Authored by:Klaus DallerupSheinal JayantilalGeorgi KonovAkos LegradiNuno PereiraHans-Martin Stockmeier

Global Banking April 2018Global Banking July 2018

A bank branch for thedigital age

1A bank branch for the digital age

The bank branch—as we know it—with tellersbehind windows and bankers huddled in cubicleswith desktop computers, is in need of reinvention.Most customers now carry a bank in theirpockets in the form of a smartphone, and visit anactual branch only to get cash or, occasionally,advice. Globally, financial institutions now processfar more transactions digitally than in branches,and since the financial crisis of the late 2000s,over 10,000 US bank branches have closed, anaverage of three a day.1 Despite such systemic

changes, branches remain an essential part ofbanks’ operations and customer advisoryfunctions. Brick-and-mortar locations are still oneof the leading sales channels, and even in digitallyadvanced European nations, between 30 and 60percent of customers prefer doing at least someof their banking at branches, according toMcKinsey research (Exhibit 1).

Changing customer behavior and the emergenceof new technologies do not spell the end of the

Introduction

Sweden

Netherlands

USSpainItaly France Germany UK

Exhibit 1

Bank in my pocket

Prefer doing everything remotely—transactions and advice/purchases

Flexible digital banking

Prefer digital channels for almost all bankingBut require face-to-face interaction for advice

Digital convenience

Prefer internet over mobilePurchase only basic products digitally Require face-to-face interaction for advice and complex products

Personal bankers

Favor branches or ATMs for all needsLow-tech seniors

Security seekers

Prefer branches or ATMs for all needs due to low trust in banks and Þnancial system

Customer segments

Segment behaviors

Segment share by country%

25

5

14

46

10

22

7

16

43

13

13 1320

9

1619 11

30

38

17

22 23

22

7

16

35

21

2128

27

17

15

14

14

8

31

31 31

15

15

Source: McKinsey 2016 Retail Banking Multichannel Survey; Finalta Digital and Multichannel Survey

Digital channels are on the rise, but a significant percentage of customers still prefer branches for at least some banking needs

1 “Withdrawal symptoms: The closing of American bank branches,” Economist, July 27, 2017, economist.com.

2 A bank branch for the digital age

branch, but rather the advent of the “smartbranch.” Smart branches use technology toboost sales and significantly improve customerexperience. When done right, the concepttransforms the way a bank branch operates(reduced staffing), significantly lowers real estaterequirements, and alters customer interaction(targeted, relevant sales and service-to-sales)—with a resulting 60 to 70 percent improvement inbranch effectiveness, as measured by costsavings and increased sales.

Our research shows that although many bankshave started to adopt elements of the smart

branch model, most are not extracting the fullvalue potential. Making branches smart is not amatter of simply installing new machines orbuying a suite of tablet computers. Smart branchtransformation builds on three pillars: 1) theseamless integration of cutting-edge branchtechnology, which has become cheaper, morereliable, and more accessible; 2) the adoption ofradically new, teller- and desk-free branchformats at every location; and 3) the use of digitaltechnology and advanced analytics to improvethe operating model in branches, includingpersonalized, data-driven sales and real-timeperformance management and skill development.

3A bank branch for the digital age

Smart branch technology

For retail banks, technology has several goals: themigration of transactions and sales to digitalchannels; 24/7 customer access for everyinteraction; a personalized approach to sales; anda unified, omnichannel user experience—meaningthat customers get a seamless experiencewhether they are online, on an app, or at thebranch. Customers should be able to come into asmart branch any time of day or night and quicklyget anything they need, from new products likeloans or credit cards to service. And no matterwhat device they use, the user experience shouldbe consistent. A number of technology solutionscan enable these goals (Exhibit 2).

Next-generation banker tablets. Tablets givebankers the freedom to roam the branch—much

in the way that Apple Store employees do—enabling them to increase sales and providesuperior customer service. Four critical featuresallow bankers to be truly effective:

Live customer transparency dashboards alert■bankers when customers make transactionsat branch machines like ATMs, so they canoffer support or personalized offers.

Advanced customer relationship management■(CRM) software gives bankers a holistic viewof a customer relationship and history ofinteractions with the bank, includingapplications, payments, and product holdings.New CRM platforms use comprehensivecustomer data and next-generation analytics-

Exhibit 2

Banker tablet with 360 view of customers

Interactive teller machine with remote teller

Video conferencing room

Service terminal

Teller cash recycler (TCR)

Robot greeter Interactive digital walls

Source: McKinsey analysis

Smart branches employ a range of technology solutions to provide full service at any time.

4 A bank branch for the digital age

based models to generate real-time, next-best-product recommendations. Using thisapproach, a bank in the Middle Eastincreased its service-to-sales conversion from1 percent to over 4 percent.

Digital sales modules allow bankers to use■their tablets to meet customer product needs,from credit cards and auto loans tomortgages, insurance, overdraft protectionand deposit accounts; they also support newcustomer onboarding. The tablets areequipped to scan and upload documentsonto bank systems, read fingerprints, ID cardsand passports, and perform credit scoring.These capabilities are also integrated withbranch technologies such as instant credit-and bank-card printing and back-officeautomation. A number of banks across theUS, Europe, and the Middle East have seensignificant improvements in customerexperience as a result of fully digital two-minute current account opening.

