We've Hit an Inflection Point in Service Delivery

As featured in an interview with CU Today:

Tim Klatt discusses evolving consumer behaviors within the branch and how to stay relevant in the changing economic environment.

MILWAUKEE—A trend in recent years by many credit unions to turn branches into consultative centers—and away from transaction hubs—will need to accelerate as consumers have rapidly changed behavior, says one design and build expert.

And while such expenditures represent significant capital expenses at a time when margins are under more pressure, there are savings to be found in the health crisis economy that will help offset the expense,  according to La Macchia Group.

Tim Klatt, director of retail strategies at La Macchia, discusses how the COVID-19 pandemic is rapidly changing how consumers prefer to do their banking.

“We've hit an inflection point (in changing) how we deliver branch services to members,” said Klatt. “It’s time to make some adjustments or lose out to the Walmart's, Facebooks, Amazons and all the other non-traditional financial players elbowing in on credit unions with their new approaches to banking. If we don’t make more changes, emphasize better digital delivery for everyday transactions and turn more branches into consultative centers, we will lose relevance to our members.”

What the new landscape all comes down to, said Klatt, is meeting members where they want to be met, the health crisis making clear the preferred meeting place increasingly is the digital banking channel.

Talk, Talk, Talk…

While turning offices into consultative centers is not a new discussion, Klatt contends a large number of credit unions have to date not moved past just talking about repurposing their offices.

“The general habit of people is to keep to the status quo,” said Klatt. “But the pandemic is making the decision for us. I don’t think there is a big window to make this change and I am not sure if all credit unions are committed to changing here.”

Klatt said another reason credit unions may not make the move away from transaction-focused branches is a perceived lack of resources.

“There's a lot that can be done within the existing framework of your branch structure to make the office more relevant now,” said Klatt. “Remember, members are looking for at least some changes. It does not mean you have to be to make revolutionary changes everywhere—you don’t have to downsize big rooms, move teller lines…And, it can be pretty inexpensive changes like changing out furniture—like the desk where members sit across from the MSR in favor of lounge chairs where people talk side by side. These kinds of changes can have a pretty significant psychological impact on members.”

Cost Savings

With the pandemic sending the economy into a recession, Klatt shared that any time there is an economic contraction, cost savings around new construction and branch remodeling surface.

“The first cost reduction always comes in real estate,” he said. “The commercial real estate market always takes a hit, as we have already seen with this current downturn. Prices for land and buildings comes down.”

Klatt recalled the same thing happened during the Great Recession.

“Real estate pricing becomes more cost-effective, and we certainly saw that during the 2008 financial crisis,” said Klatt. “The other big savings is on construction costs. From 2008 to 2012 we saw a dramatic reduction in the cost of construction. Normally, construction costs rise somewhere between 1% to 4% every year. However, between 2008 and 2011, we saw around a 13% drop in construction costs.”

Don’t Wait for Perfect Moment

The savings are the obvious result of a market where supply suddenly outpaces demand and builders lower their pricing.

“And they also want the work to keep their teams busy and employed,” added Klatt.

Klatt pointed out that when combining the potential savings in real estate purchases and construction costs, a financial institution that may have spent $3 million on construction in 2007 before the Great Recession, may have only spent approximately $2 million in 2011.

“While these numbers paint a rosy picture of investing at the bottom of the market, it’s essential to keep in mind that not all economic contractions are as stark or long-term as the Great Recession,” he said. “As a result, waiting for the perfect moment may lead to missing that moment. It is more important, and effective, to recognize that opportunity exists for smart investors and to plan ahead to take advantage of market movement.”

For more insights on finding opportunities during times of uncertainty, read the full whitepaper.