As Tesco Bank and the Co-op put branches in stores and seek to use loyalty card data to win financial services business, and as the government forces RBS and Lloyds to sell off almost 1,000 branches, opening up space for new entrants, the normally staid world of branch banking is hotting up. Liz Morrell looks at the drivers of changes and assesses how the branch might look in the future

For many customers the image of their bank branch is still that of a row of tellers hidden behind bulletproof glass, gazing out at disgruntled customers forced to queue for eternity to do the most basic of banking tasks. But if the likes of Tesco have their way then bank branches within retail stores will become the norm and cashing a cheque while shopping for your evening meal could become standard practice.

Certainly a revolution is needed. The banking crisis and subsequent recession has left many customers disillusioned and High Street banks, while admittedly not the cause of the crisis, face a fight to win back hearts and minds. "The pressure in the UK is on the traditional banks given the obvious reputational hit they have taken," says Rik Turner, financial services technology analyst at Ovum.

The recent upheavals have also, though, highlighted the importance of the role of the branch for those whose first brush with internet banking was tarnished by the collapse of the Icelandic banks. "Historically bankers have seen the branch as a high cost transaction channel but our view is they have to look at that from the customer point of view. Two years ago it was all about direct banking but now the question is will a customer deposit with you if you don't have a branch network," says Alistair Newton, research vice president of Gartner's banking and investment services team. Branches create trust, so retail banking could perversely be on the cusp of a renaissance. "Someone may be using your internet service purely because they drive past one of your branches on the way to work every day and
are reassured."

Banks are working hard to get customers back in branch. "The customer experience in a branch is key," says Rod Bulmer, retail managing director for Co-operative Financial Services (CFS). "Our customers want to be treated as individuals and dealt with in a timely fashion by knowledgeable staff, in a physical environment that enhances their experience."

In this respect technology is becoming ever more important. "Banks want to move humdrum services that don't require a large number of staff onto self service machines and kiosks. Some people will remain on teller service doing more complex high value transactions, such as mortgages or loans, but giving as much of the real estate as possible over to advisors or account managers is the aim," says Ovum's Turner.

You will find some branches become smaller in future and there will be a lot more technology deployment in the branch - for instance, teller desks replaced by phones connected to call centres; cash counting machines for deposits; cash machines for withdrawals; and internet kiosks for internet banking, agrees Sanat Rao, vice president and head of worldwide business development, at banking solutions provider Finacle.

New entrants
Customer behaviour is changing. "They are becoming more promiscuous," says Neil Tomlinson, head of retail banking at the Deloitte consultancy. A recent survey commissioned by Deloitte found that half of all the representative UK sample questioned would consider moving their retail banking relationship, and more than one in five had moved one or more of their banking relationships in the past two years. It also showed that 51 per cent would consider buying financial products from non-traditional banking organisations. These are increasing in number with everyone from Sainsbury to Marks & Spencer to O2 Money offering financial services.

The biggest danger to traditional High Street players like Barclays or Abbey, or Santander as it now is of course - highlighting yet another change - is likely to come from Tesco, which renamed its financial services division Tesco Bank in October, and is preparing to launch a current account service within two years to complement the 28 products it already offers. Six million customers have already defected to the grocer for their banking products and Tesco Bank chairman Andrew Higginson says the retailer is building a different kind of bank: "One that listens to customers, offers simple and transparent products and rewards loyalty."

The retailer is staying tight lipped on its plans but has already signed a deal for its core banking technology - confirmed to be with Fiserv as we were going to press - and is also rumoured to have picked up around 200 senior ex-banking staff from the cull caused by the banking crisis. These will be housed in Edinburgh, while a customer service centre in Glasgow with 800 people will open by the summer of next year as part of Tesco's push into retail banking. Of course, it had previously brought out RBS' 50 per cent stake in Tesco Personal Finance, now renamed Tesco Bank, last year for £950 million, showing its intentions. It's also rumoured to be preparing standalone mortgage offerings.

There are currently six in-store 'branches' co-located within Tesco stores, with reported plans to expand rapidly to 30, and according to one source to 200 branches within five years. The company's original pilot in Silverburn in Glasgow was joined this year by branches in Blackpool, Long Eaton, Brislington, Coventry and Oldham. They open at the weekend and 8am to 8pm Monday to Friday.

Tesco is not the only retailer to be launching in-store. The Co-op is running two trials in shops. In Brighton there are two bank units within Co-operative Food stores in Peacehaven and Matlock. A third will open in Hove in November. "The locations are manned by CFS colleagues and provide full banking services, albeit without the traditional counter system. Customers can make self service cheque and cash deposits, as well as cash withdrawals, and receive advice on the full range of products," says CFS' Bulmer. In the second Co-op trial, in Nottingham, the company is testing smaller in-store units that work in partnership with local branches. "The idea is you have small transactional hubs in-store and 'relationship centres' in the city centre bank branches," says Bulmer. Although both trials will run for 18 months, Bulmer says the second is showing the greatest promise. Rolling out such branches in shops could extend the company's current reach of 340 bank branches to around twice that number.

RBS and Lloyds break-up
Other new players are waiting in the wings. Virgin Money which is applying for a full banking licence and US entrepreneur Vernon Hill who plans to bring his professionals targeted Metro Bank format to the UK are likely to join Tesco in trying to acquire ready made branch networks from the asset disposals forced upon Royal Bank of Scotland (RBS) and Lloyds Banking Group in November by the EU as a quid pro quo for the state aid they've received and to try and re-introduce competition to the UK retail banking arena (see news page seven for more). RBS will have to get rid of 318 branches and Lloyds' will lose 600 over the next few years, opening up gaps for new entrants.

