Success in retail banking is partly a matter of managing distribution channels. Banks must provide channels that both accommodate customer needs and address the unfavorable economics of the mainstay branch system. Given the proliferation of channels, this may prove a daunting task.

Choosing distribution channels

Distribution channels can be evaluated along two dimensions: customer needs and costs. Banks must balance customers’ varying needs for personal interaction and convenience with their own desire to use the cheapest channel possible (Exhibit 1). The problem is that low-cost channels tend to be low in personal interaction too.

Consumer preferences

Consumers have varying levels of tolerance for impersonality, which means that banks will not be able to migrate all consumers to the cheapest channels. But neither do they have to utilize every channel to meet their customers’ needs. Customers have "bands’’ of acceptance, that permit banks to offer a subset of alternatives.

Moreover, customers’ tolerance for impersonality tends to be more rigid at the lower edge of the band than at the higher. An individual with an intermediate tolerance for impersonality who is comfortable using interactive video, for instance, would probably return to using branches if necessary, but is unlikely to be persuaded to use the telephone. This individual could be satisfied by a bank that provided only branches, but not by one that provided only ATM and phone services. As long as a bank offers at least one choice within a customer’s comfort zone, he or she will be satisfied (Exhibit 2).

Steps toward a strategy

Banks can use a carrot or a stick to move customers to low-cost distribution channels. One bank is trying the carrot approach by offering all automatic services free of charge, while another has begun charging customers for teller transactions. A bank with a substantial portion of its customer base using telephone banking would be ill advised to levy fees for telephone transactions while conducting branch transactions without charge. The goal should be to operate a portfolio of channels that provides distribution coverage for a chosen customer base, while constantly encouraging migration to lower-cost channels.

Many banks have avoided dealing directly with distribution problems by piloting alternative distribution systems. Few have a well-thought-out strategy. For such banks, evaluating their customer base’s preferences in terms of sliding scales of personal interaction, convenience, and cost may be a helpful framework within which to begin developing a comprehensive distribution strategy.