Why Banks Don't Look Like Banks No More

Branches are becoming less and less relevant to core banking transactions but are gaining importance as customer servicing and retention hubs. Meanwhile, the everyday business of lending, fund transfers and customer acquisition is moving over to other channels

"Customers are not welcome". In the bad old days of union-dictated work practices, this could well have been the unstated anthem of public sector banking.

Today, the same mantra is driving new-wave banking as banks evolve from being just physical money shops to something more omnipresent. Want to withdraw money? Don't call us at the branch. Go to an ATM. Want to borrow to buy a house? Our representative will bring it right to your doorstep. Want to make a payment to someone? A few clicks on the computer mouse should do it. You could even pay someone from your mobile phone. An auto loan? You could get these from your auto dealer himself.

Welcome to multi-channel banking. Today your bank has grown tentacles that go beyond mere brick structures. It resides in your computer, your telephone, your mobile, your car dealer's showroom, and in the briefcases of selling agents who hawk everything from loans to credit cards, mutual funds and life insurance policies. And they may not be employees of the bank at all.

The new theme-song: don't call us, we'll call you. Citibank, in fact, finds it more expensive to handle customers at the branch than through any other channel. So it even charges a fee from customers who want to transact at a branch. The message: unless your transaction is that important, don't come over just for a chat. HDFC Bank is likely to follow suit. Says Mudit Saxena, vice-president and head (retail marketing and internet banking) at the bank, "We are considering charging a fee from customers visiting our branches if they don't maintain a minimum balance of Rs 5,000 in their accounts."

What Saxena and others of his ilk are trying to do is change customer-habits that had evolved in an era when you had to spend time at a branch to deal with money. But today you can bank at your time and convenience from any place. You don't need the branch no more, but some customers don't seem to know it.

HDFC Bank, for example, has already migrated almost half of its banking transactions to alternate channels like ATMs (50 per cent), net and mobile banking (10 per cent) and phone banking (5 per cent). Similar changes have taken place at ICICI Bank. Two years ago, 95 per cent of transactions were at the branches; today, it's around 40 per cent.

Another 45 per cent of transactions have been moved to ATMs, while internet and phone banking account for the residual 15 per cent. Among foreign banks, HSBC branches account for 25 per cent of transactions. Citibank does only five to seven per cent of transactions in terms of volume through its branches. The share of the net is higher at 15 per cent while the lion's share - nearly 80 per cent - is shared by telephone and ATMs.

Four forces are hastening this transition from single to multiple channels.

Value-in, volume out: Banks want to use the branch to generate high-value business and target high-value customer relationships. They are pushing low-value transactions - which form the bulk of banking activities - to self-service channels like ATMs and the net.

Improving channel efficiency: Some transactions work better out of a branch. For example, housing and auto loans can work more efficiently through direct selling agents, who can reach your home to get the documentation done. Phones and the net work well for bill payments.

The demographic divide: The older set of customers prefer branch banking while younger customers adapt more easily to ATMs and the net.

Technology as a tool for cross-selling: At ICICI Bank ATMs, you can enquire about other financial products like insurance or mutual funds. At HDFC Bank and Citibank, phone-banking and net banking are used extensively to cross-sell other banking products.

CHANNEL MIGRATION

Says Sharad Mohan, vice-president and product head (banking and investments) at Citibank: "It is not correct to say that we are migrating our customers away from the branch. We actually provide options to the customer and then the customer selects the most convenient channel through which he wants to transact. Our customers do not visit branches because they do not need to do so, given the kind of functionality we allow on the alternate channels."

Not everybody thinks channel migration is a great idea. One bank's CEO points out that when customers stay away from branches for prolonged periods, banks may be losing opportunities to cross-sell other products. After all, the whole point about becoming a universal bank is that you become a one-stop shop for financial products.

Chanda Kochhar, executive director of ICICI Bank, hastens to correct this impression. "It is not that technology is moving customers away from the bank. Technology has made it easier for us to reach out to the customer. It is true that many Indian customers prefer a human face (to deal with), but human resources are expensive and technology helps us generate (business) leads which can then be followed up by our personnel," she added.

