Please stop. We need to be able to control ourselves and stop opening up branches. In almost every city we go to, we see a new branch opening. Whatever trend or data you think you have, there are five more statistics that are pointing the other way. Here is a scary concept – Bank of America, right now, is making loans at record tight margins based on not where their cost structure is today, but where it is projected to be in the future. Think about that for a moment – they are using forward-looking margins. Where is your cost structure going if you are still building branches?
The four main economic statistics that are best tied to branch profitability are set to peak in the next couple of years – employment, real sales, real income, and production. This means that while margins may improve, branch growth will slow. Checks and other items are trailing down; currency/coin usage is down, and branch traffic is off almost double digits. These trends will all increase per unit servicing costs. Demographics are working against you, as is labor cost, inflation, and real estate prices. Every time you build a branch, you are tying a ten plus year albatross around your neck. In order to compete in the future, banks need a cost structure half of what it is today and must be more nimble than ever before – a large branch system works against both these attributes.
Revisit your financial model and be reminded how truly sensitive banks are to improvement in efficiency. A 10% improvement in operating costs will get you almost 6% to the bottom line. You can’t get that control in loan pricing, in managing your cost of funds or increasing fee income. Consider that it takes at least $750k to build a medium-sized branch and another million dollars a year to maintain it. A GOOD branch serves about 2,500 and engages customers MAYBE 24 times per year. That is a cost per customer of about $390 dollars per year, or likely more than you are making from about 85% of your customer base. Enabled by technology, some banks with only a few branches have that cost down to $20 per year.
The industry is still building branches because it is easy and what we know. Cutting cost and moving your operations to a digital platform is hard. Building branches are bringing a cross-bow to fight a drone. Amazon, Zappos, FedEx, UPS, Costco, Walmart and others keep gaining market share because they have the capacity to be the lowest cost leader when they want to be. If any of those guys run into the competition they can keep cutting their price in the short run to force a switchover from a traditional to a digital channel. Once switched over, the experience will keep you coming back. Amazon's new Dash feature, where household's scan items at home and they are automatically delivered is an example of a superior customer service platform delivered for pennies. Building branches work against this strategy.
Don’t think that just rolling out a mobile banking application is the answer. It is great that you are doing that, but if you maintain your branches you are just increasing your cost structure while creating channel confusion and complexity. While “omnichannel” is the latest buzzword in banking, it does not have to mean a robust mobile platform, ATM network, kiosks, a call center, full online capabilities PLUS a large branch network. Since customers are not going to pay more for customized access to our banks, we must balance customer convenience with cost against the backdrop of where the industry is going. This likely means reducing bricks and mortar while you increase your digital back, middle and front office platforms.
The industry is moving to not only a better customer experience through technology but more efficient operations. While the customer experience will continue to be one objective for banks, the primary objective will continue to be profitable growth. There is only so much you can do with a branch, but by switching over some of that branch investment to technology that a) better engages the customer, b) lowers operating costs, c) increases cross-sell opportunities; AND, d) opens up markets or sections of markets that were previously not profitable, should be the criteria for any operational investment in a bank.
The two big areas in banking that are the most overlooked is deposit account processing and lending. Take lending for example. Loan origination, administration, underwriting, monitoring, and lending compliance eats up almost 65% of the cost in a bank. Make this process more efficient and you can also score high on each of the four above mentioned investment criteria. Before you think about investing in another branch, there is a long list of other alternatives that you should consider.
Take the statistics that your customers still prefer a branch with a grain of salt. Yes, 65% still want a branch, but that is because they don’t know any better. If you force your customer to come into the branch to send a wire, open an account, process a loan or resolve a problem, of course, they are going to say they want a branch. Your customers loved carbon paper before the copy machine and the computer.
Before Amazon, most customers loved to browse a book in a bookstore. They loved the instant gratification of running out and buying a new book, they loved talking to the bookseller about an author and they love having a place they could return a book. Amazon solved all those problems. Over time, Amazon’s price, selection, suggestions, reviews, easy shipping, easy returns and a host of other features completely changed an entire industry. The same will happen to banking.
Stop building branches and put those dollars and energy in trying to figure out how to better engage your customer at a lower cost. What your customers really want is convenience. A customer in a branch means you are making the customer spend their most valuable commodity – time. If your branch experience is so good with your friendly staff, cookies, prizes, video wall, demo station and free Wi-Fi - then kudos to you. That will all serve to slow down the march to a more efficient bank. However, in the history of banking, we have never seen, nor heard about a branch so fun that it was better than building a business, spending time with the family or golfing with friends. A branch can only be so good.
While there are certain branches that still make sense, they are the very rare exception. If you have any plans to open a branch in the future, we urge you to take a long look at the investment and see if that is really your best investment alternative. If you think it is, give us a call, as we would love to talk you out of it.
Submitted by Chris Nichols on April 07, 2014