Many community banks were already rethinking the role of their branches when COVID-19 forced them to interact with customers in new and increasingly digital ways. But rather than buck physical banking trends, industry experts say the pandemic is furthering existing evolutions in how customers use branches, especially for complex financial services.
By Beth Mattson-Teig
This year’s pandemic brought challenges to in-person banking, but for relationship-focused community banks, branches firmly remain a vital way of connecting with customers. Yet, the role of the physical branch is evolving as more transactions occur digitally and banks increasingly focus on using branches to satisfy their customers’ complex banking needs.
It’s difficult for the digital channel to live entirely on its own, according to Josh Schoenemann, director of design at La Macchia Group, a Milwaukee-based design build firm that specializes in helping banks and credit unions achieve growth with value-added services to support clients’ planning, branding and technology integration needs. “The physical presence is a must to balance out the efficiency of the digital channels with the personal touch and personal relationship that people need before they take on some of life’s big financial commitments, such as a mortgage or a car loan,” he says.
COVID-19 is further accelerating branch trends that were already underway and is forcing bankers to rethink the branch experience. According to a 2020 FIS survey, 45% of consumers say the pandemic changed the way they interact with their bank. Most notably, there’s been an explosive shift to online and mobile banking. A snapshot of FIS data from April 15 showed that daily traffic for mobile banking platforms jumped 145% compared with the March daily average, while new registrations for mobile banking apps rose 207%.
“COVID forced customers to go to digital channels to do their banking, and now they are comfortable doing it,” says Kevin Blair, president and CEO of NewGround, a design firm in Chesterfield, Mo. In a July 2020 NewGround survey, 58% of respondents said they prefer online or mobile banking, versus 42% who still prefer meeting in person. That is a dramatic shift compared with even a few years ago, when the split was about 60-40 in favor of in-person transactions, Blair says.
However, Blair cautions community banks not to overreact. “The pandemic will end at some point,” he says. “It will take some time for people to reset, but creating radical change in physical environments in the next six months is not a good position when you are building something that you hope will last for 20 years.” He adds that now is the time to take a thoughtful approach to rebalancing retail delivery strategies and investment in both physical and digital channels.
Evaluating branch strategies
At $2.5 billion-asset Howard Bank in Baltimore, people are becoming more and more comfortable with digital channels and person-to-person, or P2P, transactions, says Drew McKone, chief deposit officer and executive vice president. During the four-month period from March through June 2020, the community bank saw a 17% decrease in teller transactions, compared with a 7.5% increase in retail online banking, an 11% increase in mobile deposit enrollments and a 4% increase in bills being paid online.
The pandemic confirmed the community bank’s strategy to align its physical and digital channels and operate more efficient hybrid or mixed-use locations. Howard Bank’s newest location, at the Tollgate Plaza Shopping Center in Bel Air, Md., is a good example. The 2,500-square-foot building houses both a traditional branch and commercial banking team offices.
The branch portion occupies less than 1,000 square feet. It leverages newer technology like cash recycling machines that allow the branch to operate more efficiently with fewer people, McKone says. It’s staffed with one manager and two cross-functional employees who can do teller transactions, open accounts and assist with lending. Future branch locations might not all be as small as 1,000 square feet, but they will certainly be much smaller than legacy branches, some of which are more than 4,000 square feet.
Broadly speaking, banks are incorporating more tech into branch locations to maintain relevance. However, Schoenemann says, the scope and purpose of that tech will vary depending on the bank location and the customers it serves. Some branches may be fully automated with self-transaction tools, self-education tools and minimal staff on hand to assist with that technology. In other cases, technology may be used to empower the employee-customer engagement with things such as tablets or laptops that are used to walk a customer through a digital loan application.
No one-size-fits-all approach
What a community bank’s future branches look like depends on the banks themselves. Banks need to have a deep understanding of their customer base, their expectations and what is important to them in a banking relationship. That means they need to do sophisticated analysis of who their customers are and how that aligns to market profiles to figure out how to best position physical branch locations.
“Without a really good understanding of who your customers and target customers are, you can’t really put the right things in place, or you will miss the mark,” says Tim Klatt, director of retail strategies at La Macchia Group.
It’s also important to emphasize that physical branches still play an important role for community banks. For example, face-to-face teller transactions at Sanibel Captiva Community Bank in Sanibel, Fla., dropped significantly in April and May but rebounded in June and July. In fact, the number of teller transactions was on par with July 2019. “We have a lot of customers who are retired and love coming into the branch to talk to people,” says David Carleton Hall, executive vice president, chief financial officer and chief operating officer at the $566 million-asset community bank.
Sanibel Captiva Community Bank recently opened its eighth location in Fort Myers in a renovated 16,000-square foot building that will serve as a combined operations center, with a branch occupying about a quarter of the building.
