By Bryan Ridgway
Industry pessimists continue to predict that the rise of digital banking will lead to the demise of financial institution branches. Important statistics, however, paint a different picture. Many institutions are actively opening or plan to open new branch locations, and many customers continue to prefer the face-to-face interactions offered at their local bank branches.
While the branch is not going away, customer needs are changing constantly. Branch strategies must evolve to better align with the needs of contemporary customers. A critical first step is rethinking how institutions evaluate branch performance.
Countering the Doomsday view
Yes, the overall number of branches[i] and their overall foot traffic[ii] do continue to decline amidst increasing adoption of digital and mobile channels. Related statistics, however, clearly indicate a continued role for branches:
- Nearly 90 percent of banking customers plan to use branches in the future, and appreciate the human interaction they offer.[iii]
- Financial institutions open about 1,000 new branches a year;[iv] smaller institutions are particularly active.[v]
- A national survey found that more than half of institutions plan to increase their branch count over the next two years.[vi]
- Between 2012 and 2017, more than 1,200 institutions added branches, outpacing the number of institutions that closed branches.[vii]
- The average number of bank branches per institution increased from 9.8 in 2004 to 14 in 2017.[viii]
Ultimately, many small business owners and consumers — including millennials — continue to use the branch as their primary channel.[ix] The ability to assess how institutions track branch performance in support of strategic and tactical decisions is vital. In the future of banking, both old and new metrics will apply.
The continued importance of profitability
Profitability remains an essential metric for evaluating and comparing branch performance. A comprehensive view of profitability requires consideration of six key factors:
- Relative profitability. Profitability as a relative metric allows comparisons between branches and between and across specific time periods. Trend results can provide additional insights.
- Recent profitability. Measuring profitability based on recent production and activity also helps identify trends, revealing opportunities to realign behaviors and resources to support institution goals.
- Profitability per square foot. By leveraging technology, financial institutions can reduce the overall branch footprint (and cost), and/or expand front-office space for enhanced customer services.
- Analysis of all elements of the profitability equation. Elements include: Net interest margin using a funds transfer pricing process that can help shape pricing and product strategies; direct and indirect cost attribution to identify under- and over-capacity and opportunities to improve efficiencies and decrease costs; and capital allocation and provision/capital earnings charges to analyze profitability on a risk-adjusted basis.
- Product profitability. This measurement reveals the products used most and least by branch customers and indicates the relative drivers of branch profitability.
- Customer/member/relationship profitability. Knowing the profitability of each customer can help staff tailor customer interactions to proactively provide special offerings, products and pricing/fees.
Gaining a holistic view of branch performance
Looking beyond profitability is just as, if not even more, important. Understanding other critical performance drivers will help executives make more informed decisions regarding the branch network.
Growth. One of the primary goals of the branch network is to provide and support growth. Assessing various growth metrics is critical, including tracking loan and deposit growth, the number of customers/members, and referrals, cross sales and new accounts.
Activity/usage. Tracking metrics such as foot traffic, transaction counts (by type) and transactions per employee provide insights to the amount and types of services customers rely on within a branch and within the overall network.
Customer satisfaction. Branches provide one of the only opportunities to interact directly with customers. Analyzing satisfaction information enables assessment of whether customers and the institution are getting value from the branch network.
Additional branch performance metrics. In determining the full value of a branch, the following performance-based metrics can and should be measured and evaluated:
- Fee revenue, waived fees and the amount of high-value transactions
- Efficiency ratio, expense ratio and revenues, expenses and assets per employee
- Accounts, loans and deposits per customer/member
Many of these metrics most likely are already calculated at the institution level. Branch level analyses can support specific branch product, marketing and pricing strategies.
Market/competitive data. The market in which a branch operates is critical to its performance and viability. Beyond population-density metrics, it also is important to analyze average household income, ratio of homeowners to renters, age demographics, the number and types of businesses, and competing branches.
Accessing the data
The institution’s enterprise performance management (EPM) system should be the go-to source for financial leaders to perform these analyses. EPM systems should support: budgeting, planning and forecasting processes; profitability analysis across all institution segments; and detailed financial and management reporting processes.
A centralized EPM system contains robust financial and operational data that can be used to assess performance. For example, Figure 1 includes three core analytic views. At the top is a monthly look at one branch’s performance across five metrics, a list of its top customers by monthly profit, and links to branch-specific financial/operational reports and dashboards. The middle screen shows origination analytics for the branch’s auto loans, and the bottom ranks branches/departments by month-to-date net contribution margin.
Figure 1: Example Analytics for Branch Profitability. (Source: Axiom Financial Institutions Suite, Kaufman, Hall & Associates, LLC)
Leaders should leverage such data, along with market information and customer satisfaction data, to develop an expanded view of branch performance. This will enable leaders to optimize performance and support critical decisions for the institution going forward.
While branches must evolve and change, the branch is not going away. The winning strategy for branches requires creating richer, yet more simplistic customer experiences. Leaders should re-imagine branch design, resource levels, technology and automation availability, and ultimately, the purpose and role of the branch channel. Having a thorough understanding of branch performance through the metrics and assessments discussed here — and a clear vision for the future role of branches within the institution’s broader network — is critical to ensuring their relevance in the new era of banking.
Bryan Ridgway is a senior solutions engineer in Kaufman Hall’s Financial Institutions practice. He has more than 25 years of experience in financial risk and performance management for the banking industry. He can be reached at 847.441.8780 and email@example.com.
[i] Stewart, J.: “Bankers Pore Over Demographics to Design Branches of Tomorrow.” American Banker, Nov. 16, 2017. www.americanbanker.com/news/bankers-pore-over-demographics-in-branches-of-tomorrow
[ii] Pilcher, J.: “Branches in Decline: Last One Out, Turn Off the Lights.” The Financial Brand. https://thefinancialbrand.com/66228/bank-credit-union-branch-traffic
[iii] FDIC: “Factors Shaping Recent Trends in Banking Office Structure for Community and Non-Community Banks.” FDIC Quarterly, 2017. www.fdic.gov/bank/analytical/quarterly/2017-vol11-4/fdic-v11n4-3q2017-article1.pdf?mod=article_inline
[iv] Kerstein, D.: “From Customer Experience to Bank Branch Significance: Five Predictions for 2018.” BAI Banking Strategies, Jan. 8, 2018. www.bai.org/banking-strategies/article-detail/from-customer-experience-to-bank-branch-significance-five-predictions-for-2018
[vi] Meara (2017).
[vii] FDIC: “Factors Shaping Recent Trends in Banking Office Structure for Community and Non-Community Banks.” FDIC Quarterly, 2017. www.fdic.gov/bank/analytical/quarterly/2017-vol11-4/fdic-v11n4-3q2017-article1.pdf?mod=article_inline
[viii] Karl, S.: “Brick & Mortar Banking—Are Branches Actually in Decline?” DepositAccounts, 2017. www.depositaccounts.com/blog/brick-mortar-banking-branches-decline.html
[ix] Kerstein (2018).