Going Local to Optimize Branch Profitability
Former U.S. Speaker of the House Tip O’Neill famously coined the phrase “all politics are local,” expressing the need for successful politicians to understand and reflect the concerns of their local constituents. And the same sentiment couldn’t be more true for banks and bankers. In this era when consumers and small businesses are migrating away from physical bank branches, it is even more critical for banks to be relevant to the communities they serve.
It is clear that customer still value branch presence. Almost two thirds of consumers identify branch convenience as the primary reason for choosing their bank. But it is also clear that channel preferences are changing. Transactions conducted in bank branches are declining 5% to 6% per year due to direct deposit, debit, electronic bill pay, remote check capture and other methods of check displacement. And shrinking branch traffic means fewer sales opportunities, with new accounts opened per branch full-time employee (FTE) declining year over year.
While retail branches may have diminishing value for transaction processing, they remain the primary driver of customer acquisition and consultative sales. Most new household relationships are still opened face-to-face, not through remote channels. Business customers are also dependent on branch-based services.
There is a valid argument about optimal branch network configuration, i.e. the appropriate number of branches and the mix of self-service vs. in-person delivery. But there is no doubt that physical presence to serve geographically defined communities and trade areas is still basic “table stakes” for being in the game.
Defining the Trade Area
However, “being there” is not sufficient. Customers don’t automatically come to us, especially in an environment where branch utilization is declining. There is no “build it and they will come.” Success requires being local – local to the micro-market and local by knowing prospects name by name.
This is especially true when it comes to depository products. There is a natural trade area where 60% to 70% of a branch’s customers reside. While the size of the trade area may be influenced by physical boundaries, population density, and a bank’s own branch network as well as that of competitors, the fact remains that convenience is primarily defined by driving (or walking) distance. Consumers might drive across town to make a mortgage application but they want a branch less than 15 minutes away for their deposit-related activity.
In today’s data-driven environment, we can understand these branch trade areas in great depth. We can measure every consumer that resides in the trade area: who they are, what financial products they currently own, and which additional products they are likely to buy. The same is true of businesses: we can know who they are, which financial products they are likely to use, how many employees they have and their average payroll. And we can understand the personal and business needs of their owners.
But capitalizing on this opportunity requires more than better data and analysis. It requires new sales and marketing strategies. Financial institutions have responded to declining branch activity with smaller branches and fewer staff. While this may be more cost efficient, it also means that branches have even fewer staff to do outside calling and these smaller branches are less visible in the community (think newer, strip center branches vs. iconic standalone branches with high “billboard” impact).
In an era where the Internet permits ubiquitous presence, it is too easy to forget about the strength of being local. In our studies, customer acquisition is impacted less by the number of branches a bank may have nationally and far more by its presence in the local community. More specifically, it is the way a branch embeds itself into the fabric of the community that has the greatest impact on household and small business acquisition.
Our experience has shown that far too many financial institutions are still mired in an old marketing model where media and promotional mail are the dominant means of reaching prospects. These marketing vehicles primarily address awareness and brand perception and they are expensive, especially when the cost of promotional pricing is factored in. What they don’t do is create face to face interaction with bankers that can lead to in-depth discussions of relationship needs.
Higher return on investment (ROI) results from shifting the marketing mix away from media and promotional programs and more toward activities that re-establish the branch as a destination, not an errand. In this sense, intrusive programs – those that generate face-to-face contact – are more effective in providing opportunities for conversion because they create reasons for prospects to visit a branch, linger and interact with branch staff (and become customers).
As banks rethink the role of their branches, it is critical to utilize data insight combined with enriched customer experience to fuel growth. This must start with creating enabling infrastructure that includes defining branches with the greatest opportunities for growth and measuring the bank’s target segment opportunity within local markets. It must include executional support to help local branches and regional management implement focused activities and measure success.
Oregon’s Umpqua Bank pioneered many of these strategies, beginning with programs that tied branches more closely into their communities, with the result that new branches achieved profitability in only 12 to 18 months. But it is not just about new branches. PNC Bank has implemented similar strategies to revitalize growth at existing branches, utilizing non-traditional tactics ranging from mobile stores, street teams and educational events to drive traffic and reduce account acquisition cost.
Effectively implementing these strategies requires data-enabled knowledge of trade area opportunities, along with new marketing and sales management strategies and protocols to create the framework for success.