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The Smaller, More Profitable Branch of the Future

This article originally appeared in BAI Banking Strategies

Draconian reductions in branch networks are not necessary for financial institutions (FIs) that shift to smaller, more efficient platforms for meeting account holder needs.
 
By W. Michael Scott, President/CEO of FMSI

With branch transaction volumes continuing to decline, FIs are exploring their options regarding their branches’ futures. Numerous studies have indicated that account holders prefer to have access to branches when they want them, but with that need being much less frequent, what are FIs to do? It doesn’t help that some experts say branches must be downsized, while others advocate for closing smaller branches and aggregating business into larger, higher-volume locations.
 
Our experience with hundreds of FIs, nationally, has shown us there are verified alternatives to branch closure, including right-sizing branches and orienting them toward higher-profit models. In this article we’ll outline some of the strategies that prove smaller, more profitable branches are anything but a pipe dream.
 
Branch Showdown

Many FIs have already responded to the threats of the current branch era – the economic downturn; mobile and online banking – by closing or merging branches. However, statistics suggest closing branches doesn’t necessarily resolve profitability woes. According to the FDIC, the total number of branches dropped several percentage points between 2009 (the peak year for branches) and 2012 yet total deposits increased by $1.4 trillion, a 15% increase, during that period.
 
Despite the fact that fewer branches are taking in significantly more revenue, profitability continues to elude many branches. One reason is that transactions, on average, are costing FIs a lot more to process. FMSI’s Teller Line Study found that the average cost per-transaction for community FIs rose more than 34% between 2007 and 2013 to $1.22 per-transaction.
 
If FIs respond to this challenge by closing branches, they are completely eliminating the chance for the all-important account-holder “face-time,” an element of service that mobile and online banking are already taking away. The solution, we believe, is for branches to become leaner and more effectively structured and to engage in targeted strategies that maximize opportunities to capture new revenue streams. They also must restructure their thinking.
 
Many FIs have followed a model common over the past 50 years: “If we build it, they will come.” This mindset holds true, not only for the physical locations, but also for the approach to human resources, where FIs staffed based on assumed demand and then personnel simply waited around for someone to give them something to do. In an era when money was flowing, interest rates were high, and suburbs were booming with new families, this model worked. Now, it’s a recipe for disaster.
 
To change direction, FIs don’t have to sell or tear down physical branches. In fact, that sends a terrible message of ‘impending doom” to account holders and prospects. Furthermore, if a competitor buys one of your branch buildings and reopens at that location, guess where the previous FI’s account holders may end up? A much better approach is to shift FI thinking away from “order filling” to account holder-value creation. At the same time, FIs can focus on shrinking the operating (rather than physical) expense.
 
When account holders enter the FI, competent staff should position themselves as sales consultants, engaging with them in a professional manner, and working to establish a relationship of trust. The consultative approach means being alert and responsive to what the account holder wants.
 
Additionally, technology can help FIs keep running summaries of discussions with these account holders and not require account holders to regurgitate their histories with the FI every time they visit.
 
Once the relationship is established, sales personnel can use account holder data to send non sales-related information of interest to the account holder, or inquire about recent events in their lives. If a high-value account holder recently acquired a new car loan through the FI, for example, why not ask when they come in if they are enjoying their new purchase?
 
Finally, if a low-volume branch has more space than it needs, it could turn some of that space into an “Advisory Services” area, outfitted with good (fresh) coffee, cold bottled water, financial and business magazines and newspapers, and comfortable furniture where account holders can meet their sales consultants.
 
Embrace Branch Efficiency

Many account holders, especially the younger generations, are more technologically oriented. These account holders often require less time from branch personnel and they’re likely to appreciate a faster turnaround. For them, a great experience could be getting in and out of the branch quickly, or being able to help themselves if lines are long. Ways to facilitate this effort could include creating a dedicated line for account holders with one or two simple transactions, or having additional in-branch service kiosks.
 
FIs can also offer computer stations for account holders to check balances, transfer funds between accounts, set up bill payments, and perform other transactions. FIs should encourage account holders with simple requests to use these channels, either inside or outside the branch, pointing out the time savings they offer.
 
As full-time tellers leave, FIs should replace them with part-time tellers whenever possible. Our 2014 Workforce Utilization Study reconfirmed that part-time tellers often have much higher average transaction processing rates than full-timers. Using part-time tellers during peak-times makes it easier for branches to schedule around demand and reduce the amount of revenue-wasting idle time they must absorb. Traffic analysis and predictive scheduling platforms are useful in this regard.
 
FIs can often significantly increase their operating efficiency by reducing operating hours, usually by opening or closing at a different hour, or not opening on Saturday. We have seen instances where reducing operating hours in low-volume branches has saved a FI as much as $250,000 per year in labor costs alone. We recommend engaging in this effort on a FI-wide basis to make it easier to evaluate the impacts to both account holders and other branches of any change in operating hours.
 
These strategies, taken in concert, can absolutely improve profitability in low-volume branches without necessitating the closures that affect a FI’s reputation. Not all of them will be appropriate for every FI. The key is for FIs to remain flexible about their options.
 
FIs must also ensure that branch managers have the meaningful key performance indicators to measure the results of sales, service and expense reduction efforts. Finally, FIs should also be prepared to engage in proactive yet sensitive change management, including coaching and incentivizing personnel to embrace the new approaches.
 
Mr. Scott is president/CEO of Alpharetta, Ga.-based Financial Management Solutions, Inc. (FMSI), which provides financial institutions with business intelligence and performance management systems for efficient branch staff scheduling and lobby management. He can be reached at mikes@fmsi.com.

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