As customers rely on virtual banking channels more and more, many banks are reevaluating their brick-and-mortar branches. Physical retail locations are the most expensive distribution channel, so shutting down underperforming branches can be an effective cost-cutting strategy.
Once you close a branch, however, it can be difficult, or impossible, to reopen it. Before you take drastic measures, conduct a thorough analysis — one that gives you an accurate picture of the branch’s performance and its contribution to the bank’s overall profitability and growth. Also identify opportunities that can enhance the branch’s value.
Choose the right metrics
A significant challenge in measuring branch performance is assigning customers to particular locations. Traditional measures (such as new accounts opened or teller activity) no longer suffice. Just because a customer opened an account at a branch doesn’t necessarily mean that account should count toward the branch’s performance.
What if the customer relocated? What if he or she uses more than one branch? What if the customer does everything online and doesn’t visit branches at all? There are no easy answers to these questions, but to get an accurate picture of branch performance, banks need to develop models that better reflect a branch’s interactions with customers and its contribution to the bank’s overall performance.
Some banks are developing point systems to measure the value of products sold, customer service and retention. For example, core accounts like checking accounts generally are more valuable than CDs, which often constitute “hot money” — that is, funds frequently transferred between financial institutions in an attempt to maximize returns. The analysis might be different, however, if a checking account has a small average monthly balance or if a CD has a relatively long term.
For services, one set of point values might be assigned to transaction processing — such as cashing checks or accepting deposits — with higher values assigned to loans or consultative services.
It’s also vital to consider customer retention. According to financial services technology provider Fiserv, customers with one banking product stay with a bank around 18 months on average. The average relationship increases to four years for clients with two products and to almost seven years for customers with three products. So branches with more customers purchasing multiple products tend to contribute more value.
Another critical consideration is how transfers of funds among branches affect branch profitability. (See the sidebar “Why you need a funds transfer pricing system.”)
Understand local markets
Too often, banks’ business development plans fail to reflect the sometimes dramatic differences between their branches’ local markets. Many simply allocate their budgets uniformly among locations and demand that each branch achieve similar profitability and growth goals.
There are two problems with this approach. First, it establishes unachievable goals for branches in certain markets, while allowing other locations to coast. Second, it may cause a bank to miss opportunities to enhance branch performance.
A better approach is to benchmark the bank’s performance against that of its peers. After identifying areas in which it’s falling short, the bank can examine individual branches, analyze their local markets and develop strategies for enhancing performance.
It’s important to analyze each branch’s current customer base as well as the various commercial and consumer segments that make up its local market. Armed with this information, you can develop marketing strategies that make the most of each location’s unique profitability and growth opportunities.
For example, a branch in an area with a lot of high-income consumers might target those consumers and also focus on cross-selling to existing customers. As noted above, providing multiple products to customers improves retention rates. On the commercial side, analyzing local markets may reveal opportunities to serve previously untapped commercial sectors or business niches.
Rethinking the bank branch
Once your bank understands each branch’s market, it can make informed decisions about whether to close certain locations — and, for branches that stay open, develop products and services tailored to meet the market’s needs. In some cases, this analysis may lead you to rethink the role of certain branches and shift their focus away from routine transaction processing and toward higher-value consultative services.