Branch-Banking in the US: There’s an App for That

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February 25, 2014

BranchBanking in the US: There’s an App for That

Some bankers and analysts think that Google, Facebook, Amazon or the like will not fully enter a highly regulated, low-margin business such as banking. I disagree. What is more, I think banks that are not prepared for such new competitors face certain death. Francisco Gonzales, CEO, BBVA

  • This note argues that the traditional role of branches, to provide secure transaction processing, will be taken over by apps not so much because banks are looking to reduce teller-costs but because the digital engagement of customers (whether in-branch, on-line, or through mobile) provides the opportunity for banks to capture data and build a digital profile. This, in turn (and subject to permissions and privacy laws), is the basis for understanding customer preferences and hence designing real-time marketing campaigns around targeted and personalized ads and e-offers.
  • Over 10% of households already use remote deposit capture (RDC) apps to deposit checks instead of visiting a branch, and cash withdrawals (the other main reason consumers visit) will likely decline as digital wallets including P2P capability gain adoption.
  • Like most retailers, banks have been disadvantaged as Google and other online players have tracked the internet activity of customers to build digital profiles. Mobile (see Exhibit) radically changes the competitive landscape for profiling because customers will interact digitally with an increasingly “smart” physical environment (web-connected through wireless technologies such as RFID, NFC, and Bluetooth) controlled by retailers and banks, not online players. In mobile, Google does not have home-field advantage over retailers and banks for digital engagement.
  • Proprietary Data: Retailers and banks may partner with online players to build out a profile of their customers but the mobile-enabled digital interaction of customers with a smart and private physical infrastructure, including stores and branches, generates proprietary data.
  • Changed Role of Branches: In a world where consumers choose their bank based on the proximity of a branch to home or office, the role of branches is to provide the convenience of a physical network. In a world where consumers choose their bank based on its understanding of their preferences, the role of branches (assuming customer activity is digitized through in-branch apps rather than handled manually) is to provide the proprietary core of a bank’s digital network.
  • The challenge for retailers, including banks, is to make sure that they, and not competitors (and particularly not online players such as GOOG and AMZN), capture, control, and protect the digital impressions made by customers through mobile interaction with a smart physical environment. This is the root of the app wars generally and digital wallet wars in particular (so that, for example, the success of MCX is a strategic imperative for participating merchants such as WMT and TGT). In promoting adoption of their mobile wallets over competition, the killer apps for banks will be personal financial management (PFM) and person-to-person (P2P) payments (where customers send money based on a recipient’s e-mail or mobile number).
  • PFM: Banks are data-advantaged in providing customers with apps to organize their day-to-day finances and budgets. For example, mobile bank service company, Simple signed up 35,000 accounts in just over a year through May 2013 by offering a mobile app that organized PFM; Simple directed deposits to bank partner TBBK (although that will likely change given the announcement last Friday that BBVA will buy Simple).
  • P2P: Non-bank providers, such as PayPal, Square, and Google Wallet, offer P2P but must do so through Visa/MasterCard which is expensive or ACH which is slow. Banks can offer real-time solutions through white-label providers such as PopMoney by FISV, PeoplePay by FIS, and the bank-owned clearXchange[1] (powering SendMoney at BAC and QuickPay at Chase, for example).
  • In summary, winners in consumer retail banking will base business models on mobile, real-time marketing, personal financial management, and social media (which we will address in later research). Beyond creating a sense of community around the brand and an opportunity for customers to learn about how to use the bank’s digital services (think the Genius bar at Apple stores), the role of branches will be to provide a forum for proprietary digital engagement with customers through appified transaction processing and more general mobile-enabled digital interaction with a wireless-enabled physical infrastructure. We believe Capital One has advanced furthest among the large banks both culturally and in execution as illustrated by the following quotes from CEO Richard Fairbank and by the PushPoint relationship:
  • Conception: “There is a need to systematically, as a conscious and high priority strategy, drive customers to digital; digital is not a channel that is added on but it is who we are and how we do business…As a by-product, I think over the long term you get cost benefits but we would not do it for the cost benefits … [rather], the founding concept of Capital One was that banking was going to become an information-based business”
  • Execution: In partnership with PushPoint, COF enables SMB clients of its Spark Pay mobile point-of-sale platform to create ads and e-offers which are pushed to customers through near- and in-store marketing channels (with campaign-radius controlled by geo-fencing) including search, messaging, social media, and beacon. SMB clients can track the inbound customers and purchase revenue generated by each campaign, and this visibility creates willingness-to-pay for better tools to target and personalize offers which we expect COF to provide based on mining the data generated from digitized banking relationships.

