In this day of razor-thin interest margins and heightened competition, most banks are focusing on becoming more efficient to increase profitability. Yet, many of these financial institutions may be looking for efficiency gains and cost savings in the wrong places. It’s fine to streamline work processes, scrutinize vendors and tighten the belt on discretionary spending, but that’s not really where the fat is.
The fact is, branch networks and their associated costs, including personnel, make up about two-thirds of a typical bank’s non-interest expense. If you want to make a dent in your cost structure, you have to focus on more intelligent management of people and facilities.
How important is this? Bank Intelligence Solutions, an advisory arm of Fiserv, conducted a study of America’s banks, in which our team gathered metrics such as revenues per branch, core deposits per branch, number of deposit accounts and revenues per employee. We found that 45 percent of banks have an excess branch capacity problem. Their allocation of resources is out of alignment with the needs of the marketplace. As a result, inefficiency and weak performance continue to create a drag on earnings. It’s one of the top issues that banks need to address in 2015 and beyond.
Smart branch optimization begins with tapping into and interpreting data—using market analysis and your bank’s internal reporting to execute informed business decisions.
Know Your Markets
First, you have to understand the markets in which your branches operate, from both a consumer and commercial perspective, as dictated by your unique operating strategy. You need to know the makeup of households and businesses, as well as their product propensities and current growth rates. Is the area populated by young families or retirees? What is the ratio of homeowners to renters? Are the businesses predominantly retail, service-oriented or industrial? Then you need to understand the competitive dynamic – the market saturation of the geographic area, who you are competing with and how effectively.
This market profile, drawn from current census data and other information sources, drives other important questions: Based on current trends, what does the future of the market look like? Considering the types of households and businesses in the market, what product and service set will be most appealing and helpful to them, now and in five years? Answering these questions helps you move beyond a one-size-fits-all branch strategy to serving specific community needs.
Rank Your Branches by Performance
You need to understand the markets, but also how well your branches are succeeding in those markets. How does your bank measure success at the branch level? Review key metrics to measure branch performance, such as the number of accounts, profitability of the branch, fee income and transaction activity. Are you generating sufficient revenue from the loan, deposit and fee activity at the branch? These are all metrics available in your internal data.
Now that you have your rankings, it’s time to use that information to make some decisions about the future of your branches, choosing from four options:
Keep: This branch is performing well, with good growth potential.
Close: The community has changed in the last five years and there’s not enough growth to sustain a branch at this location.
Move: This branch is not performing well where it is, but market analysis suggests that a move to an area in close proximity would result in more traffic and greater success.
Consolidate: Two branches are located fairly close together, and the market data supports the idea of serving this community with one branch instead of two.
What if your bank doesn’t have all the funds up front to make the needed changes to your branch network? Prioritize which branches you need to invest in first, and execute a phased plan over your projected timeframe. And remember, some of your reinvestment may pay for itself if you’re closing a few branches.
Embracing a Unified Approach
Data-driven decision making can bring new focus to your financial institution’s branch strategy and marketing efforts. But whether you attempt branch optimization using these techniques on your own, employ software tools or engage consultants to guide you through the process, it must be a team effort.
It is critical to be in agreement, enterprise wide —from retail to lending to the executive team —on the process you’re going to use and the metrics you’re going to measure and track over time. Even more important is having full executive team buy-in on how to weight these factors. Finally, it must be understood that you’re going to use this analysis to make real decisions.
With smart branch optimization, the goal is growth. Good analysis, intelligently used, can propel you toward it.
To learn more about making the most of your branch network, view Driving Smart Branch Optimization Decisions from Market Analysis, a recorded presentation from Fiserv.