Buying a Branch? Look Before You Leap
With the expansion of digital channels, a decline in branch traffic and the current industry focus on controlling costs it’s not surprising that some financial institutions are reducing their branch network. In 2012, over 700 branches were closed. Institutions with large branch networks, such as Bank of America Corp., HSBC and SunTrust Banks Inc., have all announced significant branch closings.
Community banks see this as an exciting opportunity to acquire attractive sites and expand market share – and, in many cases, it can be. But given limited capital and changes in the ways consumers and businesses are using branches, how should banks approach this opportunity?
Our view is that too many institutions become enthralled with the real estate “deal” and sometimes overlook strategic implications of their investment. Competition for an attractive property in an appealing market makes it easy for buyers to be seduced by aspects of the branch that ultimately will have little to do with whether it will turn a profit.
While physical branch presence is still valued by consumers and businesses, its utility is declining. The trend is undeniably moving toward greater use of non-branch channels, such as the call center, online and mobile. That raises the relative cost of the branch per customer served and makes for a tougher business case for a branch buyer.
As we see it, a “look-before-you-leap” approach is in order:
Take a deep look at the branch trade area. Do the consumer and small business segments match your strategy? Is the branch contiguous to your existing markets? Entering a market where your brand has low awareness presents a significant marketing challenge. In contrast, adding a branch within, or contiguous to, your trading area affords a much higher chance of success, since you are extending rather than introducing your brand.
Have a clear strategy for growth. You invest in branches because they are needed to serve specific trade areas. Presumably, you need a “store” that is convenient to residents and businesses in order to really penetrate that market. But a branch doesn’t automatically attract customers, so it’s critical to mount an effective outreach program targeting the community and your key prospects. In our experience, too many banks invest in the physical facility and insufficiently invest in the marketing and sales infrastructure required to generate a high return on investment.
Also, consider that most branches cast off by larger institutions have some deficit. They may have site deficiencies, or be in markets that are not growing. In saturated markets, share between major competitors is largely static, and not changing. How will you, as a new entrant, grow?
Don’t make customers wait. We’re not talking about teller lines here. Rather, we mean make sure that you have a customer acquisition strategy ready to go the moment the deal is struck. After all, the seller knew they were leaving long before they put the branch on the market. They had plenty of time to consolidate customers into another nearby branch – at least the customers they wanted to keep. They knew what kinds of incentives to offer to retain those customers. Any remaining customers might give the new owners some time to reach out, but not much.
For community bank acquirers in particular, this can be a real Achilles heel. There is often an assumption of a pent-up demand from customers who are unhappy about their neighborhood branch closing. But consider this: It can take three months for a buyer to refurbish and staff the branch and re-introduce it to the market. If customers choose a branch for convenience, three months or more is the opposite of convenient. From the customer perspective, the time frame may be longer since the branch was likely closed prior to being sold. In the meanwhile, most customers who were truly dissatisfied have moved to another nearby bank.
Acquiring banks need to move quickly, within days of closing the deal, with a disciplined process for entering the market and building their customer base.
Think local. Customers – or rather, prospective customers – don’t care about national averages; they care about what is important to them. In this case, demographics can be deceiving. Those are just statistics. What is important is the lifestyle segments within your market that predict how people make decisions about their financial future, what products they will buy, and who will influence their decisions.
The same is true about commercial and small business prospects. If business banking is a core competency, how will you capture the opportunity? On all matters related to your customer strategy, the only statistics and analytics that matter are those that apply to the precise trade area in question.
Fill the box. Most branches are sold as real estate only, without their customers – or without all their customers. (For example, Bank of America typically sells branches with deposits, but not loans). You’re essentially buying a box and betting you can fill it with profitable customers.
But there’s nothing remotely automatic about that happening – there’s no automatic constituency waiting for you. Even with the world’s best merchandising and neighborhood outreach, it is remarkable how a facility can be overlooked by people who pass it every day. I’m in the banking business, and so are you, so we tend to notice branch changeovers. But I don’t notice new nail salons or other retailers, and customers won’t notice you just because you are there. You don’t want to touch a box until you are confident that a) the trade area can support your entry, and b) you have a clear and rapid strategy for penetrating the trade area.
We have found that a willingness to ask such questions on the matters posed above, and insisting on well-researched and rigorously thought-out answers, dramatically improves the likelihood of achieving your return on investment goals. So the next time acquiring a branch becomes a possibility, ask penetrating questions, get reliable answers, and then – and only then – arrive at a rational, well-reasoned conclusion.
In summary, when you’re doing a deal for a branch, think less about “the deal” and more about your channel and customer strategy. Then you’ll know if the deal is right for you.