These past couple months seem like a different reality (as in Twilight Zone different) which requires significant adaptation for all of us. The Coronavirus has put many business models to the test and greatly accelerated future industry predictions. One such prediction is the demise of the traditional branch model. In this issue, we’ll take a deep dive and examine the value of the digital channel when compared to the traditional branch model.
While the digital channel is enjoying the spotlight right now due to unfortunate circumstances, the reality is that there are several reasons the digital channel will surpass the traditional branch in terms of value to a financial institution. The problem is that for this transformation to take place, the burden of proof is on you. You need to address the value that the digital channel has in your specific organization. Our goal here is to equip you with tools and insights that can help you advance your digital objectives with the senior management team of your credit union.
Here are several general assumptions about the digital channel’s ability to provide member and revenue growth:
• Digital banking growth cannot offer the core deposit and loan growth that a traditional branch achieves.
• The digital channel is a cost center and not a profit center like a traditional branch.
• Compared to a branch, the digital channel’s ability to generate new memberships, accounts, and loans is anemic.
USE VALUE TO OVERCOME THESE ASSUMPTIONS
The core of the opportunity here is the acquisition of new members, the addition of new accounts/loans, and the upsell of additional products and services to members. Anemic digital growth is attributed to lower member penetration in the digital channel as compared to the branch/call center operations. There are a few problems with this logic:
1. Unless the digital channel has its own branch assigned to it, then there is no way to accurately measure the members assigned to that branch and the cost efficiencies of that branch vs. the other branches in the institution. That leaves the digital channel to be viewed as an AUXILIARY channel such as shared services, rather than as a primary channel/branch. In many cases, the digital channel is considered to be an expense center, as opposed to a profit center due to the improper classification of the channel.
2. Unless an account reassignment process is run periodically in the institution (most models are quarterly), then the real value of the digital channel is hidden. Account reassignment is the moving of the entire member relationship to the “branch” where the member is conducting all of his/her business. While a new membership may be opened in a physical branch, once a member signs into online banking or begins using the digital app, the majority (if not all) of their financial business is conducted through that channel. If those member relationships are moved to the digital channel through account reassignment and the digital channel is a separate branch as discussed above, then the real member value that resides in the digital channel compared to the branches/call center is revealed. It is true that the operating expenses of those members are passed onto the digital channel, which increases the operating expense of the channel. But… the revenue for those members is also given to the digital channel. Also, the operating costs for those members will be reduced over time due to the lower operating cost of the digital channel resulting in higher revenue of that member relationship to the institution.
3. Lastly, there is the assumption that the digital channel cannot market or upsell products to members since there is no “physical interaction” between a salesperson and the prospect. Ask any third-party provider offering credit/life insurance, GAP protection for a loan, or extended warranty protection and they will tell you that the digital channel predominantly outsells the branches. Why? Because the digital channel offers the product in EVERY member interaction. Consistency is the key to long term growth. Besides, the digital channel provides one-to-one marketing opportunities to digital banking users every time they “enter” the application. With the support of data analytics, these offers can be refined to meet the member needs more accurately. The marketing strategy of the “right offer at the right time” has never been better executed than through the digital channel. A member may remember an upsell discussion with a branch or contact center employee for three to five days after the interaction, and a direct mail piece is either thrown away or placed in a “to-do pile” that may never see the light of day again, but a digital product offer is always present when the member is in the digital channel with every login. Consistency.
The digital channel needs to be established as a branch competing for financial institution resources. Members who have moved most of their behavior to the digital channel need to be reassigned, including their deposits and loans. After all, as a branch, the digital channel will inherit the member expenses, so it should also be credited with the member revenue. As more members open relationships through the digital channel or are reassigned to the digital channel, the channel’s ability to provide targeted upsell offers becomes better than the traditional branch’s ability to do so because those offers are presented at every login and are always present until removed. Also, offers can be promoted via text and in-app messaging, which is more engaging and timelier than the traditional product email. The digital channel (branch) is poised now more than ever to become a contributor to the credit union’s bottom line through reduced operating expenses and lower-cost loan/new account acquisition with consistent and relevant marketing offers. One thing is for sure: the digital branch is not one that you would ever consider closing. In and of itself, that fact should beg the question of what percentage of the organizational resources are allocated to the digital channel.