Exhibit: Percent of US Households Using Each Channel for Banking

Source: Capital One


Through to the late 1990’s substantially all households with a bank account used the branch channel; today, the proportion is below 70% with near half of households using online banking services and a rapidly-growing 20% using smartphones (see Exhibit 1). Investors would like to understand how these shifts in channel preferences affect banking efficiency and, given that branches generate by far the highest cost-to-serve, the management of branch capacity (in terms of configuration as well as absolute capacity). The discussion with banks and other commenters typically evolves towards:

  • Segmenting the customer base by channel into: “smart” customers (who are active already users of mobile and online); “potentially smart” customers (who can be migrated to these lower-cost-to-serve channels); “mass affluent” customers (for whom the cross-sell opportunity may justify the cost of branch engagement); and “marginal” customers (who look to branches but whose balances and activity does not cover the cost).
  • Considering which competitors may have over-capacity in the branch network and hence most potential for efficiency gains. Just this Friday, for example, the FT reported on a third-party analysis that BBT and KEY were candidates for having the most opportunity for branch cuts.

Exhibit 1: Percent of US Households Using Each Channel for Banking

Source: Capital One

Our contention is that this discussion misses the point, and that increasing penetration of the smartphone (see Exhibit 2) creates far deeper, structural reform in retailing in general, and consumer retail banking in particular, than introducing a lower cost-to-serve distribution channel. We argue that mobile does not represent another channel to be optimized along with branches, call-centers, ATM, and online, but rather clarifies that banks have a single digital distribution channel of which branches (providing they are app- rather than teller-enabled) can represent a proprietary core. Our conception of branches as making a proprietary contribution to a bank’s digital profile of a customer is quite different from the traditional view and role of branches as providing a venue for secure transaction processing.

We expect this role to be increasingly fulfilled by apps and note that this is already occurring in the case of the two reasons consumers visits branches most frequently: to deposit checks and to withdraw cash. In the first case, remote deposit capture (RDC) is already used by more than 10% of US households after being introduced only in 2009 and has received a boost with the advent of mobile apps that leverage a smartphone camera to capture an electronic image of a check (rather than the use of a scanner as was typical with first-generation internet applications). In the second case, we expect cash to be increasingly substituted by digital wallets (which are being used for smaller payments than traditionally associated with plastic cards) and P2P applications.

Exhibit 2: Mobile and Smartphone Penetration (% US Households)

Source: Capital One

The Significance of Mobile

From a marketing standpoint, the significance of the internet is that customer activity leaves digital impressions that can be collected and assembled into a digital profile. This profile is valuable enough to marketers when generated by online activity from one or more fixed workstations and, of course, has powered the immense success of GOOG in supporting its clients through targeted and personalized ads and offers. Other online services fill out the digital profile through social-graphing and mining text/chat/and e-mail communications.

The resulting profiles are nonetheless very partial; mobile will remediate that and not just because digital profiles can be supplemented with environmental data such as location. Mobile phones will track customer interaction with an increasingly “smart” physical environment (web-connectable via wireless technologies such as RFID, NFC, and Bluetooth) vastly enriching the potentially collectible digital profile. The critical marketing success factor for retailers in general, and consumer retail banking in particular, will be accessing this digital profile for customers, and using it (subject to privacy laws and customer permission) to understand customer preferences and hence to design targeted and personalized ads and offers.

The critical strategic success factor for retailers in general, and consumer retail banking in particular, will be assembling a proprietary portion of that digital profile. In this context, the significance of mobile is that it provides retailers, including retail bankers, with a digital channel for communication with customers that is potentially proprietary or, at the very least, more difficult to access by providers of internet browsers, search-engines, and social-media/messaging software. Retailers and retail bankers may then choose to partner with these providers to assemble a more complete digital profile for their customers, but they are no longer digitally blind.

The Role of Branches

Banks cannot assemble a digital profile if customers do not leave digital impressions, and they cannot be reasonably certain of assembling a proprietary digital profile if customers do not leave digital impressions on a private and protected platform. It is as much for this data-capture reason as reducing the cost-to-serve and customer wait-time associated with tellers that the traditional function of a branch – to provide secure transaction processing – will be taken over by apps (whether used on a mobile device, ATM, or branch workstation). We have already seen this with remote deposit capture (where, rather than being presented physically at a branch, a check is deposited by electronic scanning at a remote location) now used by over 10% of US households after being introduced only in 2009; while “RDC” is possible online, adoption has accelerated with mobile because of the use of smartphone cameras to transfer an image of a check into a mobile banking app.

In a world where the branch as a primary channel and consumers choose their bank based on the proximity of a branch to home or office, the importance of branches is that they provide the convenience of a physical network. In a world where consumers choose their bank based on its understanding of their preferences, the importance of branches is that they provide a private digital network where customer activity, assuming that it is digitized through proprietary apps rather than handled manually (in which case the data are difficult to capture) on web-sites (in which case the captured data may be accessible to others at least in part), can be assembled into a proprietary customer profile. In short, branches provide the proprietary core of a bank’s digital network.

