Banks will not meet their key objectives — improving customer service and reducing operating costs — by simply Web-enabling branches as they are today, Forrester Research (Nasdaq: FORR) asserts in a new report. To avoid throwing good money after bad, Forrester advises firms to aim their investment at the future role of branches as networked service centers. Forrester defines these as thinly staffed collaborative service centers based on open standards and connected to internal or external service networks through integration hubs.

“Between 1999 and 2001, European banks invested 13 billion euros in Internet and call center technologies,” said Forrester Senior Analyst Remus Brett. “Anticipating the demise of the physical distribution network, banks in the UK, France, and Germany closed 11 percent of their branches between 1995 and 2000 and brought branch technology innovation to a standstill. The profit slump following the economic downturn now forces bankers to further their cost rationalization plans and cut branch operating costs.”

Seventy-three percent of the European banks Forrester interviewed believe the Internet has so far had little or no impact on branch distribution, and 61 percent believe that branches will remain the dominant channel in 2007. However, nearly half of our interviewees have begun to connect their branches to online banking applications as part of a multichannel integration strategy, and another 24 percent plan to do so. Thirty-nine percent believe they can cut costs by upward of 15 percent — mainly in application development and maintenance — all while improving customer service.

“But contrary to banks’ current Web-based plans for branch improvement, networked service centers will build a service level that doesn’t exist today, cut costs by reducing headcount, and create an open technology platform that’s ready for the future,” Brett added.

To prepare for business networks and Open Finance becoming pervasive by 2007, Forrester advises European banks to build an infrastructure based on collaborative networks and open standards. Networked service centers will create meaningful interactions by giving agents real-time customer profiles, empowering staff with guided sales tools, and collaborating to match human specialist advisors with customers. Broader network bandwidth will let service center staff get customer data in real time — including data like Web usage and a customer’s history on other channels. Networked staff will be equipped with modular, Web-based advice tools and will be empowered by a superior command of those tools.

“Networked service centers’ thin clients will run applications on Net-native platforms,” Brett said. “All basic customer applications, such as bill payment and fund transfers, will be centralized on integration hubs — cutting development and maintenance costs. Networked service centers will strip manual and electronic processes out of the branch, as firms use workflow technology to take the paper out of credit checks for mortgage applications. Reinvented as networked service centers, branches will be able to participate in this Open Finance future. Networked service centers will drive new business as banks partner with local insurers, financial advisors, and real-estate agencies.”

For the report “Reinventing Branch Banking,” Forrester interviewed executives at 33 leading European banks.