Digital rise = branch demise: Not so fast, consider these facts . . .
Doomsday messages about the death of bank and credit union branches neglect to examine important data and related considerations. Yes, the overall number of branches and their overall foot traffic do continue to decline amidst increasing adoption of digital and mobile channels. But, many institutions, in fact, are opening or are planning to open branches and most customers expect to use branches in the future (see Sidebar for relevant data).
Deeper analysis shows that branches—and branch performance—play a critical role in the success of most financial institutions. Many consumers and small business owners, including Millennials, continue to use the branch as their primary channel, preferring the personal interaction of staff in a brick-and-mortar facility to help them open new accounts, get cash, pay bills, and obtain financial advice.[ii] Smaller institutions are expected to operate larger networks as they seek growth through footprint expansion.[iii]
In any case, the branch is not going away, so branch strategy must evolve to better align with the needs of contemporary customers, while at the same time optimizing performance and supporting institutional goals. My recent blog[i] describes four specific strategies that financial services executives should pursue whether they plan to expand or to contract their branch network (Figure 1):
- Taking a retail perspective with a smaller footprint and service-oriented “front office” space
- Integrating technology by combining assisted self-service and personal interaction for a consistent customer experience across all channels
- Optimizing the staffing model by using a team of utility players that can, and do, perform all branch functions
- Assuring customer-centricity by tailoring technology and services based on customer behaviors and needs
The winning strategy for branches centers on creating richer and more complex customer interactions. For example, if the institutional goal is expansion through a broader set of financial services, such as insurance, investments, and other financial products, the branch becomes a significant asset in achieving that goal. The ability to evaluate branch performance in support of strategic and tactical decisions is vital, given the continued usage and expense of a branch network.
Profitability remains an essential metric for evaluating and comparing individual branch performance. Through robust profitability measurement and analysis, leaders of financial institutions can:
- Determine the level of revenue generated and operating costs
- Align branch manager performance with organizational goals
- Identify and optimize branch and staff efficiency
Executives also can use the results to inform decisions around whether to open or close specific branches, expanding or contacting the network to achieve profitability goals. A deep dive into profitability analysis is required, with consideration of the following six elements.
Relative Profitability. Profitability as a relative metric allows comparisons between branches, and between and across time periods. The relative rather than static view enables leaders to compare performance and apply assumptions over time. Trend results can provide additional insights that fuel decisions resulting in performance improvement.
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. For example, if a branch has a large loan portfolio that generates significant revenue, that branch may be a top-performing branch from a total profitability perspective, but may in fact be trailing other branches in loan production over the recent year. In this case, traditional profitability analysis rewards the branch for loan production from years ago rather than current activity.
Profitability per Square Foot. This is a common performance metric for the retail industry. By leveraging technology to shrink back-office space, financial institutions can reduce the overall branch footprint (and cost) and/or provide additional front-office space for richer and more complex customer interactions.
Analysis of All Elements of the Profitability Equation. Elements include: Net interest margin using a funds transfer pricing (FTP) 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 the customers of each branch and indicates the relative drivers of branch profitability. The analysis can reveal opportunities to: shift customers to more profitable products; change processes, pricing, or fee structures for less profitable products to help improve overall profitability; and to increase usage of profitable products through branch promotions and cross-sell strategies within the branch and across the branch network.
Customer/Member/Relationship Profitability. Knowing the profitability of each customer can help branch staff tailor interaction with that customer to proactively provide special offerings, products, and pricing/fees. While staff should treat every customer well, understanding each customer’s profitability and the overall profitability of the relationships that customer brings to the branch or institution as a whole can help ensure retention of the highest-value customers. As executives consider possible branch closings and openings, they must understand the impact to customers that use (or may use) those branches, and proactively implement strategies to let high-value customers know they are appreciated.
A Holistic View of Branch Performance
Profitability is one component of branch performance. Digging even deeper and expanding the analysis to understand other performance drivers will help executives make even better and more informed decisions.
As with any other channel, the goals for a branch should include providing excellent, efficient, and effective customer service; growing wallet and usage share; increasing profitability; and ensuring that the branch is providing value to the institution. With these goals in mind, executives can consider the following five analyses to enable a more holistic view of branch performance.
Growth. One of the primary goals of the branch network is to provide and support growth, including overall growth of the institution, its customers/members, balances, and ultimately earnings. Assessment of various growth metrics is critical as part of the branch performance evaluation, tracking both loan and deposit growth; increases in the number of customers/members; and referrals, cross sales, and new accounts opened.
Activity/Usage. Tracking metrics such as foot traffic, transaction counts (by type), and number of transactions per employee provides insight into the amount and types of services that customers rely on within an individual branch, and within the overall branch network. These metrics help leaders assess the best services to provide in the branches, analyze optimal staffing levels, and develop targeted marketing campaigns. Activity/usage also is a consideration in branch closure decisions.
Customer Satisfaction. Gauging customer satisfaction for any channel is important; capturing, storing, and analyzing customer satisfaction data for branches is critical. Branches provide one of the only opportunities to interact directly with customers and to develop and enhance these relationships to meet customer/member needs. The costs related to this interaction are high, so gathering and 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: This assessment provides insight into the importance of fee-based products and services within a branch and whether the branch could better optimize revenue from fees.
- Efficiency ratio, expense ratio and revenues, expenses, and assets per employee: This assessment can help determine whether branches are staffed at appropriate levels and whether additional efficiencies in branch processing should be pursued.
- Accounts, loans, and deposits per customer/member: Assessment of these data can reveal growth marketing opportunities related to wallet and mindshare[i] of the branch customer base.
Many of these metrics are most likely already calculated at the institution level. Analytics at the branch level 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. Consider whether performance expectations should be the same for a branch located in a busy, highly populated urban location compared to a branch located in a sparsely populated, rural location.
Beyond population-density metrics, it also is important to capture and analyze information about average household income, ratio of homeowners to renters, age demographics, and the number and types of businesses. These data help set performance expectations, but also should reveal growth opportunities, influence product strategies and the types of services offered, and even impact branch design considerations. Information about competitor branches, products, and rate offerings provides insights into growth and pricing expectations and strategies.
Accessing the Data
So where can leaders of financial institutions access the data needed to perform these types of analyses? The institution’s financial performance management (FPM) system should be the first go-to source, already containing the majority of data needed for a more in-depth analysis of branch profitability and a broader view of key performance metrics. FPM systems should support: budgeting, planning, and forecasting processes; profitability analysis across all segments of the institution; and detailed financial and management reporting processes.
A centralized FPM system contains a robust set of financial and operational data, such as current period and historical general ledger data, transactions, fixed assets, customer and account data, employee counts and salary data, production data, and more that can be used to assess performance.
For example, Figure 2 includes three core analytic views: at the top is a monthly look at one branch’s performance across five metrics, a listing 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 screen is a ranking report of branches/departments by month-to-date net contribution margin.
Leaders should leverage such data, along with market information and customer satisfaction surveys available externally, to develop a more comprehensive view of profitability and an expanded view of branch performance. These views will enable leadership teams to optimize performance and support critical decisions for the institution going forward.