Bank branches remain a critical channel for delivering financial services to individuals and businesses. However, as banks consolidate and technology advances, branch traffic, and items processed remains on a rapid decline. Further, the need for the physical branch is running into bank’s need to reduce costs. From a cost standpoint, a bank’s branch network is their largest single functional cost. Becoming more efficient in physical delivery is now mandatory at community banks. In this article, we take a look at how one bank, Capital One, is transforming branching and then look at the pros and cons of the model to see if the customer experience and the economics warrant further consideration.
Many consumers are choosing mobile banking to conduct their financial tasks. Adoption rates for branchless banking are increasing across all age groups (see below). Broadband, smartphones, and tablets are now ubiquitous for bank customers across generations (data HERE).
For forward thinking community bankers, the new role of the branch is to support technology adoption, to enhance the sales platform and fill in the service-level gaps. This means that many branches are becoming less transactional and more relationship focused. It also means banks are evolving to a lower cost structure, but one with greater engagement. These transformational trends are the drivers of a new style of branch.
New Concept Expansion
Last year, Capital One started to roll out their latest “branch” concept to major cities across the U.S. With more than a year of seasoning and several iterations, we wanted to check in, mystery shop and review the Capital One platform as we believe this style branch is an interesting concept worthy of consideration. Capital One Bank, N.A. is $108B asset financial institution with a 44% efficiency ratio. The bank has only one branch – only one. However, Capital One continues to open cafés which are billed as “Inviting spaces where you can go to bank, get answers to your financial questions, recharge your devices, or simply connect with people.” Capital One describes the cafés as places to bank, recharge (with brand name coffee bars), learn about financial products, and hang out.
What caught our attention was the social media posting below discussing the new Capital One Café location in our town:
To highlight the transcript above, someone (who we suspect is a millennial) stated “A bank? … I don’t need to go there. Everything can be done online.” To which another (again probably a millennial) states “It’s more a café.”
We first opened our accounts at Capital One online. We opened a checking account and CD account in less than 10 minutes. We funded both accounts in two days, and we applied for the Capital One Visa credit card (with 1.5% cash back on all purchases). We downloaded the app on our phone. The bank’s online and mobile platforms are robust and state of the art with two-step sign in, swipe and password options, free alerts and free credit monitoring (called “CreditWise”). The bank also pays some of the highest CD and money market rates in the industry. That is usually a catastrophic move for most banks, but because Capital One drives alpha or excess risk-adjusted return through its credit card portfolio and operational leverage, it can still thrive with higher and more rate sensitive deposits.
However, what impressed us about Capital One is their physical location which does not look or feel like a branch. They call the branch a café, and in many spots on the West Coast, it physically cohabitates with Pete’s Coffee, a West Coast chain akin to Starbucks. In partnership, your drinks are 50% off with a Capital One credit or debit card.
In addition to a formal entrance, the branch has an inviting open access front (below) exposing more of the branch to the street. The signage cleverly reads “café, coffee, banking.”
The atmosphere inside the café is substantially different than the typical bank branch. Instead of teller lines, a safe, marble floors and wood paneling, the Capital One café is a cross between a coffee shop and a library. The location is open, well lit, with free wifi, meeting rooms, charging stations and work stations open to the public. Except for the three bank advisors and four interactive ATMs, there is very little to remind the patron that they are at a bank location.
We visited the Capital One café three times at different times and observed visitors either: A) entered to buy coffee or a snack – perhaps oblivious to the banking business, but certainly could see the Capital One signs, the ATMs and were greeted by the financial advisors; B) spent an inordinate amount of time in various rooms and open areas on their computers or in meetings; or C) (a small percentage of the time) they came in with the express purpose to use the ATM or talk to the advisor. This is very different traffic flow and customer objectives from a typical branch where most users view the visit as an inconvenience and try to minimize interaction time.
We observed that the Capital One cafés engaged users and prolonged interaction at the location. The cafés are also a cross-sell opportunity for the bank for those wishing to meet, connect to the internet or buy coffee. Not lost on us is the irony that the Capital One café in our town is directly next to an Apple Store which similarly seeks out a unique and engaging customer experience beyond just the purchase or shopping aspect of the retails store.
Staffing Model Comparison
The most interesting part of the café branch is its employees. Each café is largely managed by a set of “ambassadors." These are not advisors, nor are they even bankers, but they do have some basic customer experience knowledge, and they are trained to assist customers with basic banking needs like navigating and using banking technology, setting up an account, paying their bills online, and applying for a credit card. In addition to the ambassadors, there are intermittent financial experts with training that come in at set times to talk to customers, conduct one-on-one sessions and to teach group sessions that range from 20 minutes to two hours on such topics like wedding financing, talking to your significant other about money, buying a car, managing credit card debt, paying off student loans and similar. Targeted at the 21 to 31 year old demographic, it does give patrons of all ages a qualified person to engage with to ask about financial planning advice.