The traditional banks need to move fast for not only do their shop rivals mean to beat them on convenience but also on how well they understand their customer. "The likes of Tesco are going to leverage their customer data and do all the analytics they would typically do around buying a pint of milk," says Mike Gordon, managing director, EMEA, of decision management software provider Fico.

For Tesco, which already rewards shoppers with Clubcard points when they use their Tesco credit card, loyalty will play a vital role. It already has 16 million Clubcard holders in the UK, more than Barclaycard's 11.7 million
so its clout and potential, in terms of using customer data to cross-sell or up-sell, is obvious. The advantage could be exacerbated as High Street banks siloed legacy systems have often hamstrung them in the past with inadequate data sharing and customer relationship management (CRM) systems leading to lost opportunities.

Customer data sharing, CRM & loyalty
Banks haven't traditionally been good at sharing customer data internally, but this could be changing. "One thing we are talking to banks about is how to use their customer data better not necessarily to sell more immediately, but to better target the customer," says Gartner's Newton. It's something Tesco does brilliantly and traditional branch banking operators will have to up their game if they want to compete.

The challenge is that customers can often get a completely different response via the web or contact centre. "Consistency requires a centralised view of the customer and the ability to make decisions based on those customers in real time," says Stephen Haighton, Northern European vice president, at banking software provider Chordiant. "Using our Decision Management software banks could create individual sites for individual customers. Very few banks are in the position to do this just now and very few have released the ability to provide individualised marketing."

Of course some of the problems around having a centralised view of the customer comes from the disharmony of core banking systems. Many banks have built up legacy systems as silos, so whenever a new channel came up they put in a new system but couldn't necessarily join them up, making it difficult to deliver a consistent view and brand. "It needs one CRM system, one database and one unified IT system that can support the business," says Mark McMurtrie, marketing director at S1 (previously Postillion). "If banks invest in building effective CRM systems they can then group their customers and tailor services and campaigns to them." And he stresses that banks must realise the value of each of their channels as complementary rather than competing. "For instance mobile banking is not just a subset of internet because customers are using it for balance enquiries and recent transaction activity, which is very different to the most popular actions on the net where paying people tends to be paramount," he says.

Banks are working hard though to redefine their relationship with customers. "We have seen a lot reinvesting in their branch network because they realised that pushing customers down the internet route had alienated them and made them more likely to jump ship. They lost the customer relationship," says Gartner's Newton. Many have branch of the future concepts that have a concierge desk type approach that emulates the likes of Deutsche Bank in Berlin where its concept has everything from a coffee shop to a crèche. The automation of mundane processes allows banks to remove the physical barriers between staff and customers, freeing them up for more in-depth and value added services. "There are a number of models being developed - some focus on process and some on the customer, but all recognise that the role of the branch has to change," adds Newton. "The banks are recognising what their customers want but it's not necessarily a case of picking one model and saying that's the template. It's what's most relevant to that customer."

HSBC's branch of the future
HSBC currently has four 'branches of the future' and its latest opens in High Holborn, London, in December. "We are making more of the advice and expertise available at a branch," says Peter Keenan, head of branch network at HSBC. He is looking at various technology changes to cut the account opening and mortgage approvals to a day, as well as conferencing facilities to bring specialist expertise to smaller branches. The look of the branches is also changing - segmented to key customer profiles. "In High Holborn there will be an area where you can check share prices, internet kiosks where you can do web transactions, a premier centre for our high end customers and a business area," he says.

HSBC will open ten more branches of the future in Q1 next year, at which point it will roll a current refurbishment programme and the branch of the future programme together with the aim of having 200 branch of the future stores by year end 2010, and the whole chain revamped within the next four years. "We will put the refresh and branch of the future programme together once we ensure we have design just right," says Keenan.

Integration
Integration will become more important for banks. "You will see all the different channels that touch the consumer will start to show a similarity - there will be an overall look and focus to an ATM, branch and internet interface for example," says Aleksandra Lubavs, sales manager for ATM provider, Diebold. This is already happening at HSBC where screens used for applying for a loan online are the same as in branch, meaning that an application can be started online but be completed within the branch. "Ultimately the vision is to have one way of doing things," explains HSBC's Keenan.

CFS' Bulmer says technology will allow sophisticated opportunities to help the customer in ways he or she may not have even thought of yet. "For example, your bank texts you when you are nearing your overdraft limit and says you have x amount in your savings account, would you like to transfer some cash to stop being charged," he explains. "It is something we are looking at but the challenge is how to do it securely."

Better customer management will help banks like CFS, HSBC and others to understand their customers more fully. "The data we have on our customers covers all their shopping and the richness of that data is what allows us to understand them. We can use that data and expertise to ensure we give the right, appropriate advice," says HSBC's Keenan.

The role of the branch is changing and inevitably the big banks will lose some market share but if they get the blend of technology and customer service just right then it will be the bank where their customer is having a cup of coffee and a slice of cake as they chat over their finances, rather than Tesco. They'll need to improve to meet the challenge of this powerful grocer though and the other new entrants that are bringing the shock of the new to this market.

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