Plan Ahead for Branch Makeovers

CUNA’s E-Scan Newsletter
July 7, 2010 | COMMENTS

The branch may be approaching a generational tipping point when most people favor electronic transactions and have less need to make branch visits. Just ask generation Y. Among these young consumers—the eldest of whom are still several years shy of 30—at least 80% use online banking and 43% plan to use mobile banking over the next year, according to Fiserv.

Facing that set of preferences, will the financial services industry's investment in branches finally begin to decline? And if so, what does that mean for the future size, mix, design, and staffing of your branch network?

How an institution answers these questions will have a profound impact on its competitive position, capital expenditure plans, staffing, overall delivery strategy and, ultimately, on its bottom line.

Circumstances will vary by local markets. But, according to the Bank Administration Institute's Banking Strategies magazine, expect changes from transaction-oriented branches to financial-services outlets oriented more to sales, support, merchandising, information resources, and high-tech delivery. In the longer term, fewer branches may be required with a minority of those being teller-staffed.

During the transition, those who make bold changes to a branch network might risk short-term customer losses to competitors that hold on dearly to a fading delivery model. On the other hand, no one wants to be the last in a market with an outdated, over-priced branch system.

Transition time

In the banking world, the number of commercial bank branches increased for the 17th consecutive year in 2009, according to the Federal Deposit Insurance Corp. (Similar information is not available for credit unions.) This branch growth has occurred despite major advances in electronic delivery and recent declines in branch transaction volume.

Alongside this, however, branch growth was reduced by branch closures, failure-related branch consolidations, and unfavorable economic and industry conditions. These conditions may lead to an actual decline in branch count during 2010, and it may accelerate the transformation of branch networks.

Key elements of a branch-transition strategy should address network size, mix, and geographic footprints as well as branch design, staffing, and functionality. Three key planning considerations are market factors, competitive aspects, and client dynamics.

1. Market-level factors such as branch outlet share and market growth prospects drive investment decisions. Branch outlet share is still a major determinant of deposit market share, especially for those institutions operating as full service and serving entire markets.

Low branch outlet shares (generally below 8%) usually result in achieving less than a fair share of the market. With few branches in the market, fewer consumers know about an institution and there's little chance of making an impact. Banking analysts recommend targeting an outlet share range of between 12% and 16%.

Competitive intensity is high (overbanked) when the ratio of total financial demand to market branch count is low. Limit new branch investment in over-banked markets unless projected market growth is strong and your institution's outlet share is low. Instead, focus investment in markets that exhibit strong total financial demand and market potential for the products, services, and consumer segments in which your institution excels.

2. Competitive actions and market positioning also deserve consideration. In many markets, the near-term challenge will be in dealing with the fact that most institutions consider the branch network and traditional branch design a centerpiece to their value proposition. That said, institutions with strong alternative delivery offerings (online banking and bill pay, mobile banking, remote deposit and consumer capture and, to a lesser degree, a strong ATM network) should have an easier time with the transition.

3. Client preferences are the third consideration. It's important to understand the channel preferences and behaviors exhibited by the existing client base. Transaction and account-opening data should reveal the degree to which current clients are branch-dependent, self-service oriented, or mixed. Develop use-based client profitability and relationship measurements to guide resource allocation.

These analytics, together with a review of information available on the channel preferences of growth-oriented target-market segments, will help determine the appropriate size and allocation of a branch network and will also help prioritize and select branches for design reconfigurations.

Branch design

In terms of branch design, one size does not fit all, especially moving forward. In order to transition to networks with smaller overall footprints while maintaining the functionality to service current customer needs, banks and other institutions will continue to use a variety of facility types including supercenters, specialized financial centers, and satellite branches. Characteristics include:

• Supercenters (think Wal-Mart Superstores or Bank of America's “showcase” branch in Charlotte, N.C. ) are fully staffed, larger versions of the current traditional branch. They provide information on all retail, commercial, and investment services through a variety of delivery options and technologies. These are destination centers typically located in the busiest sub-markets with substantial consumer and commercial activity.
• Specialized financial centers may also evolve from traditional branches and focus on serving specific market segments: commercial/small business, private banking and investments, or retail/self-service. They may also be locations for introducing and testing new technology, and they may or may not include teller lines.
• Satellite branches will have smaller footprints (typically less than 1,500 square feet and perhaps much smaller) and may be in-store or converted mall or strip-center facilities. Over time, teller lines will be eliminated or converted to multifunction stations (sales and service) with transactions being processed by universal branch associates.

The timing and degree to which an institution transforms a branch network will depend on the:

• Competitive structure, demographics, population trends, and economic prospects of local markets;
• Current and targeted customer base's delivery behavior and preferences, and
• Institutional staffing capabilities and financial constraints.

In markets in which you have a strong competitive position and where growth prospects and consumer needs warrant, analysts advise doing whatever is necessary to maintain your level of branch share. Moving toward newer styles of branch networks and facilities will require significant changes in design and configuration. While your institution may have a longer period in which to implement, the time to plan is now.

This article originally appeared in CUNA's E-Scan Newsletter. Reprinted with permission.