Among alternate channels, the ATM has emerged as the closest substitute to the branch. The objectives behind setting up ATMs are many, says Vivek Kudva, country head, personal financial services, at HSBC India. It is cost-effective as the cost per transaction on an ATM is just 30 per cent compared to a branch. In smaller cities and towns, cost saving is higher as real estate costs in housing ATMs are even lower.

"For UTI Bank, our channel strategy has become our USP," says Hemant Kaul, vice-president, retail banking. The ATM expands the command area of a branch manifold at a lower cost. This strategy makes even more sense for new-generation private sector banks since they have a weaker geographical presence. As V Chandrasekhar, general manger (IT) and chief information officer at Bank of Baroda points out, "the thrust of private banks on IT can be understood by the fact that they need to grow their reach in order to compete with public sector banks. ATMs and other channels have helped them grow while keeping capital expenditure under control".

A senior foreign banker who shares this view feels that as customers of public sector banks hold their accounts with branches nearest to them, they will keep visiting the branches. Customers of foreign and private banks will rely more on alternate channels because of the paucity of branches.

FORCE-MULTIPLIER

Apart from cost savings, an ATM can also bring in fresh revenues when debit or credit card customers of other banks transact through another banks' ATM. UTI Bank has been eyeing this business, targeting customers of foreign banks which do not have adequate off-site ATMs to service a widespread customer base. The bank had entered into an alliance with BNP Paribas (which subsequently closed its retail operations) a few months back and is currently talking to many other banks for similar arrangements. Non-UTI customers account for 10 to 12 per cent of total transactions at UTI Bank ATMs which accept both Visa and Mastercard.

With over 550 ATMs in 65 cities, UTI Bank's network is the second largest among private banks after ICICI Bank (1,000-plus). SBI, which is currently running neck-and-neck with ICICI Bank, is slated to become the bank with the largest ATM network by the end of fiscal 2003.

"Our ATM networks function on a hub-and-spoke model in which a branch is never more than 2-3 km away from an ATM in a city like Mumbai, and more than five km in smaller cities," says Kaul of UTI Bank. Thus, these ATMs serve as a powerful tool for customer acquisition. HDFC Bank's expansion plans have been highly conservative. Says Mudit Saxena: "We set up an ATM only when the concerned business manager demands it. I can say with full confidence that all my ATMs are viable." HDFC Bank has an internal benchmark of 200 transactions per ATM per day to judge the viability of an ATM.

Will the bank branch become a relic of the past over the next few years? Not quite. For three reasons. One, for all practical purposes corporate banking continues to be managed through branches. Banks have, in fact, gone to the extent of setting up special corporate banking branches to target prized corporate customers.

Two, even in the case of retail customers, branches act as service hubs for ATMs. Chanda Kochhar rules out the possibility of branchless banking in the foreseeable future. According to her, branches provide services to customers in a particular catchment area, with the ATM acting as a force multiplier.

Three, and most important, the fact is no channel is good for all seasons. For some transactions, the branch is the best bet, while for some others ATMs, phone banking or the net may offer better value.

A CHANNEL FOR EVERY NEED

The strongest argument in favour of branch banking is that it is the friendliest - and costliest - channel for transactions. So it makes sense using it as the base for creating and nurturing high-value customer relationships, or in situations where human interaction is vital. Phone banking also provides some amount of human interaction but involves high capital and maintenance costs. Net banking offers both low cost and high convenience, but lacks the human touch and depends upon customers' comfort levels with technology. Not surprisingly, the bulk of transactions on the net today are non-cash transactions.

ATMs have reduced the workloads of most branches, and its popularity is growing. New functionalities are also being added to improve usage. The flipside involves high maintenance costs which directly impact a bank's bottomline. So, when a bank aggressively expands its ATM network, it takes a short-term hit on profits.

