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Retail Banking 2020: the Future of the Branch Network is Digital

Up to 50 percent of today’s bank branches may become obsolete by the year 2020, according to new Jones Lang LaSalle research. But real estate investors shouldn’t expect all those sites to come on the market anytime soon. Obsolete branches are expected to benefit from integrated real estate and technology strategies that make the most of both bricks and clicks. The recent “Global Retail Banking 2020” research report details strategies banks are deploying throughout the Americas, EMEA and Asia Pacific regions, charting emerging trends that will change the face of retail banking by the year 2020.

In a tricky balancing act, many banks today are faced with the dual needs to reduce total real estate costs while simultaneously pursuing targeted growth strategies. Banks are under more pressure than ever to right-size their facilities, reduce square footage per worker and reduce overall occupancy costs. Looking outward, the evolution of retail banking has real estate implications as well, as the age of the sprawling branch network comes to a close while banks adopt new technology-driven branch network models. All things considered, banks that are able to view their facilities as strategic investments will be best positioned to achieve successful top-line results.

The Global Rebalancing of Bank Real Estate

Many banks are re-thinking the space they occupy around the world. While right-sizing their North American footprint as part of the relentless drive to reduce operating costs close to home, many banks are also seizing upon robust growth opportunities in emerging markets overseas. According to a survey of Jones Lang LaSalle’s annual Banking Forum participants, bank executives are focused on achieving the maximum return on investments in assets, people and space.[1]This focus represents a change from the traditional cost-center view of real estate, under which cost reduction was the only priority. While cost is still important, it is among multiple factors to consider as banks maximize their investment in their institutions’ occupied space.

With regard to bank-occupied real estate, Banking Forum survey respondents reported that their top priorities are to manage total occupancy costs, increase the flexibility of the bank-occupied real estate portfolio, increase space utilization rates, expand into new markets and increase the productivity of employees. Having exhausted the immediate opportunities to trim occupancy costs, these executives recognize that banks need to look for more advanced real estate tactics to not just reduce costs, but to add value to the business.

Bricks and clicks: no longer competitors, but strategic partners

Technology adoption will be critical to many banks’ drive to remake their corporate real estate strategies. Of course, banks have long used sophisticated CRM and back-office technology to manage their financial operations – but forward-looking institutions are also using technology to boost the efficiency and productivity of their facilities. To manage facilities operating costs, for example, some banks are using cloud-based “smart” building management systems that remotely manage building operations to minimize energy waste.

Another priority is proactive planning and forecasting. Nearly all the Banking Forum survey respondents expressed a heightened need to get ahead of business unit planning with regard to real estate needs. Looking ahead, the most successful corporate real estate executives will be “space prophets” for the business units, using sophisticated modeling and forecasting tools to project various scenarios for facilities utilization.

Toward this aim, some bank corporate real estate executives and CFOs already are adopting portfolio management tools that can, for example, help a bank determine the productivity of the facilities it occupies, and assess whether and where it needs space, whether for management and general administration, call center operations or back-office functions.

As a result of advances in technological tools and new thinking, Jones Lang LaSalle predicts that, by 2015, the space allocated per average office worker will drop from 200 square feet today to an estimated 50 to 100 square feet per person in the future, dependent upon the industry sector and function. Banks, therefore, have an opportunity to generate significant cost savings if they can use their facilities more strategically.

Mobile workplace, less required space

Mobile workforce technologies, such as tablets, smartphones and videoconferencing, are at the forefront of changes related to where and how bank employees work. While not new, worker mobility programs have been pushed to the top of the agenda as a tactic to lower occupancy costs, achieve sustainability goals and increase employee productivity.

When asked to identify the largest cost savings opportunities to real estate over the next five years, worker mobility programs was the top selection of Banking Forum survey respondents, followed by portfolio rationalization and more accurate tools for forecasting space demand. More than 40 percent of Banking Forum respondents expect 16 to 30 percent of their U.S. workforce to be enrolled in a mobility program by 2013.

Evolution, not revolution

Just as banks are seeking to optimize their office and back-office facilities, many are also taking a close look at their branch network real estate. A typical bank’s portfolio varies enormously across size, location type, traffic flow and brand identity. However, these variations are not necessarily the result of strategic portfolio management.

Amidst the industry challenges of recent years, one positive development has been the recognition of retail bank branches as a type of retailer – and thus subject to the same demographic and customer analytics that retail chains use, and subject to the same “bricks and clicks” competition and synergies. While some banks may have paid more attention to their commercial and investment banking locations in central business districts in the past, this new perspective underscores the significance of the branch network and the underlying real estate to driving financial results.

Where branch expansion was a given during the housing boom, branch networks have been shrinking since 2009, according to Celent data. Facing a confluence of regulatory, legal, economic and competitive challenges, combined with the growing adoption of mobile and online banking channels, the “branches everywhere” model of the past is neither effective nor affordable.

Industry consolidation has only exacerbated trends that began with the emergence of mobile banking and are fundamentally altering the size and structure of bank networks. Branch-driven revenue has declined in recent years, while branches continue to have higher per-transaction costs than call centers and ATMs, according to Fiserve. As reported in Jones Lang LaSalle’s Global Retail Banking 2020 study, up to 50 percent of branches in U.S. bank networks may ultimately be declared obsolete—although not necessarily defunct—by 2020.

