GonzoBanker recently released its list of Top 20 Banking Realities for 2020.
While many of the items on this Top 20 list were carryovers from 2019, such as consolidation of financial institutions, slowing revenue growth, and the shortage of talent to replace outgoing management at financial institutions, several items on the list relate directly to the value of the digital channel. Below is an in-depth analysis of Reality #8.
No bank has taken a sharp enough pencil to branches. With robust deposit growth in the past decade, banks have kept an eye on staffing and watched their average deposits per branch grow nicely. The issue? There are still 106,000 branches when credit unions are considered, and banks are overestimating the contribution many branches are making to retaining and growing revenue, all while starving investments in marketing, digital and data maturity.
The traditional bank branch was long seen as the only way to grow core deposits. Those core deposits could then be used to fund loan growth or to place into investments for the financial institution. At the heart of both these practices is the need to generate revenue. The issue with obtaining core deposit growth and increasing loan revenue through the physical branch model is the expense to get those deposits due to the lease, operating, and maintenance costs of the branch. Also, the most significant expense of the branch is the human resources to staff the branch. When those costs are factored in, the actual value of the core deposits is reduced, and that expense is passed on to the funding of the loan or the investment. A loan priced at 5% may only yield 4.5% after the branch expenses are factored in. The value of investment yields may be reduced by 0.75% based on the branch operating costs.
The digital channel has a lower operating cost due to no requirement for physical space and reduced headcount to run the function. The digital channel's account opening and loan acquisition products have grown in their abilities over the last ten years. Consider the amount of staff time required to take an account/loan application, run the necessary ID and OFAC validation, and WAIT for a decision to approve the loan or new account in a traditional branch. That process takes time and time is money.
The digital new account and loan opening process, on the other hand, offers an expedited way for an applicant to enter an application and runs all the ID and regulatory checks in the background. In many cases, a new account can be approved and opened within minutes of the application being submitted. This expedited processing, together with no need for financial institution personnel to take the application, and quick approval times, increase the value of the deposit of the new account or loan due to lower operating expenses and faster approval times.
If you still think that your digital channel is a cost center, it may be time to run a new analysis. Compared to traditional branch expenses like real estate, rent, utilities, employee headcount, etc., you may find that your digital channel is your most profitable branch. Come to think of it, is your digital channel recognized as a branch? If not, that is an excellent place to start. Then you can compare the same branch metrics to the digital channel and let the results speak for themselves.