles of cash. That liberates bank employees, no longer walled off from customers behind Plexiglas, to mingle with clients as sales reps. One European bank we worked with replaced the revenue "dead zones" in its branches by relocating administrative functions to centralized processing centers. With more floor space available for product sales, the bank is equipping employees with skills that enable them to serve as financial advisers. All branch employees are given monthly sales targets and receive bonus pay on a sliding scale for meeting or exceeding them. But the bank's test of whether the sales-centered approach is working is whether the outlets are increasing the number of customers who stick with the bank and are willing to recommend it to colleagues and friends. Through brief surveys, branch managers continuously gather customer feedback, which they use to help front-line employees sharpen their service skills and adjust policies and procedures to improve the customer experience. Lean-retail bankers' third challenge is to find the best fit between customers, products, and the way those products are delivered. Fortis, the Benelux financial services conglomerate, kick-started its expansion in Germany by building a chain of colorful Credit4Me boutiques in high-traffic urban neighborhoods to serve the personal credit needs of younger households. Featuring attractive in-store displays that invite browsing, the credit shops also encourage shoppers to make spontaneous purchases. Unlike with a conventional bank branch, for example, prospective car buyers can drop in, shop for an auto loan that suits them, and close the deal, whether or not they have an account with Fortis. With more than 100 of the compact specialty shops open in just one year, Credit4Me helped Fortis rapidly establish a strong operation in a new market. The company expects to use this approach to foster profitable growth across its retail banking operations. As lean-retail banking techniques continue to prove a cost-effective way to win customers and reinvigorate growth in Europe, more U.S. bankers should warm to the idea of rolling up their sleeves like shopkeepers. Mr. Debacker is a partner in Brussels and Paris with Bain & Company. Mr. Facq is a Bain partner based in Brussels. Both are members of its European financial services practice.

With bank balance sheets listing and profits sinking, the pressure on industry executives to reduce costs and boost efficiency has been ratcheted up.

One idea topping many retail banks' list of ways to cut costs is closing high-overhead branches and encouraging customers to shift their transactions to automated teller machines and Web sites. But banks cannot shrink their way back to growth and prosperity. Consumer banking margins began tumbling even before the subprime lending woes—by more than 20% since 2001.

There is a better way. Borrowing a page from the playbook of top retailers, European bankers are beginning to transform traditional branches into attractive "stores" that sell products that are packaged and priced to appeal to the customer segments they are best able to serve.

Their North American counterparts may want to follow the Europeans' lead.

The compact outlets have a smaller, lighter footprint than the ponderous, full-service branches that banks can no longer afford. Construction and operating costs are less than one-quarter of those of a standard branch. But savings are only one factor favoring lean retail. The biggest one—and a major challenge for banks—comes from taking a different approach to customers that uses bank "shops" to connect with them where they live and work.

For instance, banks are converting stand-alone branches into hubs for their distribution networks.

Instead of operating on a parallel track alongside newer forms of e-banking, lean-retail branches are the centerpiece of a distribution channel that offers customers many points of entry.

Some sites may offer a full array of personal and small-business services, generating more business than conventional branches in half as much space.

Others may be boutiques specializing in credit or personal investment products, located strategically near target customers in neighborhood shopping districts, for example.

Face-to-face contact with customers in the new outlets—branch stores or shopping-mall kiosks—creates opportunities for banks to augment services they provide through remote ATMs, call centers, and Web sites.

On its home turf in the Netherlands, ING is adding small-format locations that tailor their product and service mix to local demographics.

In emerging markets, like Poland, Ukraine, and India, a fast-expanding chain of Self Banks give customers ready access to cash and simple credit transactions through smart ATMs.

The pocket-sized outlets also have financial advisers to help customers navigate new investment and loan choices.

Another challenge for lean-retail banks is to focus on sales, not transaction volume. According to a Bain & Company analysis, the percentage of European bank transactions conducted at branches plummeted from 45% in 1995 to just 20% in 2005—a trend that has been mirrored in the United States.

As customers rely on ATMs and online accounts for deposits, transfers, and withdrawals, branches are freed from having to process and secure piles of cash. That liberates bank employees, no longer walled off from customers behind Plexiglas, to mingle with clients as sales reps.

One European bank we worked with replaced the revenue "dead zones" in its branches by relocating administrative functions to centralized processing centers. With more floor space available for product sales, the bank is equipping employees with skills that enable them to serve as financial advisers.

All branch employees are given monthly sales targets and receive bonus pay on a sliding scale for meeting or exceeding them.

But the bank's test of whether the sales-centered approach is working is whether the outlets are increasing the number of customers who stick with the bank and are willing to recommend it to colleagues and friends. Through brief surveys, branch managers continuously gather customer feedback, which they use to help front-line employees sharpen their service skills and adjust policies and procedures to improve the customer experience.

Lean-retail bankers' third challenge is to find the best fit between customers, products, and the way those products are delivered.

Fortis, the Benelux financial services conglomerate, kick-started its expansion in Germany by building a chain of colorful Credit4Me boutiques in high-traffic urban neighborhoods to serve the personal credit needs of younger households.

Featuring attractive in-store displays that invite browsing, the credit shops also encourage shoppers to make spontaneous purchases. Unlike with a conventional bank branch, for example, prospective car buyers can drop in, shop for an auto loan that suits them, and close the deal, whether or not they have an account with Fortis.

With more than 100 of the compact specialty shops open in just one year, Credit4Me helped Fortis rapidly establish a strong operation in a new market.

The company expects to use this approach to foster profitable growth across its retail banking operations.

As lean-retail banking techniques continue to prove a cost-effective way to win customers and reinvigorate growth in Europe, more U.S. bankers should warm to the idea of rolling up their sleeves like shopkeepers.

Mr. Debacker is a partner in Brussels and Paris with Bain & Company. Mr. Facq is a Bain partner based in Brussels. Both are members of its European financial services practice.