Branching out

A bookshop? A yoga studio? No: your local bank. And it is out to get you

WALKING into one of Umpqua's many “stores” is a strange, if pleasurable, experience. There are plush chairs where you can sip free Umpqua-branded coffee, a shop peddling books and music, computer terminals to surf the internet and, often, a yoga class. The smiling employees—all trained by Ritz Carlton, a luxury hotel chain—drop a chocolate onto a silver tray with customer receipts. That Umpqua is a bank comes as a surprise. But a retail bank Umpqua is—small and fast growing, with 144 branches in western America, up from only five 12 years ago.

Umpqua's approach may seem whimsical but it was the result of careful study over a decade ago when Ray Davis, its chief executive, noted a shift in people's relationship with their bank. The cornerstone of local banking had been dealing with simple transactions—depositing cheques and helping customers. But the advent of ATMs and call centres was sucking activity out of the branch. “How do you keep the branch relevant when customers increasingly do not need to walk through its doors?” Mr Davis asked.

The question was prescient. Today, the popularity of internet banking means even fewer transactions are done at the counter. According to Celent, a consultancy, 40% of American households bank online, almost twice the proportion that did in 2002. TowerGroup, a research outfit, reckons that by 2010 most transactions will have migrated online.

Such a switch looks all the more likely because of the successful “direct banks” that have been launched in the past couple of years by Citigroup, HSBC and non-bank firms such as Charles Schwab, an online broker. These online businesses have begun attracting not just savings accounts but checking accounts, too—the most profitable balances at the branch.

The shift away from cheques to plastic and digital payments has also played a role. Traditionally, processing cheques accounted for around two-thirds of a teller's job, says TowerGroup. Even making loans has become automated at some banks, such as Spain's BBVA, which allows certain customers to withdraw pre-approved loans from an ATM without ever speaking to a credit officer.

None of this means that the branch is dead. Indeed, small businesses still make frequent use of bank branches, as do individuals seeking sophisticated products. But all the business now done outside a bank's four walls means the role of the branch must change. That is especially important for banks that have greatly expanded their branch networks in recent years, at no small expense.

Those that do may have history on their side. Mike Redding of Accenture, a consultancy, notes that in Scandinavia in the 1990s, big banks closed down swathes of branches and pushed customers online, expecting cost savings. Instead, the banks lost lots of customers, their revenues stalled and they ended up back-pedalling. “The branch matters,” says Mr Redding.

Fat fees, low-fat ice cream

Umpqua's style of business is further removed than most from the normal ways of retail branch banking. Tellers have been replaced by generalists (called “universal associates”) who are paid largely on sales commissions—rare in banking. Each branch has in its budget some cash that every quarter must be spent on customers—a bouquet of flowers for a sick customer, perhaps, or ice cream on a hot day.

Indirectly the customer pays for such service, of course—Umpqua's fees are not cheap. But Mr Davis believes clients see it as a worthwhile expense. “In the digital age, where everything from books to banking has become commoditised, you have to compete on more than price.”

Umpqua is one of a few banks that woo customers by selling non-financial products as well. Another pioneer in this field is BBVA, which flogs a wide array of wares—from houses to cars to health care—in a few branches. BBVA believes it can wield its vast financial firepower (it is Spain's second-largest bank by assets) to buy products more cheaply than consumers could and distribute them through its branches at a profit. Customers could use BBVA to finance their purchases.

This is still being tested but executives have high expectations. “It is absurd to think that a branch can be very profitable without pushing more products and services through it,” says BBVA's José Olalla. Selling stuff is also a way to draw new customers in, he hopes.

Along the same lines, BBVA is rolling out the “Duo branch”, which makes its assets sweat even harder. In mid-afternoon, when banks usually close in Spain, the branch is transformed at the flick of a switch (and with the clever use of curtains) into an outlet targeted at immigrants, offering cheap telephone calls home, remittance services, legal advice and the like. The idea is that eventually the new arrivals to Spain will become bank customers. But in the meantime, its main clients are given no indication about the branch's moonlighting activities.

Other banks, perhaps not as ambitiously, are finding new ways to bring life back into the branch. They include investments in technology to free staff from mundane activities so they can concentrate on selling new services to customers. The newest Bank of America branches use palm-identification software to give customers access to security-deposit boxes without the assistance of an employee. As part of a £400m ($800m) refurbishment project in Britain, HSBC is building branches with a clearly demarcated “self service” section. Much of the rest of the branch is given over to serving well-heeled customers. “You want to use your most expensive overhead—the branch—for your highest-value transactions and automate the rest,” says Joe Garner of HSBC.

Spain's largest bank, Santander, has gone a step further and rigorously profiles customers to see what new products it can sell them. After online analysis of their earning and spending patterns, it automatically assigns them a credit line—which releases staff to sell new products. “Most big banks are still struggling to do this,” says Jerry Silva of TowerGroup.

Fortunately for them, customers are creatures of habit when it comes to banking—perhaps because they also want their money managed conservatively. The more choice clients have, however, the more likely it is that their habits will change as well.
Jun 14th 2007 | NEW YORK From The Economist