In our increasingly connected world, why do bank branches still matter to consumers?

Location, location, location – importance of bank branches plays a role in choosing a financial services provider

A continuing saga in financial services consumer research is the stubborn consumer preference for choosing banks because a branch is across the street from where they live or work. In Mintel’s forthcoming Retail Banking US October 2012 report, half of consumers state that they chose their bank because there is a branch near to their home–a significantly higher proportion than any other reason listed. And nine in 10 (including hyper-connected Millennials!) say that it is important to them to have a bank branch nearby.

But with the enhanced convenience and availability of products and services such as remote capture, online bill-pay and other non-branch-centered transaction capabilities, why do they continue to use branch proximity as a primary factor in their choice of bank?

Consumers don’t think like financial services companies do (although they say they do)

Consumer Involvement Theory (via Neal Cole @northresearch and @adcrackercom) outlines a scale of involvement in how much energy and thought is put into the purchase process. It is basically a binomial template (rational/emotional) that might be useful in digging deeper into the consumer mindset when it comes to bank choice. The template outlines the following issues as the primary factors in consumer choice when it comes to financial services:

  • High involvement/rational would be issues related to cost and convenience (such as customer service issues). This would spur rational advertising which tends to be features- and benefits-driven (this is currently the primary language of financial services advertising).

  • High involvement/emotional varies from customer to customer but involves issues such as status and ego, or trust and fairness. This is one area where current financial services advertising tends to be weak.

  • Low involvement/rational issues would be habit. Companies must differentiate or familiarize customers with their product to get customers using this type of thinking to switch.

  • Low involvement/emotional tends to apply more to quick or impulse purchases such as movies or magazines.

According to theories in Consumer Psychology and Behavioral Economics, consumers will say they choose a bank using “High involvement/rational thinking”–which is where the vast majority of financial services advertising is targeted. But is this really the most important part of the decision-making process, and therefore the most effective way to reach consumers?

An additional barrier is that financial services companies tend to assume that consumers make decisions this way because this is how financial services companies make decisions themselves.

What Behavioral Economics tells us is that we can’t think that consumers stay in the same binomial “silos” of rational vs. irrational, formal vs. informal, etc. that we think they do. All of the discrete components in the Consumer Involvement Theory outlined above are really inextricably linked and must be considered when selling the consumer any product, but most importantly financial services.

Saying vs. Doing

In Mintel’s forthcoming Retail Banking US October 2012 report, you can see patterns in the responses that reflect how consumers think they make decisions based solely on rational attributes, but in reality they do not. For instance, almost half of respondents who switched banks in the prior three years say they switched because their previous bank began charging new or higher fees, and 38% say they had issues with the quality of the customer service at their previous bank. Neither of these is shocking news to the industry.

However, in a separate question, when switchers were asked why they chose their new bank, only 37% said they chose their new bank because it had lower fees, and only one in four because it had better customer service. There is a substantial discrepancy between the two.

What does Behavioral Economics tell us that might help reveal the real underlying issues in these consumer preferences?

  1. People say they leave their bank because of high fees, but then they tend to choose a bank that is close by (has a convenient branch location). This suggests familiarity bias–that people will tend to choose the option that they are familiar with. And seeing a bank branch on every street corner enhances their familiarity with that brand, whether or not that bank charges higher fees.

  2. Traditional economics assume that the utility derived from the outcome depends on a certain reference point. In other words, banking fees should matter more to lower-income than higher-income respondents because they represent a much greater proportion of their overall wealth. But this is not the case. In Mintel’s survey, 43% of households with income of $100K-150K said they switched because of fees, vs. 32% of those in the lowest income bracket. This indicates that there are more components to the decision-making process than what is revealed on the surface. Issues such as trust and fairness come to mind. (Note–the dictator game in Economic Game Theory provides excellent examples of how important fairness is to economic behavior and decision-making.)

  3. In a 2012 study conducted by Novantas Research, 71% of respondents who chose a “well-respected brand” as a reason for their choice of bank state that they would not use a bank without branches. Obviously the branch is inextricably inter-connected with their attachment to the brand. And attachment to a brand is an emotional issue.

  4. Consumer preference for convenient branches indicates that their interaction with the brand has implications for customer retention, as well as adoption of other, less expensive channels such as mobile banking. In other words, the success of multiple initiatives is impacted by this familiarity and emotional attachment to the brand.

So what can banks do better?

  • Since branches are so obviously important to consumers, banks may want to consider increasing the number of customer touch points outside the branch (particularly in their digital realm). This will increase familiarity with the brand and increase loyalty.

  • Banks might also want to consider making the customer experience outside of the branch just as good, or even better than it is in the branch. Finding every way possible to personalize it is a good start. For instance, add a personal touch to text messages, or include a picture or video stream during interactions with customer service representatives. This personalization is much more important than adding more bells and whistles to banking products.

This means that it behooves banks to try to figure out what consumers really want, based on the understanding that they see the branch as something more than just a convenient place that is available to them if they need to conduct high-complexity transactions. The branch should be viewed as a brand icon–basically as something that defines the brand for the consumer. The next logical step then is to make every attempt possible to incorporate those attributes into every other consumer interaction.

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