Chanda Kochhar feels that ICICI Bank's ATMs are now being used to the fullest, and thus their share in total transactions (45 per cent) may not go up much. On the other hand, customers have not been all that enthusiastic about net banking which, at the peak of the internet hype, looked all set to draw the curtain on the traditional brick-and-mortar model of banking.

The share of financial transactions continues to remain low on the net, although most banks have introduced multiple security features. The net is most frequently used for making enquiries, including checking on account balances and obtaining information about the products. The second most popular transaction at icicibank.com is payment of bills, followed by funds transfer.

A major bottleneck, according to UTI Bank's Kaul, is the lack of a virtual clearing house in the country. To overcome this drawback, ICICI Bank has launched a product called 'e-cheques'. By using the RBI's electronic funds transfer (ETF) mechanism, ICICI Bank customers can transfer funds using e-cheques to any account in eight cities. When the RBI expands its ETF network, this will be extended to 14 centres. HDFC Bank also allows third party transfers to defined accounts, but this involves giving the bank details of the beneficiary party before-hand in writing.

Net banking, in a way, represents the next stage in the evolution of banking in which transactions will happen without the use of paper currency or even cheques. It could gather further impetus if online shopping catches on. But with shoppers still wary about using even credit cards on the net, the vast majority of banking customers may prefer to use traditional channels for money transactions. Mani Mamallan, executive vice-president of the India Switch Company, which runs the shared ATM network Swadhan, feels that the ATM will emerge as the most important channel of funds transfer. The net will take much longer to catch up.

The views of customers differ regarding alternate channels offered by banks. A public sector bank official said that the time saving features of alternate channels may not matter for people in rural areas or pensioners who have ample time. According to him pensioners come to a bank's branch to spend some time and also converse with bank employees as their social interaction is otherwise limited. Similarly, rural customers get a variety of information from bankers.

This suggests that demographics may play an important role in channel usage. The older customers may stay with branches, and the younger ones may shift to new-age channels. Mudit Saxena of HDFC Bank says that the older generation may not find it convenient to transact with phones or the net. But with the increase in proportion of younger people in our population, he expects the usage of alternate channels to grow fast.

VALUE IN, VOLUME OUT

In any event, the guiding principle behind the channel transition process is 'value-in, volume-out'. Thus while banks have been pushing low-value transactions - which also account for a high proportion of total transaction volumes - out of the branch and into remote channels, the branches continue to dominate the matrix in value terms.

This is true even for Citibank, where barely 5-7 per cent of the transactions go through the branch. The underlying logic is simple to understand: since the branch is an expensive channel, a transaction should be routed through it if, and only if, the branch can add value to it. Argues Anil Wadhwani, business manager at Citibank Suvidha, which handles lower-end retail banking: "I would like to make it clear that there is no charge for walking into our branches. We charge only when a customer does a transaction. We charge our customers for doing certain transactions even on the phone. It actually depends upon what kind of contractual obligations a bank assumes. When a customer does come to our branch, he gets a different banking experience and he is willing to pay for it."

A broad distinction can also be made between asset (loan) and liability (deposits and investments) products. Asset products, for example, are easier to sell through DSAs because all that a borrower looks for is low rates of interest and hassle-free borrowing. People do not mind accepting money from any source, but they are choosy when it comes to handing over money to anyone. Hence, when it comes to liability products, they prefer the branch though it is just as easy to make deposits through ATMs. Currently banks are not allowed to mobilise deposits through DSAs, but even if allowed to do so, it is unlikely that depositors will hand over cash or cheques to agents, says Mudit Saxena.

At UTI Bank, while 90 per cent of cash withdrawals are through ATMs (the bank allows withdrawals upto Rs 40,000 in a day, second only to Citibank's Rs 50,000 limit), only 3-5 per cent of deposits take place through ATMs.