“Flagship” branches (such as Citi’s branch in Union Square, Manhattan – see Exhibit 3) serve the additional purposes of providing a sense of community and aspiration around the brand, an education on how to use the bank’s software (think Genius Bar at Apple stores[2]), and an opportunity for affluent customers to meet in-person with investment and other specialists. We expect these flagship branches to be complemented by smart (in the sense of being app- rather than teller-enabled) “kiosk” branches in the suburbs to allow customers to self-help with secure transaction processing (and generate the data for a digital profile at the same time) and have by-appointment, in-person access to roving mortgage and investment specialists.

Exhibit 3: Citi’s Flagship Branch, Union Square, Manhattan

The Likelihood of Bank/Merchant Partnerships in Mobile Payments

Beyond depositing checks, the other most common reason consumers visit branches is to withdraw cash. While the dollar-share that checks contribute to US consumer payments is falling rapidly (to 16% in 2012 from 64% in 1990 – see Exhibit 4) because of substitution by debit and credit cards[3], the contribution of cash remains stable at over 20%. This will change as digital wallets make it more convenient to use cash-alternatives for smaller payments (and are increasingly accepted at QSRs such as Starbucks and Macdonald’s), and with person-to-person applications.

Exhibit 4: US Consumer Payments System by Tender Type

Source: Nilson. Excludes ACH payments and non-purchases (e.g. food and lodging for employees)

We have written extensively about the appification of card payments through digital wallets (see, for example, “Mobile Wallets: Structural Advantage of MCX over Apple, Google, PayPal, and Square” dated January 26th, 2014). For now, we reiterate only that merchants understand the critical role of hard payments data (particularly the in-basket, SKU-level data to which they have access) in assembling a digital profile for customers and are intensely focused on protecting and controlling these data for themselves; indeed, a core motivation for their collaboration through the Merchant Customer Exchange (“MCX”) payments system is to keep these data out of the hands of Google: “What would these other wallets be doing with that data if they were the ones collecting it? Would they be using it or selling it? Would they use it to steer consumer to competing stores? The control and ownership of the data is really important to us [MCX] retailers”. John Manna, VP Lowe’s, Jan 2013

Of course, this does not mean that banks will gain access to the payments data to help them build their own proprietary digital customer profiles, but they hold an important asset. While merchants can see the in-store spend of a customer, the bank issuer of a payment card can see the out-of-store spend (and, unlike Visa[4] and MasterCard can link this spend to the personally-identifying information or “PII”). In short, merchants and banks will both benefit from aggregating the in-store and out-of-store payments data to assemble a more complete digital profile of a shared customer and we expect retailer/bank data partnerships[5]. Furthermore, both merchant and bank have an interest in keeping data proprietary from third-parties and we see this as a key reason for JPM’s announcement last February that it would develop a private processing network. Indeed, JPM reported that it planned to distribute offers to customers through participating merchants that would be applied at the time of purchase. CEO Jamie Dimon was explicit about the advantage of a direct relationship with merchant partners: “It [private, as opposed to Visa, processing] allows us to go to merchants and strike our own deals; we just think it will be a better relationship between us and the merchant”.

Beyond the opportunity for pooling data, merchants need banks to provide pre-approved credit at point-of-sale. The traditional means of offering this through the Visa and MasterCard networks makes payments data, at least at the ticket- (rather than item-) level and at least by card account number (rather than cardholder identity) available to Visa and MasterCard. Members of the MCX consortium clearly prefer to protect payments data more tightly but will nonetheless need to enter into partnerships with banks on a private-label basis if the MCX wallet is to be credit-enabled. We expect these banks to strike data-sharing agreements if, for no other reason, than to be better able to manage credit risk. As discussed in our note of November 4th, 2013, “Winners and Losers in Mobile”, this creates an opportunity for banks with strong private-label platforms (see Exhibit 5); COF is our favored play on the theme (given GE will likely be pre-occupied by the spin-out of its consumer finance business and C may prefer to harvest, rather than invest, given DTA issues).

Exhibit 5: Share of $140bn of 2012 Charge Volume on Private Label Cards

Source: Nilson 1019

  1. ClearXchange does not currently offer a real-time solution likely because the intention is to roll that out later, perhaps once fraud countermeasures are better designed for realtime, as a premium service
  2. Indeed, for its flagship branches, Citi hired the same architectural firm that designed Apple’s stores; Eight Inc
  3. Affluent consumers use credit cards for their rewards rather than credit, and pay-in-full at the end of each month to avoid interest charges.
  4. Visa is trying to access the PII with the wallet in which it promises additional services, such as customer alerts, if issuers give up the mapping between card number and card holder. Smaller issuers have signed up, but large issuers understand the importance of a proprietary digital profile for customers and will not.
  5. In Hong Kong, Citi offers retail customers of Hutchison personalized offers based on spending patterns through a mobile phone payment service.
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