Measuring Branch Value

3-28-13_Crowe.pngBanks have any number of measures to track branch performance.

Traditional metrics often include account openings, deposits, daily sales per employee, and staff utilization, to name a few. Most of these measures have been in use for decades, beginning when branches were the primary, if not sole, channel customers had to conduct their financial affairs.

Today, however, customers use multiple channels for banking. While their accounts might be held at a main office downtown, they make deposits and withdraw cash at smaller satellite branches—and turn increasingly to ATMs and to the Internet via computers, tablets, and mobile phones to check balances, transfer funds, make payments, open new accounts and make deposits.

Branch Metrics Need to Change

Customer sentiment now shows that, although branch traffic is down, branches continue to be significant contributors to bank appeal and customer satisfaction. Brick-and-mortar banking is not going away, but the metrics banks use to evaluate performance need to change.

Instead of employing only traditional measures to assess branch performance, banks should consider using holistic metrics that take a functional view of profitability and incorporate elements that capture customer satisfaction and retention.

Branches are not mini-banks independent of one another; they are interrelated portals through which customers enter to engage with the greater enterprise. An institution, therefore, would be well served by taking a holistic “portfolio” approach to its branch strategy.

Some branches, such as those in shopping malls, might have high levels of low-value transactions; other branches, such as those that house private banking departments in wealthy suburbs, might have lower levels of extremely high-value transactions.

Private banking customers might visit shopping mall branches several times a month to withdraw cash for shopping. Does it make sense to use measures that penalize mall branches for lack of deposit growth when they are integral to satisfying and retaining private banking customers?

Assessing Branch Value

As banks look to gain efficiencies going forward, here are some factors to consider when assessing branch value:

  • Branches exist to sell, service and retain customers and their accounts in collaboration with other branches and groups within the institution.
  • Customer relationships exist with the bank, not its branches.
  • Most products and services are not delivered by branches alone, but rather through collaboration with operations, product management, credit risk management and specialized product groups.
  • The value of product sales, servicing activities, and customer retention to the institution is derived from consideration of product margins, operating costs, customer profitability characteristics and strategic objectives.  Value generated is a useful metric for branch performance. It consists of the value of new products sold, the value of transactions processed and the value of customer account retention. Constructing these metrics requires having a fresh perspective on the role of the branch and its performance.
  • Branches are profitable if the cost of operating them is less than the value they generate through sales, service and retention.  Net value generated after direct branch costs is a useful metric for this purpose.
  • The value that branches generate through sales, service and retention should provide clear and appropriate signals to branch teams regarding the relative allocation of their time and efforts. Measuring value generated per full-time employee (FTE) hour can highlight staff productivity and focus attention on high value activities.
  • Other distribution channels (such as online and mobile banking) are likewise profitable if the costs of operating those channels are less than the value they generate for the institution through sales, service and retention.
  • Comparing branches and channels based on growth and efficiency can help guide resource allocation. Analyzing net value generated, value generated per FTE hour and growth in value generated are useful for this purpose.

By taking these and other factors into account, banks can develop more effective standards for measuring branch performance and not rely strictly on metrics that have existed for decades.  As times have changed, so must the measures of branch value.

Jason Bomers