For everything from strategy formation to performance management, banks compare themselves to their peers, and the way they define their peers has often come down to answering a simple question: who’s across the street?
New BAI research indicates it’s time to stop asking that question and to completely redefine what constitutes a peer. Doing so clarifies the real reasons behind many aspects of performance, particularly those related to the branch, and it helps bankers more effectively optimize resources and improve growth.
The process of peer identification begins with looking at two factors: the overall size of a market, in terms of the number of households in it, and the bank’s presence within the market, in terms of its share of household checking accounts. It’s within these market-presence categories that banks can identify their true peers and begin to understand the forces driving branch performance.
Rather than looking across the street to identify the competition, bankers will benefit by thinking in terms of weight classes. Banks with the strongest presence in a market (at least 25% household checking penetration) are akin to heavyweights. Those with a mid-sized presence (between 10% and 25%) are similar to middleweights and those with a small presence (less than 10%) are essentially lightweights.
Analysis of these weight classes also reveals the huge importance of network strength, as measured by the number of branches in a market. Banks with more branches consistently outperform banks with fewer branches in terms of deposits and deposit growth. Even as routine transactions migrate away from the branch, customers continue to favor the banks with the largest local branch networks.
This is where big differences emerge. Depending on the market size, heavyweights attract a multitude of deposits for every dollar a lightweight gets. For every household a lightweight serves, heavyweights also serve a multiple of that number. Compounding the per-branch effect is the fact that heavyweights have between 3 and 3.9 times as many branches as lightweights.
For middleweights, the numbers are between those of lightweights and heavyweights.
These differences span markets of all sizes, from those smaller than 50,000 households to those with more than 2.5 million households. The exact magnitude of the differences varies within the ranges noted above, but the effect remains the same.
Heavyweights are also growing faster than middleweights and lightweights in all market sizes. Year-over-year per-branch deposits grow significantly faster at heavyweights than at lightweights.
Lots of Branches
It’s clearly good to be a heavyweight, or at least a middleweight, and the good news is that a bank can move to a heavier weight class with the right branch strategy. To achieve a strong presence (25% or greater of checking households) in a market, banks need branches and a lot of them. In fact, they need three to four times as many as they would need to gain a small presence of 10% or less, regardless of the market size. The total number of nationwide or statewide branches is much less important than the number of branches within a specific market.
Our findings for per-branch deposits and growth hold true for both consumer and small business customers, and they indicate banks can benefit by re-considering where they put branches and how big those branches are. Banks may also need to re-think how they formulate their overall growth strategies.
Banks may get a significantly higher return on branch investments by developing a strong presence in a set of medium or small markets rather than attempting to compete in a large or extra-large market (those with more than 2.5 million households). Some banks may prefer to shift resources from some markets to others to maximize their chances of gaining market share, deposits and growth. Or, banks may find it’s more profitable to replace three large branches in a community with six smaller branches in the same area. As branches become more focused on relationship-building and cross-selling, this strategy can both strengthen the bank’s presence and give customers what they want: convenience.
People want branches close to where they live and work, so for banks to gain substantial market share among residents of a particular location, they need to have a significant branch network in the places where those people are on a daily basis. It’s also important to note that large branch networks actually increase use of online, mobile and other non-branch channels. People with more than one checking account tend to more frequently use the one from the bank with a big local branch network. Branch presence can serve as a form of marketing.
Interest rates remained essentially static throughout the time period covered by our research, so consumers have been basing their decisions on convenience alone. It will be interesting to see what, if any, role higher rates will play in the future. Perhaps consumers will continue to choose convenience over returns, or perhaps they will shift their behavior.
One thing is clear, though: To grow, banks do need to spend money, and many banks need to spend at least some money on increasing the size of their branch networks. Banks that do so intelligently position themselves to see market share and deposits grow at rates that more than justify the investments.
When banks identify peers based on market size and presence, they can set more realistic and achievable goals for branch performance and deposit growth. It may be that a bank’s current goals are only reachable with huge investments in the branch network that simply aren’t possible. Or, it may be that the goals are reachable in some markets but not realistic for others. Either way, banks can understand why they aren’t reaching their goals in certain markets and more clearly see what they would need to do in order to meet them.
Mr. Rose is director of Research at BAI. He can be reached at email@example.com.