The "phygital revolution" is blurring the lines between physical and digital banking experiences

The changing interdependencies between channels must be taken into consideration throughout banking distribution. A feasible solution involves accelerating digital and making physical experiences "phygital."

Banks in developed countries reduced the number of their branches by 9% in 2021, the most in the previous five years, as they reevaluated their current sales and customer support methods. This decrease was probably a reaction to consumer behavior changes brought on by the pandemic, particularly the rapid transition to digital channels and the decreased demand for services through physical channels like branches and contact centers.

Closing branches and expanding digital channels alone cannot constitute an adequate distribution strategy, given the complicated dynamics of retail banking, regardless of how important these adjustments may have been. Banks should respond to the following questions to plan their distribution strategy: Can digital channels displace physical locations as the primary means of selling financial services? As many believe, did COVID-19 actually hasten a permanent channel shift? Or will consumer behavior revert to its pre-pandemic patterns after a while?

The following crucial insights from McKinsey's Retail Banking Survey can help banks in their responses to these questions:

Retail banking sales decreased by 10% in 2021 after branch activity plummeted in 2020, and development in digital channels was insufficient to fill the gap,

Customers express significant variances in their willingness, desire, and use of digital channels, mandating steps to create and maintain customer relationships.

Although banks continue to downsize their physical channels, it still needs to be determined what their long-term function will be. Branch activity grew by 20 percent in 2021 at more than a third of banks.

Retail banking sales declined

A new high was reached in 2021, as more than 40% of core retail banking sales were generated online. At the same time, a confluence of micro and macro variables led to a 10% global decline in overall sales. Digital sales grew by 4%, but it wasn't enough to make up for a 15% fall in the still-larger branch channel caused by lockdowns making facilities inaccessible.

It is crucial to remember that branch closures, rather than true digital gains, were primarily responsible for the widely reported increase in digital sales as a percentage of total sales. But not all organizations have this problem. By driving 40 percent growth in the digital channel and keeping branch sales reductions to single digits, the growth leaders in developed countries raised total sales by 10 percent. Conversely, growth laggards faced revenue reductions in both branches and online, despite robust digital growth in prior periods.

The differences between digital and branch performance are substantial. In comparison to an average annual rise of four percentage points between 2017 and 2020, leaders raised their digital-sales penetration by 15 percentage points in 2021; at laggards, digital penetration slightly decreased. To put it another way, banks that had already gained traction by creating a world-class digital consumer experience increased their lead in 2021.

Many banks still need to catch up in developing the capacity to meet simple and complicated customer journey demands. Less than a third of institutions have introduced investment sales, and nearly half of all institutions globally still do not offer a savings-account opening route on their mobile apps. According to benchmarking data from McKinsey, the leaders in digital new-to-bank acquisition consistently beat their peers at every point of the sales funnel. They are rewarded with twice as many account openings. In just 24 months, banks that introduced and invested in digital personal loans saw their channel sales increase sevenfold.

Before COVID-19, banks focused their digital investments primarily on consumers likely to use these products. Now, the emphasis must go to creating new prospect traffic and improving the sales processes of mainstream consumers.

The imbalance between willingness, preference, and actual behavior

Customers' propensity to use digital channels is greater than 70% in every region and age group. The market thus has plenty of room for future migration. Even if the digital growth rates attained in 2021 persist, it would take four to five years to convert all "willing" consumers to digital channels.

Results differ between products and locations. For instance, barely 30 to 35 percent of consumers wish to open a new current account online. Only 15 percent of such accounts are opened digitally, even though readiness to do so stays around 75 percent. Less than 30% of banks worldwide have implemented new digital acquisition pathways for their websites or mobile applications, indicating that institutions still need to embrace this requirement fully.

Over the previous four years, digital servicing increased by three to four percentage points every year, with comparable improvements across regions. The mobile channel has fostered this expansion. Moreover, half of all digital adopters worldwide in 2021 used only mobile devices. Nearly twice as many customer support conversations now take place on mobile devices as in 2017. Online usage, on the other hand, is declining everywhere.

Even while mobile usage increased significantly in 2021, it outpaced customer preference by almost ten percentage points, suggesting that banks still need to win over their customers and run the risk of alienating them. Similar to sales, there is considerably more willingness to use mobile (75 percent on average). Across all regions, there is a variation in mobile use, preference, and willingness.

The current digitized philosophy, which addresses digital by replicating offline journeys online, should be reconsidered by banks, given the imbalance between consumer willingness, preference, and actual behavior. Applying such a philosophy, banks have had great success with early adopters. However, to balance the three dimensions by bringing willingness in line with desire and actual use, they must now give a truly unique-to-digital experience and tailoring solutions to digital skeptics.

The mobile channel presents an attractive sandbox to develop and test a differentiating value proposition that can reinforce current behaviors and open the door to the next growth spurt.

The future of physical channels

It is no surprise that physical channels, especially branches and contact centers, have changed in importance over the past five years. Nevertheless, it can be useful to quantify these changes, particularly given that in 2021, 37 percent of banks observed a rise in the percentage of active branch customers without a corresponding reduction in the percentage of active call center users.

Due to ongoing branch consolidation, the number of physical locations has decreased by 20% since 2017. Branch staff per customer has decreased by 18% over the same period, despite branch employment declining at a little slower rate, adding some support to the idea that consolidation rather than outright branch removal has been the goal.

Additionally, branch jobs have changed in nature. The emphasis has changed from customer service to sales and from specialized to universal. There are now 48 percent more advisors and universal bankers per branch than in 2017.

Productivity is a problem at many banks. Since 2017, sales per employee have decreased by 25%, primarily due to sharp declines in basic financial products like credit cards, personal loans, and savings accounts. Sales of more complicated items, such as mortgages, increased in contrast. The capacity of banks to maximize each site is a major distinction. McKinsey's analysis of the UK indicates significant differences in sales per employee between rival branches. In one region, the branch with the best sales per employee outperformed the branch with the worst sales by a factor of seven.

28% of customers still prefer to get their servicing needs met at a branch; this percentage rises to over 50% for delicate or complex cases like fraud and assistance with financial troubles. Banks must develop strategies to reinforce existing behavior to prevent a return to the channel for lower-value jobs, even though branch utilization was reduced during the pandemic. This difficulty is demonstrated by the fact that almost a third of branch customers cite social factors (such as encountering a familiar teller) and a greater sense of knowledge as the main reasons they prefer face-to-face service.

The inversion of the distribution pyramid has become a prevalent topic, even though each institution must develop its own model for physical channels. Branches and call centers are no longer the dominant channels for addressing all customer demands, leaving digital to handle specific tasks for specific customers. Mobile has replaced the desktop for a segment of the population that is becoming more mainstream, with physical channels serving as brand ambassadors for genuinely sophisticated and empathy-focused circumstances.

The pandemic's severe distributional changes are not necessarily an unchangeable new baseline. Leaders know that while adjusting specific channels may result in short-term advantages, a comprehensive distribution strategy is needed to realize its full potential. Banks require a plan that considers the changing interdependencies between channels. Additionally, they must use enablers like data, analytics, and technology to ensure that their distribution model successfully and efficiently meets customer needs.

Institutions that take quick action can anticipate reviving growth and separating themselves from laggard rivals. Success depends on developing digital experiences that are genuinely distinct from physical ones while augmenting and improving physical channels with digital components. These financial institutions will offer a "phygital" experiences that considerably increases the satisfaction and trust that customers from all demographics continue to seek.