On the other hand, the single dominant channel, which can be effectively used for marketing credit cards, is the DSA. A look at the selling patterns of different banks reveals that credit cards can be effectively marketed through other channels as well. Branches are often used to sell credit cards to existing customers. Direct mailers are frequently used to initiate the transaction, which is subsequently closed at a branch.

Car loans can best be sold at the point of purchase - often a dealer's showroom. Automakers often run their own financing subsidiaries and offer loans through the dealer network. Independent financiers like NBFCs and banks have been tapping dealer networks to sell auto loans. DSAs have been successful in selling auto loans by following up individual leads. Branches have been selling auto loan products to existing customers while banks which have not developed a DSA network still depend on branches for the bulk of their business.

Housing loans and personal loans are largely sold through DSAs. Some business comes through branches as well. Citibank manages high-value housing loans at the branches as a part of its wealth management services while the rest comes through aggressive DSAs.

CHANNEL STRATEGIES

HSBC: Leveraging branches to grow channels

At HSBC, only around 25 per cent of transactions are routed through the branches - much lower than any Indian bank. HSBC has around 250 ATMs, but another 2,000 are available on the Cirrus (Mastercard) network to the bank's premium customers. The bank bears the transaction charges for these third-party ATMs, since this is cheaper than setting up its own ATMs.

Vivek Kudva, country head, personal financial services, at HSBC India, explains the build-or-buy decision thus: if one is paying Rs 50 per transaction to other banks and an ATM costs around Rs 30 lakh a year to run, setting up one's own ATM is justified only if one expects more than 60,000 transactions per year. Otherwise it is better to share other people's ATMs.

Kudva emphasises the importance of bank branches in transiting customers to cheaper channels. HSBC has put computers at branches where customers can register for net banking and bank staffers give them a guided tour. Thus even customers without access to computers can use net banking from branches.

Outside the branch, HSBC's DSAs account for around 70 per cent of credit card sales while branches sell cards to existing bank customers. DSAs also play a dominant role in selling various loans, and their share varies from 50-75 per cent. Branches appear to be relatively ineffective for auto loans with a share of only five per cent.

HDFC Bank: Conservative migration

Conscious about maintaining profitability, HDFC Bank has been conservative in expanding its ATM network which now stands at close to 500. It has an internal benchmark of a minimum of 200 transactions per ATM per day.

Branches account for around 35 to 40 per cent of transactions, which is around the level of arch-rival ICICI Bank. The bank is also considering charging customers for transacting at branches if they do not maintain a minimum balance.

The number of active users of the bank's netbanking facility has trebled during the last two years to 2.2 lakh now. There are around 6.5 lakh transactions performed on the net every month out of which the bulk - 85 per cent - are non-financial transactions.

The bank's DSA network, which accounts for around a fourth of mutual fund sales, comprise over 40 per cent of credit card sales and around 60 per cent of auto and personal loans.

UTI Bank: ATMs as force multipliers

UTI Bank too has been expanding its ATM network. At around 550 ATMs in 65 cities, the bank sees its ATM network as a force multiplier for its branches. According Hemant Kaul, vice-president, retail banking rapid growth in the ATM network was necessary to feed the phenomenal growth of the bank's business. While the banking industry as a whole has been growing at an average rate of 16-18 per cent, UTI Bank's growth rate never fell below 50 per cent in the last nine quarters.

The bank is also trying to generate revenue from the credit and debit card holders of other banks by allowing them to use its ATMs. Keeping this acquisition business in mind, all the ATMs of the UTI Bank have been made Visa and Mastercard-enabled. Today, non-UTI customers account for 10 to 12 per cent of total transactions on its ATM network.

Citibank: Parallel banking

Citibank, which had positioned itself as a premium brand, has created a parallel vehicle to garner numbers. Its high net worth customers receive the complete wealth management service. They get value-added services at branches apart from non-branch channels. The bank launched its Suvidha banking facility to extend its reach to salaried employees, where customers are serviced substantially through non-branch channels. The bank, however, has an internal mechanism to upgrade higher-income salaried customers to the premium wealth management category.

