Location! And 9 other things to consider when opening a branch
It seems as though every banking journal today has an article about branch closures or consolidations. Less reported is that banks still open about 1,000 or more new branches annually. In fact, banks opened nearly 6,000 new branches in the five-year period between 2011 and 2015, according to the latest FDIC update—and are on pace to unveil nearly 900 more this year.
During the last half of my career I opened about 900 new branches and learned a great deal about the factors that drive a successful launch. Here are my 10 best insights:
- Location. Location. Location. Anyone who’s ever worked in real estate knows this concept – and what applies for real estate applies for real banking success. Your location and site selection impact your sales volumes in a big way. Not only do you want to locate in heavily trafficked retail areas, you also want to select highly visible and accessible sites. Hard corner stand-alone sites tend to out-perform mid-block or in-line sites. Both types tend to out-perform in-store or supermarket sites.
- Don’t shortchange marketing. Spend some money marketing the new site, whether through a grand opening celebration with a contribution to a local charity, or some other type of event. Make sure people know you’re open for business. I’m always amazed when banks spend $2-3 million building a new branch – and zero dollars marketing it.
- Bridge to where you already have customers. About half a typical branch’s sales come from existing customers, so the other half must originate from new customers. When you open a new branch as an infill point within your current footprint, it will likely outperform a new branch in a new market that expands your bank’s footprint. When building a convenient new location in an existing market, the number of existing customers will influence sales performance.
- New customers are critical, but not the only reason for expansion. Conversely, opening a branch in a new market where you don’t have an existing customer base will lessen initial sales and extend payback time for your capital investment. In these cases, increase marketing efforts to promote the new location. Even spending $25,000 in marketing can provide a big boost in sales—and it’s a small incremental price to pay for a $2-3 million investment.
- Will an ATM substitute for a branch? Consider deploying stand-alone, deposit-taking ATMs as infill points in markets where you have a decent branch network. They only require about 5-10 percent of a branch’s operating expenses and can help boost local sales by as much as 15 percent in their trade area. Make sure you use the same site characteristics you would for a branch (e.g. highly visible, high traffic area, easy to access site, etc.). Also make sure the machines are available 24-hours. Avoid placing inside a retailer.
- Be wary of supermarket branches. While they are less expensive to build and cost about 60-70 percent as much as a traditional branch to operate, supermarket branches will only generate 40-50 percent of the revenue. Additionally you have limited control over the grocery store: If they close you close—often with little customer notice—which could lead to regulatory issues.
- Heavy up on sales staff. As a corollary to the supermarket note, make sure you have plenty of sales staff on hand from day one. Never open a branch with only one seller, even if you have limited initial transaction traffic. Your sales volume in the early months will make a major impact on the ultimate size of the branch.
- Go big on signage. Wherever you build, make your signage is as big and bright as you can get it. Customers need to find your location. Some municipalities and landlords limit the square footage of signage, so plan carefully and consider in-branch signage through the windows as a complement to external signage.
- Add drive-up lanes, but not drive-up tellers. Find a site that offers a drive-up lane if possible, especially in the colder Northeast and Midwest markets—but place a drive-up ATM there instead of a traditional teller. Lower operating costs and increased transaction migration outweigh any potential customer complaints. It’s easier if you don’t offer a manned drive-up lane from the beginning, rather than take it away later by swapping in a drive up machine. Depending on where you operate, consider wider-than-normal drive-up lanes if big pickup trucks are common to your markets.
- Get staff on board early. Hire the new branch’s staff early and get them into the market, talking to local businesses in order to “pre-sell” accounts. It not only shows that your firm is committed to the local neighborhood but also helps ensure a good opening month.
There you have it: Ten things to consider before making your next branch investment. Make it count every bit as much as you want your customer’s investments to count.
A regular contributor to BAI Banking Strategies, Jon Voorhees is a 30-plus year veteran of retail distribution planning.