Our disappointment was that the entire staff was unable to demonstrate anything beyond basic banking advice. However, they could get you connected to a banker via interactive ATM/video banker that could. What the staff lacked in banking knowledge they substituted for practical knowledge such as how to use remote check deposit or advice on what debt to pay off first. Walk into most community banks, and the later question meets with some quizzical looks (we know as it is one of our mystery shopping test questions).
From a cost standpoint, Capital One’s staff is compensated more than a typical teller, but less than a universal banker. Training costs are less and training time is shorter allowing for easier staff management. The café branch allows for much greater staffing flexibility allowing the bank to better match traffic patterns. To that point, the cafés are often staffed starting at 8 am until a 6 pm close which is longer than the average traditional branch.
One of the most interesting aspects of the café branch compared to the traditional branch is what it does to traffic patterns. We charted the café branch and a set of surrounding traditional branches for several weeks and derived a comparison of traffic patterns. While figuring out the exact traffic that is just using the banking is difficult in this model, aggregate foot traffic ends up having a different and more stable profile. Below is a graph of foot traffic based on the single peak observable time.
As can be seen, the café branch tends to have a more steady traffic pattern to it and does not have as pronounced a “double peak” pattern. The associated coffee shop tends to pull customers in earlier and after lunch. For the traditional branch, traffic usually peaks at around 11 amand/or12 pm and again at 4 pm. This often creates an underutilized staffing situation around 2 pm and 3 pm. The café branch has the advantage of having two overlapping shifts covering the peak afternoon periods. Capital One further leverages this traffic flow to often have seminars and workshops around the 10 am and 2 pm time frame which better leverages staff.
On a weekly basis, the peak traffic time for a traditional branch is usually Friday around 4 pm and the through day is usually Monday (if not open on a Saturday). The differences in traffic can be stark between the Monday morning slow times and the busy Friday afternoon. For café branches, no matter where they are located, traffic is more consistent across each day with a slight peak on Wednesday or Thursday at 4 pm. Similar to branch hours, branch days tend to have less variability in traffic as Mondays tend to be within 15% of the average compared to being about 40% below average for a traditional branch. In general, this makes café branch traffic more predictable and both easier and more efficient to staff.
Perhaps the most interesting aspect of the café branch is that the time spent in the branch is multiple times greater than the traditional branch. In our traffic research, the average bank customer stayed an average of 15 minutes in the traditional branch compared to an average of 45 minutes. It was not uncommon to have some patrons stay in Capital One’s Café for two or more hours, something unheard of in a traditional bank branch. You can debate if spending capital is worth it to have someone sitting around your branch for two hours, but it is hard to debate that is your goal is to promote your bank’s brand having two hours of interaction in better than 15 minutes.
We read every day that retail is changing rapidly. Banks, like all retail stores, sought plum locations in cities and towns for their branches. Some sought foot traffic, some car traffic and others access to parking. All banks chose branch locations that would put their brands front and center to serve existing customers and, importantly, attract new ones. As more and more brands move to mobile as their primary channel with ‘more convenient’ and ‘more transparent’ as themes, banks need to continue to evolve. We are not here to tell you that Capital One’s café concept is the best way to branch going forward, only that from our research the concept is successful and presents an alternative to the traditional branch that community banks may want to consider adding to their channel delivery portfolio.
Instead of a long-term strategy, the café branch should also be considered in the context of a five to ten-year plan to move your customers from a traditional branch to an all-mobile banking platform. The café branch excels at helping train customers up on when and how to use your bank’s mobile offerings.
Today, many bank customers take advantage of every opportunity to avoid any retail experience that is not satisfying or convenient, whether it is at the local mall or the local bank branch. The younger demographic of bank customers often distrust the largest, established brands, preferring upstart brands that reflect their ethos. The 25 to 35-year old segment, in our focus groups, tends to prefer the discovery of brand attributes on their own (sort of “I know when you’re there when I need you” feeling) and this new, innovative branch café concept plays into this need.
Capital One recognized that to create a physical retail presence, it did not have to build traditional bank branches. The primary goal of its Capital One Cafés is to serve a community, providing a positive experience creating a halo effect for the brand which may lead to a banking relationship. Capital One’s Cafes reimage retail banking by providing a space that is convenient, flexible and conducive to education. Ironically, each Capital One Café “unbranch,” may do more to create a meaningful branded bank experience for its bank customers of the future despite its lack of “bankers” and access to banking products. By ditching the sales pitch and instead offering perks like free Wi-Fi, a nice co-working space, device charging, restrooms, local coffee and food, and complimentary money coaching, they may have young professionals who aren't already with the bank asking, "Why not sign up?"
Submitted by Chris Nichols on August 14, 2017