The revenge of bank branches: from decline to digital revival

Over the past decade, the Italian banking system has undergone a profound transformation, characterized by a significant reduction in the number of branches. Digitization and changing customer preferences have had a decisive impact on how banks offer services, making the cost-to-serve average per transaction of the traditional physical channel.

However, despite the increasing prevalence of digital channels, bank branches continue to maintain a central role, with customers increasingly hybrid, using the different channels available to them in complementary ways, depending on their needs and contexts. Therefore, there is an emerging need to rethink spaces and access points to the physical channel, automating simpler operations such as checkout, in order to prioritize higher value-added operations, such as consulting activities, which can also generate value from the human relationship through the support of technology.

The steady reduction in the number of branches

From 2011 to the present, the number of branches has been steadily declining. Overall, there are about 37 percent fewer bank branches in our country, with an average of about 1,000 closures per year. The closures have mainly involved unprofitable branches that are too close together, often as a result of bank mergers that have characterized the last decade. This rationalization process has also been accompanied, however, by a sharp decrease in bank staff, around -18 percent, with an average loss of about 5,000 employees per year (Statista data).

The drivers behind the rationalization

Decisive drivers behind the rationalization phenomenon certainly include the new habits of customers, who are increasingly inclined to use digital channels, especially to access simpler products and services, such as dispositive payment transactions.

The rise of digital channels in customer habits

In fact, the portion of customers who take advantage of digital channels has gradually expanded over the past few years; in detail, there is a 33 percent share of users who prefer to interact with their bank exclusively online. In addition, nationwide, a large share of the customer base is digitally enabled, with 78 percent of users enabled by home banking and 69 percent enabled by mobile (data Cetif). This digital evolution of customers has, therefore, contributed to the unsustainability of the traditional branch model, whose cost-to-serve is about ten times higher, compared to that recorded on digital channels.

Moreover, if we turn our attention to the characteristics of banking customers, we find that age data does not seem to affect the propensity toward the use of digital channels , which do not appear to be the exclusive prerogative of younger customer segments. On the contrary, it is the over-50s, the prevailing slice of customers in the banking world, who are the greatest users of digital channels, confirming the accessibility and convenience they provide.

Branch remains central to customers

Despite the rationalization, however, the branch and physical bank-customer interaction seems not to have lost appeal. On the contrary, the physical point remains an important prerogative for 75 percent of customers, although there is a gradual reduction in access to the branch with weekly (from 15 percent in 2021 to 8 percent in 2022) and monthly (from 34 percent 2021 to 23 percent in 2022; source: Kearney, Retail Banking Radar, 2022) continuity. Therefore, the customer is going to access the branch for particularly sensitive, particularly complex, or particularly life-relevant transactions, such as a home loan, or for simple provisions, such as SCT transfers, but particularly large amounts, thus, high wealth impact.

The need for a new branch model

Against the background of the above considerations, it seems clear that the traditional branch model is obsolete with respect to current customer needs. In this sense, the assessment regarding the sustainability of the physical channel necessarily ties in with the issue of enhancing the human relationship in the context of complex activities, such as consulting, which tends to generate interest in products that are more profitable than cash products.

Branch optimization and innovation

At the same time, the rationalization process seems to have reached a turning point today. Over the past two years, there has been a shift from branch closures to branch optimization, with a focus on manning strategic areas. New branches, therefore, are generally larger, with an average of 4-5 employees, and designed to offer a more dynamic and interactive experience.

Therefore, the current reconfiguration of distribution models must focus around a customer experience capable of incorporating the physical channel, in a balancing act with the issue of model profitability, reconciling the digital and physical components within an innovative and flexible service model capable of generating value from the human relationship.

Greater digital and physical integration

Omnichanneling, realizing the smooth integration between multiple types of channels even within the same process, is to be considered one of the most effective paradigms to guide the evolutionary path of the model and rediscovery, indeed, of thebanking experience.

Revising the distribution model, however, also means reshaping the spaces allocated to customers, automating customer journeys for the simplest activities, such as checkout operations, and communicating their institution's products and services in a more friendly and understandable way. Until now, spaces have been designed exclusively for the convenience of employees, while, all along, the space dedicated to the customer has been minimal and negligible. So, today it is necessary to completely overturn this logic, pursuing the specialization of spaces and increasing the surface area at the service of the customer, setting up more areas dedicated to him, such as a welcome area for reception, a self area inside, or near the branch, including through the support of digital totems. In addition, it becomes essential to review the advisory stations, constituting advisory lounges and setting up technological tools to support both customer-manager-specialist interaction.

Toward new models of banking services

In this process of space remodeling, new service models are therefore beginning to emerge. Among these, the most common constitute the creation of fully unattended, dedicated to the simplest and least complex services. It is expected, however, that new branch concepts, such as Flagship branches, designed to enhance the brand, or Branch as-a-service models, which involve sharing space with other institutions, including non-financial ones, will become more common in the coming years. At the same time, many institutions have decided to integrate full-digital branches into their strategies, with resources dedicated exclusively to managing customers wholly carried on remote branches.

The key role of technology

In this context, technology plays a key role, making cost-to-serve more sustainable and improving the profitability of physical branches. In the coming years, investments in technology aimed at modernizing physical spaces are set to increase, leading to the adoption of digital tools, such as videochat, to support banker-customer interaction in more complex advisory services, where the physical channel still remains preferred.

Conclusions

In conclusion, although the branch rationalization process seems destined to come to a halt, a profound rethinking of the distribution model is underway.

The bank branch will continue to be a strategic element for the banking system, evolving through the integration of digital and technological tools, which will facilitate and make the relationship with the customer more effective, including through the creation of more dynamic spaces and the employment of dedicated specialists.

*Data and analysis from: "Rediscovering the banking experience: new branch models in light of digital transformation. Cetif Research, 2023.