Clearly, the age of the sprawling branch network is drawing to a close. Yet, the opportunity for realizing increased revenue potential by investing in retail banking real estate remains, according to Global Retail Banking 2020. At this point in the retail banking business cycle, strategic real estate optimization and investment in a bank’s branch network can make a profound impact on future overall bank performance. Given that branches constitute 75% of a bank’s total distribution costs, according to Capgemini data, implementing smart retail real estate strategies will be a critical part of boosting bank performance.

Branches may be outdated – but far from irrelevant

Contrary to averages, some institutions are even expanding their branch networks, albeit more thoughtfully than in the past. JP Morgan Chase, for example, is targeting 500 U.S. branch openings per year. Industry analysts expect the expansion not only to generate greater account penetration in markets in which it has little street presence, but also to support the bank’s goal of connecting with high net worth individuals, who as a customer group prefer branches to online banking.

While many branches will continue disappearing as leases expire and long-term plans call for overall contraction, banks have too much depreciation left in their branch assets and contingent liability on their balance sheets to afford the wholesale disposal of branches. Furthermore, even if mobile technology and non-traditional competitors displace some services from physical branches, consumers will always want both convenience and the ability to interact with their bank on a personal basis.

However, Global Retail Banking 2020 points to the dramatic evolution of branches as retail outlets. Following the experience of other retail sectors, many U.S. banks will need to adopt a mixed “bricks and clicks” strategy to succeed. Branches will likely remain the cornerstone of the typical bank’s retail sales and service proposition, but branch formats and networks must recognize the widespread consumer adoption of mobile and online banking.

Retail banking site selection now encompasses not only branches, but also anywhere that banking services can be conveniently provided to consumers. Whether that means providing a service kiosk in a train station or a premium branch in a business district, proximity to the right kinds of customers ultimately matters more than having a traditional, prestigious façade. Flexibility and agility will provide a competitive advantage for banks with the operational wherewithal to provide, for example, a “pop-up” bank in a temporary location.

Some banks already are exploring the hub-and-spoke network model. Flagship branches in major markets can offer the most sophisticated products and services, while smaller satellite branches will provide access to basic banking services, possibly supplemented by call-center videoconferencing to provide a human touch without the cost of a full-service branch.

Real estate, technology and the customer experience

Taking another page from the retailer playbook, some banks are applying their deep customer intelligence data to the deployment of branches. An increased focus on customer segmentation is having a direct impact on not only how and where branches are being established, but on the total branch experience.

Yesterday’s “branches everywhere” approach is being discarded for highly selective site selection based on deeper analyses of micro-markets and target customers and more thoughtful considerations of what constitutes a trade area. Bank of America, for example, is converting some—but only some—of its branches in Washington, D.C., and Los Angeles into "specialty stores" where high-value customers can get expert advice on mortgages, small business and investing in addition to traditional teller services.

Those “deluxe” branches will focus on selling to high-value customers in locations in which those high-value customers are concentrated, while low-value transactional customers will be guided to ATMs, direct channels or even entirely cash-less branches. For small and remote branches, some banks will likely create high-tech centers with minimum on-site staff, but high-touch service available through 24-hour call centers accessible via videoconferencing. Some banks are even experimenting with quasi-Internet cafes, offering high-tech environments with relaxing furnishings and wi-fi access along with ATMs, service kiosks, areas for plug-in consumer devices, and tutorials for mobile and Web banking.

A focus on consumer segmentation has created a greater focus on both branch locations and branch formats, with implications for the types of facilities selected for bank branches. Some banks are revisiting their branch design, following the lead of other types of retailers in conveying brand identity through the total customer experience. In certain prime locations, some banks have incorporated upscale, home-like furnishings in branches targeting high-net-worth wealth management consumers—a highly sought-after segment that expects a high level of service and responsiveness.

Cash is king – or is it?

The move to a cash-light society will trigger still more changes in how branches are deployed. Since the size and configuration of a retail bank branch traditionally has been conditioned upon the number of teller points at the counter, radically fewer cash and coin transactions will inevitably reduce branch size further. Branch design will continue its shift from a focus on teller counters to a focus on sophisticated ATMs and other technology-enabled service delivery channels.

As banks seek to gain market share through new products, services or markets, they will be tasked with getting ahead of these business unit strategies. Best-in-class corporate real estate teams and their institutions will be defined by their ability to proactively plan for and execute real estate solutions that support long-term business goals.

As the third-largest operating expense for banks, real estate has long been considered simply a cost of doing business. The new thinking among forward-looking institutions is that real estate is a tool that should be leveraged to support business goals. To help their institutions succeed in the long term, bank administrators should proactively plan for and execute real estate solutions that support long-term business goals.

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[1] The Jones Lang LaSalle Banking Forum survey is administered to seven leading U.S. banks and financial services firms representing $2,500 billion in total assets under management and employing approximately 170,000 employees across the U.S. and Canada.

By Stuart Hicks, President, and Joe Brady, Managing Director, Banking Industry Group, Jones Lang LaSalle

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