“Quite frankly, we look at branches quite differently than how a big bank would,” Hall says. “We know that for us to make an impact in a particular community, we need to be there. So, as we continue to expand, we’re going to have physical locations.”
In fact, the community bank expects to see more opportunities to open locations due to the consolidation and closures occurring among some of the larger national banks. Branches are important for growing market share, as physical proximity to a branch is still the primary reason a consumer selects a financial institution, Blair says, adding that the branch experience is going to continue to evolve. “It’s really about complex sales and service more than anything else, as well as brand presence,” he says.
The surge in demand for Paycheck Protection Program (PPP) loans is one example where customers needed a lot of assistance. “What that illustrates is that there is always going to be a need for banker and customer interaction for complex transactions,” McKone says. “What I think you are going to see a decrease in is the casual transactions—those business owners or consumers who stop in a branch because they are out doing something else.”
Preparing for the future
Although community banks will need to tailor branches to their clientele, there are some common themes emerging. Short-term changes include plexiglass at teller stations, as well as hand sanitizer, temperature check stations and stickers on the floor to encourage social distancing. Other changes likely to linger are appointment banking and increased drive-thru services, both adjacent to the branch and in remote locations in the form of drive-up ITMs, or interactive teller machines. “Those are wonderful, because they are bridging human and digital if the customer chooses to interact with someone, and they also give you a brand presence without having a full physical branch,” says Gina Bleedorn, chief experience officer at Adrenaline, an experience design agency in Atlanta.
The branch is not being entirely tipped on its head, Schoenemann says. However, many banks will continue on the path of shrinking in size as a result of less foot traffic, increased efficiencies and more services shifting online. “We’re still going to see transactions be a function of the branch, but it is not going to be the primary function and it won’t generate the volume that it used to,” he says.
“We have found that our customers want to have a place close to where they live where they can sit down with a banker and discuss their finances.”
—Bill Day, Frost Bank
Banks have been steadily downsizing even before the pandemic. The average size of a freestanding branch has dropped from about 4,000 square feet a few years ago to about 3,000 square feet currently, and that decline will continue, Blair says.
Many banks are continuing to shrink teller lines as they introduce universal bankers and more collaborative meeting spaces. Despite the trend toward fewer branches, $39.4 billion-asset Frost Bank in San Antonio, has been actively adding branches as part of a 25-location expansion that began in December 2018.
“We have found that our customers want to have a place close to where they live where they can sit down with a banker and discuss their finances,” says Bill Day, the community bank’s senior vice president of corporate communication. “The location doesn’t have to be big, but it does have to be welcoming and accessible.”
One of its most recent additions is a branch in the northern suburb of Tomball, Texas, that features one of Frost Bank’s newer design features: a welcoming greeter station where universal bankers can help customers make deposits or withdrawals, ask account questions, open an account or apply for a loan.
Rightsizing banks is a bit of a delicate balancing act, as smaller branches tend to be more transactional and bigger locations tend to be more relationship oriented, with more touchpoints and opportunities to cross-sell, Blair says. To that point, some banks may adopt a hub and spoke model with a larger main branch and smaller satellite locations that offer convenience and brand presence.
“The consumer is still migrating toward digital, so all banks need to be cautious so they don’t overbuild or overspend in a market,” Blair says. “Flexibility is really important, because we don’t really know with 100% certainty what it’s going to be like five to 10 years from today.”
Future branch trends
Experts say there’s no one-size-fits-all solution to what the future branch may look like—but there are trends common among many community banks. Here are some of them, illustrated by images from a new Williamstown Bank branch in Parkersburg, W.V.
Social distancing. Banks will need to reconfigure lobbies and teller lines if they haven’t done so already.
Going green. Banks will continue to embrace sustainable practices like energy-efficient lighting and electric vehicle charging stations. COVID-19 has also renewed the focus on ventilation.
Shrinking footprints. Many banks will continue to downsize to reflect a decline in foot traffic.
More tech. Some branches may be fully automated with self-transaction tools (such as interactive teller machines, or ITMs) and self-education tools, while others may use tech to encourage customer engagement.
Universal bankers. Layout and design will adapt to the shift away from transactional teller lines and toward space that is more conducive to the collaborative, face-to-face meetings needed for more complex services.
Resurgence of the drive-thru. COVID-19 has shifted more traffic to convenient, contactless drive-thru services, and that trend is likely to continue after the pandemic subsides.
Reconfiguring signage. Banks are going digital with signage that can be quickly updated and that’s located where customers are, such as in waiting rooms and near drive-thrus and ATMs.
Beth Mattson-Teig is a writer in Minnesota.