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Does Your Bank's Branching Strategy Need a Tune-up?

January 2019

by Scott MacDonald, SW Graduate School of Banking Foundation

Do you recall, several years ago, when you went to the airport and stood in line to see an agent to check in for your flight? I do, and I also remember when the kiosks appeared and I avoided them. Later, customer service agents began to "encourage" us to use the kiosks. I still avoided them until circumstances finally forced me to succumb to the automated check-in. To my delight, it was actually an improvement. The ensuing reduction in gate agents and greater reliance on automated check-ins have been going on in other industries for about ten years. I suggest the financial services industry would have likely followed suit if we had not been preoccupied, recovering from the 2008 financial crisis. Teaching our customers to self-serve, as the airline industry did, will save our industry billions of dollars in the long run.

The total number of commercial bank offices peeked at 90,133 in 2008, while the peek in commercial bank branches was 83,130 in 2009. The use of automation in banking will not eliminate the need for banks, or branches, or lose the personal touch with customers. On the contrary, automation in banking will enhance the level of service, reduce costs and allow the bank to perform at a higher level, not only in profits but also in customer service. The greater availability of technology and the heavy cost of a branch compels bank management to continuously re-evaluate their branching footprint.

There are several strategies we should consider when evaluating our branching footprint. First, branches can be critical in driving organic growth. Second, branches can be a prominent means of promoting the bank’s brand and their commitment to the community. Third, branches are a great customer service tool. Finally, branches can be a means to expand outside of the bank’s core market.

Organic growth is critical when considering opening a new branch. Branches, however, are expensive and new technology can make existing branches more efficient or reduce the need for additional or existing branches. Hence, we should always consider branch closures alongside expansions. Jon Voorhees with Peak Performance Consulting Group suggests that the best sites for a branch are those that can be easily seen, have good easy access, and are generally a free-standing building at hard corners. Many banks did not build the branch at the ideal site owing to its cost, only to find that the second choice was not as productive as they had hoped. Often, they would build another branch, again, not on the best site, only to find they now have two less productive offices— when what they needed was to be on the right site.

According to the FDIC Quarterly, those banks which decreased their number of offices by more than 25 percent, improved their efficiency ratios by 7.14 percent. Lesson learned: when we consider branch expansion, always consider consolidating existing branches.

A physical branch is a prominent means of promoting the bank. Before the financial crisis, community and regional banks were rewarded by how big their footprint was. The strategy was to use the branch to expand their footprint as large as possible. What we are discovering today is: as we create more branches to expand our footprint, we dilute the impact the branch has as a branding tool and commitment to the community. One or two branches in a large city might not be noticed, while one or two additional branches in our core market will often have a much greater impact. Post financial crisis, the strategy is to maximize the quality of our footprint, not its mere size. It is important to focus on dominating the core market before expanding into new markets. This keeps costs down, has a great brand impact, and does not risk dilution and pose execution risks outside the organization’s primary area of expertise.

A branch as a customer service tool is an argument I often hear against closing a branch and less so, the motive behind opening a branch. An old story I tell is about the early stages of the Internet. Back then banks returned customers’ physical paper checks (non-truncated accounts). Today I bet the majority of bankers don’t even know what a non-truncated checking account is! We moved to not returning the physical checks. We had a few older customers who just could not adjust; and we continued to return checks to these handful of customers, at a cost that would embarrass us today! Bottom line is, branches can be a great customer service tool but they must be profitable. We cannot keep a branch open or open a new branch at near break even or less just to ensure we don’t lose a handful of customers. Believe It or not, when we finally stopped returning the checks, those customers neither got upset nor left the bank as we thought they would. They frequently found the new technology useful, just as I did with the airline kiosks.

Most banks will find mining their existing core markets more fruitful until they have saturated their existing core market. It bears repeating: today’s strategy is about dominating a market rather than stretching resources too thin. A single branch in a new market often has less branding power and rarely adds to the customer service experience of the existing customer base. On the other hand, expanding into a new market with a branch is a great strategy when the bank has saturated its existing market or there is little growth opportunity there. When expanding into a new market it is critical to evaluate the trade area, the density of its population, its business and economic conditions, and the existing competition and growth opportunity in the area. Expanding in a new market can provide that needed growth, but it will be associated with high startup costs and execution risk if we don’t have the right people or locate in an already saturated market.

As one of our New Year’s resolutions, we should all tune-up our existing branching strategies. If we built our branches as we did many years ago, they could be larger than we need today; in the wrong location; or replaced or supplemented by new technology in the form of automated tellers and cash recycling. Not only can new technology reduce the cost of operating a branch, it can improve the efficiency of branch personnel and the customer experience. Look no further than our experience with the airline kiosks!

S. Scott MacDonald is the President & CEO of the SW Graduate School of Banking Foundation at Southern Methodist University in Dallas, Texas. He also serves as the Director of the Assemblies for Bank Directors.

A downloadable PDF of the original article can be found here: Does Your Bank's Branching Strategy Need a Tune-up?

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