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...