Assisted migration modules allow bankers to■migrate customers to digital channels foreverything from money transfers, address andemail updates, and check cashing, to largecheck deposits and withdrawals. Severalbanks have designed a “self-service”experience in which a banker can walk thecustomer through the process, leading tohigher digital adoption and customereducation.

Interactive teller machines (ITMs). ITMsembed most branch services into a machine; inremote locations, they can function as a “branchin a box.” By incorporating remote connection toa human banker, ITMs effectively extend branchhours to 24/7 and allow customers to do most ofthe things they would normally come to a branchfor: for example, deposits, account transfers,cashing checks, getting statements, and

authenticating over-limit cash withdrawals andmoney transfers. Customers can also apply forand receive products like credit cards, debitcards, and loans. Customer authenticationtechnologies include national ID/passportreaders, fingerprint scanners, two-step mobileauthentication, digital signature verification, andeven facial recognition.

Service terminals. With fewer features thanITMs, service terminals are simple, inexpensivedevices that can be placed both inside andoutside of branches (e.g., in shopping malls). Theirmain objective is to help less digitally inclinedcustomers feel comfortable with the experience ofdigital banking. They provide the same userexperience and interface customers would get ona mobile device and process nonfinancialtransactions such as statement requests; they canalso transfer money between accounts, andaccept applications for new products (e.g., creditcards). Service terminals also presentpersonalized offers that customers can respond toon the spot and use the same customerauthentication capabilities that ITMs use.

Video conference rooms. Located in the self-service area of the branch, a dedicated andsecure room equipped with VC technology andco-browsing software is accessible at all hours.Where most individual customers will gravitatetoward ITMs, video conferencing rooms aremainly there to serve small and medium-sizedbusinesses or individual customers with complexproduct needs, such as mortgages. Customerscan use video conferencing to get sophisticatedadvice, open lines of credit, sign letters ofguarantee, and update their business details, allin a confidential environment. A number of banksin the UK and Scandinavia are already usingvideo conference rooms in advanced ways.

Interactive welcome screens/walls. Imagine acustomer passing by a large video monitor inside

5A bank branch for the digital age

her bank branch. She is recognized by facialrecognition software, and identified through dataanalytics as not owning a car. Immediately, herimage is superimposed in front of a new vehicle;the screen prompts her to knock on the window,which opens the “car door” and gives her a viewfrom the driver’s seat. She is asked if she isinterested in a car like the one shown, and if shereplies “yes” she is offered a low-cost loan,

based on the bank’s existing data on her. Anearby banker, alerted by his tablet’s customertransparency dashboard, comes over to providemore information. This is one example of howinteractive walls can capture customers’attention and gamify interactions and productmarketing. On a more basic level, interactivewelcome screens can greet customers andimmediately direct them to appropriate channels.

6 A bank branch for the digital age

In a traditional bank branch, 70 percent of thefloor space is devoted to tellers and otherassisted sales and servicing areas, with 30percent dedicated to self service. Smartbranches flip this ratio, and have a significantlysmaller, simpler, and more streamlined footprint.Instead of wandering around trying to figure outwhere they need to go, customers areimmediately approached by an employee whoguides them to an intuitive piece of technology orassists them directly on their tablet. With theexception of a few large flagship branches, tellercounters and most of the back offices are gone.In their place is a distinctive layout constructedfrom three building blocks:

Self-service area: Located at the entrance■of the branch and taking up most of thespace, the self-service area is the core of thesmart branch. It is open 24 hours a day, andoffers ATMs, ITMs, service terminals,interactive digital walls, robot greeters, and avideo conferencing room.

Standing desk zone: Within the self-service■area, bankers at standing desks canproactively approach customers for sales andassisted servicing. Standing desks also signalto customers that transactions will be quickand efficient—no need for a long sit-down.

Smart branch formats

Exhibit 3

Fully digital booths (Þtting one customer) with secure entry

Overview

Size

Accessibility

Staffing

<10 m2

24/7

0 FTEs

Box branch

Modules ITM and/or self-service terminals

Small branch combining digital solutions with assisted human interface

<140 m2

Standard hours for in-person servicing

24/7 self-service availability

3-4 FTEs

Standard branch

All technology elements

Branch with relationship managers to serve speciÞc segments

140 - 250 m2

Standard hours for in-person servicing

24/7 self-service availability

5-7 FTEs

Segment branch

All technology elements

Segment relationship managers

Central/main full service branch

>250 m2

Standard hours for in-person servicing

24/7 self-service availability

>8 FTEs

Flagship branch

Suitable forremote areas

Most of thenetwork (85%)

~10% of branches ~5% of branches

All technology elements

All segment relationship managers

1 rotational banker as teller (by exception)

Source: McKinsey analysis

Smart branches come in four distinct formats, based on what is most effective for a location.

7A bank branch for the digital age

Priority lounge: Larger branches will include■priority areas for premium advisory servicesand support for customers and businesses.