Phone banking is a relatively popular channel among Citibank customers and, along with ATMs, account for around 80 per cent of total transactions. Apart from around 160 owned ATMs, Citibank customers can use the Swadhan network and Mastercard-enabled ATMs of other banks as well. For using Mastercard ATMs, the customer pays Rs 50 per transaction.

Citibank has a well-developed DSA network which accounts for almost the entire sales of its credit card and loan products. Branches sell high-value housing loans besides mutual funds and insurance.

ICICI Bank: Reducing importance of branches

ICICI Bank, the most successful in migrating transactions to other channels, has set up over 1,000 ATMs. Two years ago, 95 per cent of transactions were routed through branches. Today this has come down to 40 per cent. Another 45 per cent has moved away to ATMs, while phone and net banking account for the residual 15 per cent. Locations like petrol pumps, major business districts or even corporate campuses (like Infosys) were selectively targeted to tap a large number of customers.

There have been value-adds too: customers can pay bills and may soon be able to charge their pre-paid mobile cards. Apart from easy access and convenience, the third important aspect of ICICI Bank's ATM strategy is multi-lingualism. Its ATMs display information in four regional languages besides Hindi and English. These languages are Marathi, Kannada, Tamil and Malayalam. The bank wants to introduce tri-lingual interfaces in each state.

Chanda Kochhar, executive director of the ICICI Bank feels that the usage of ATMs may have peaked, but the share of the net has scope to rise. As customers are yet to be comfortable with net banking, they may need further inducements, she feels. Currently, ICICI Bank has registered over a million customers for net banking. As the transition process gets underway, net and call centres together are expected to account for 20 per cent of total transactions, leaving only 35 per cent to be routed through branches.

ICICI Bank is also using ATMs to generate leads for other products, including loans, mutual funds and life insurance.

Branches continue to play the dominant role in selling mutual funds, insurance and other third party products like RBI Relief Bonds. DSAs are either not allowed to sell them or are not very effective at it, for they require a high level of expertise in understanding customers' needs and risk profiles. New-age banks have set up personal banking desks at their branches to sell these products. An upgraded version of personal banking comes in the form of portfolio management (or wealth management) services, which offer the entire gamut of investment products to high net worth clients.

Alternate channels also make a partial contribution to the sales of various products. For example, HSBC gets five to seven per cent of its new cards business through its web-site and gets a few hundred leads for loans from apnaloan.com, says Kudva. Banks are trying to close sales of different products on the net. For example, credit cards and mutual fund transactions can be done on the net now at Citibank's website.

CHANNELS AS MARKETING ARMS

On an ICICI Bank ATM, a customer can ask for more information on products. Currently six options are available: car loans, credit cards, mutual funds, life insurance, online trading (icicidirect.com) and home loans. When a customer asks for information on any product, his action is recorded and the lead passed on to the relevant product seller. If he seeks information on life insurance, an ICICI-Prudential insurance agent can follow up on this lead.

Citibank's Wadhwani feels that migrating customers from branch to alternate channels does not affect the bank's ability to sell him other products. Actually, the customer does not want to come to the branch any more. Secondly, a bank has easy access to all information regarding a customer's financial position and can thus anticipate his requirements. Technology helps the bank track the accounts of its customers and offer them pre-approved cards or loans, adds Sharad Mohan.

According to Kudva, it is critical to manage the channel migration process well. It is important to educate the customers so that they may utilise the functionalities available on the net. HSBC has placed computers at vantage points at its branches where customers can register for net banking online with help from employees. Unlike other net customers, who have to wait for receiving their passwords by courier services, HSBC customers at the branch get their passwords immediately. IDBI Bank offers its customers their ATM cards and passwords within 10 minutes of opening an account. They can thus use their ATMs almost immediately.

Quite clearly, branches can be leveraged to make other channels work better. In the process, they may look less like branches of yore and more like convenient meeting places for facilitating customer servicing and retention.

(This article appeared in the July 2002 issue of Indian Management magazine)