There’s a strong statistical argument to be made for disruptive technologies that change consumer behavior. I’ve argued the impact of this on branch banking extensively starting with Branch Today, Gone Tomorrow, and more recently in Chapter 3 of BANK 3.0, but I’m still faced with significant resistance in the retail banking industry at large. While there is growing evidence for a grass roots change in bank behavior, it’s not uncommon to see quotes or responses like this still in the banking sector:
Ten years ago the consultants said to us that we had to scrap our branches and go straight to the internet, but I had heard those kinds of statements before with the credit cards and ATMs…I’m old enough to remember.”
Alfredo Sáenz, CEO Santander (The Economist, May 19th, 2012)
I think that this sort of comment is effectively hiding your head in the sand, ignoring the signs. Thus, I thought I’d share a statistical view of the triggers that result in the deconstruction of traditional distribution systems, and look at the evidence we can already see in the retail banking space to give some specific metrics around which branches need to go and when. This is hard data demonstrated in a way that reinforces that banking is no different to any other business facing changing consumer behavior. If you still believe branches will survive en masse, you need to at least read this for your own peace of mind.
One other warning. This is a lengthy, detailed post for obvious reasons…
Core behavioral shift
The argument at the core of anticipating widespread disruption to the physical distribution channel within retail banking is to examine changing behavior around the branch, and if there are any patterns we can learn from in other industries. In industries like music, books, video rental, and others we see historically the same triggers and shifts, along with the same reluctance to accept the inevitable changes that this brings. In each industry we’ve seen majors like Tower Records, Borders, and Blockbuster (see Wikipedia’s List of Defunct Retailers of the United States to see the full effect of disruption in distribution) faced with the same core shift, and an inability or unwillingness to change their distribution model to match changing consumer behaviors. In the retail banking market, we’re seeing the same reluctance to believe that anything will be fundamentally different with passionate arguments that the ‘branch will survive’. What is typically at the core of this imperative for change?
In each disrupted business or industry we see a paradigm shift in distribution initiated by a technological breakthrough that changes buying habits. These paradigm shifts are sometime convergent as in the case of the iPod and iTunes, but correlate with a core product model such as the shift from buying entire Albums, to just buying (or downloading) Singles. In the case of books the core buying behavior is characterized as eBook versus Hardcover or Paperback, but the eBook wasn’t really a serious competitor in the buying behavior stakes until Amazon launched the Kindle ‘eBook reader’.
At the core is an emerging behavior that demonstrates a trade-off between buying convenience and the need to ‘touch and feel’ the brand or product in-store. Often the new product provides a substantial price benefit because of lower distribution costs also, but not always. Great new product mechanisms show that convenience and ease of use will often even trump pricing disadvantages (such as in the case of a booking fee for cinema tickets).
In each instance of buying behavior shift we see early adopters first out of the gate on the new technologies that allow different buying or consumption, we then see both traditional consumers and retailers voice extreme skepticism around the import of this new emerging behavior, and finally we see rapid adoption of the technology over 3-5 years resulting in a irreversible upheaval of traditional distribution systems. This cycle of adoption and industry realization might be likened to the Kübler-Ross model, commonly known as the “Five Stages of Grief”, the only difference being that by the time the industry at large accepts the core consumer behavior shift a few major brand names have usually, already gone the way of the Dodo.
Those that have gone before us
The cycle of disruption can be articulated in the following simple manner. We start with Physical Products in a Physical Store supporting the traditional distribution structure. A new distribution platform (such as the Internet) comes along and changes early adopter buying behavior – we still buy a Physical Product but it comes through a Digital Store. Finally, the product (where possible), is abstracted to a digital form (Digital Product) which is Digitally Distributed without the need for the traditional stores.
To support this process we need both changing consumer behavior, and the paradigm shift of an emergent digital product. While Amazon has disrupted book sales massively through the Kindle, they can’t affect the same rapid level of disruption on clothes, shoes and electronic goods because those products can’t be fully digitized. When you digitize the product, it eliminates the majority of physical stores required for distribution over time because consumer behavior shifts away from visiting the physical store as the primary buying behavior. Whereas, when a physical product is retained, there is more of a split along buying preferences (e.g. in-store versus digital store) and the same shift takes longer or levels out.
The other interesting side effect of the disruption cycle is that in industries where the physical distribution layer is destroyed, incumbents rarely survive as the dominant distribution players. Look at books where the likes of Borders and Angus & Robertson failed in the last two years, Barnes & Noble still struggles to survive and Amazon absolutely dominates hardcover, paperback and eBook sales across the United States (and to some extent globally). Amazon is now the largest distribution player in book sales bar none – because they owned the new emerging distribution platform, i.e. the digital book and reader combined with the digital bookstore.
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