Smart branches will all share a streamlined, moreefficient design, but there are several archetypesbanks can use based on what is most effectivefor a particular location (Exhibit 3). Booth-sized,fully self-service box branches with no full-timeemployees are ideal for remote or rural areas.Standard branches with three to four full-time

employees will comprise most of a bank’snetwork (85 percent). Segment branches have afew more employees and several relationshipmanagers who help serve customers in specificsegments, such as those requiring affluentbanking services. Located in more populated,urban areas, large flagship branches are onlyabout 5 percent of the network, with typicallymore than eight employees and one rotationalbanker double-functioning as a teller.

8 A bank branch for the digital age

The advent of the smart branch has implicationsbeyond the redesign and reformatting ofcustomer interactions. It also requiresfundamental shifts in how banks think about andsupport the branch and its employees.

A technology first and needs-focusedmindset. Digital technology should not be anadd-on to existing practices and processes. Itshould be built into customer interactions andemployees’ day-to-day work. The goal should beto migrate more than 90 percent of simplecustomer activities to assisted or self-serviceformats, to have simple and unified paperlessprocesses for sales and service, and to use next-generation analytics to deliver personalized offersthat are truly relevant for customers. Wheretraditional bank branches are reactive andservice-oriented, smart branches are proactiveand focused squarely on customer needs.

Transformed roles and capabilities. In thesmart branch model, almost all branchemployees will be multiskilled sales/servicebankers, and will spend 90 percent of their timeon targeted, analytics-driven activities. With mostsimple sales and service customer needs metthrough self-service tools, the need for greetersor tellers will be reduced. And the employees thatdo staff the branch will be equipped to delivermore for customers when they need it.

Importantly, technology doesn’t just make lifeeasier for customers; there are effective tools totrain bankers in the higher-value functions ofdelivering advice and sales offers. Gamifiedtraining videos on tablets make instructionengaging and efficient, and can be tailored to anindividual banker’s needs based on herperformance with actual customers so that timeis not wasted on irrelevant training. Chatbotscan give bankers instant access to informationabout a bank’s latest product offerings andpolicies, as well as details about their ownperformance metrics.

Digital performance management. Digitaltools can improve performance of branchemployees and the branches themselves. Digitalhuddle boards, for instance, can be highlyeffective for planning the daily goals andstrategies of both individual bankers and teams.They add to self-reported performance metricsby looping in data from sources such as ITMsand tablets, and an analysis of customermovements within a branch that are generatedfrom facial recognition software. Branchmanagers can get transparency into employeeperformance through a simplified commandcenter on their tablet. The command center caninclude live feeds, tracking of which employee isusing which tablet module, status updates on abanker’s adherence to standards, and dailymanagement briefings automatically prioritizedtoward the most pressing problems.

Recent time and motion studies have shown thatthe expectations of branch resourcing modelsare considerably out of line with the actualworkload. An accurate view of the duration ofcommon activities—such as transactions—aswell as untracked customer demand, leads tomore realistic resourcing models. Advancedmanagement dashboards that track real-timeworkloads and sales results give managers theflexibility to shift resources as required in a fact-based manner.

■ ■ ■

With the right tools and models in place, bankbranches can deliver radically improved, inspiringcustomer experiences. The bottom-line impactfrom a shift to smart branches will also besignificant—considering that physical branchesaccount for the majority of a bank’s operatingexpenses. Cost-saving elements includetransaction migration, self-service technologies,and smaller branch footprints. On the revenueside, analytics-driven service-to-sell, digital salessupport tools, near real-time digital performance

A new operating model for a new branch

9A bank branch for the digital age

management, and enhanced banker capabilitiesall contribute to increased sales (Exhibit 4)

Far from rendering the bank branch obsolete,technology holds the key to the branch of the

future. To reap the full value potential, a bankneeds to fully commit to the smart branch model,equipping its bankers—and their branches—withthe tools they need to succeed.

<1

5-10

<20

<40

<65

150100

100

100

100130

90

Exhibit 4

Sales(indexed)

Roaming sales approach, supported by advanced analytics

Financial migration

(over-the-counter %)

Majority of transactions handled by new technology

Service migration

(over-the-counter %)

Majority of transactions handled by new technology

FTE(indexed)

Automation of back- and front-ofÞce tasks and new operating model

Cost per branch

(indexed)

Profit per branch

(indexed)

Initial

Impact

End state

Source: McKinsey analysis

The impact of smart branches can be seen across a range of metrics.

Klaus Dallerup is a partner in McKinsey’s Copenhagen office. Sheinal Jayantilal and Georgi Konov are partners, Hans-Martin Stockmeier is a senior partner, and Nuno Pereira is aconsultant, all in the Dubai office. Akos Legradi is an engagement manager in the Budapest office.

The authors would like to thank the following colleagues for their contributions to this article: Ali Ab-basi (alumnus), Zubin Taraporevala, Daniel Rona, Ozgur Tanrikulu, Petko Rangelov, Muthanna Muslet,and Levente Janoskuti.

Global Banking Practice July 2018Copyright © McKinsey & Companywww.mckinsey.com/clientservice/financial_services