Rightsizing the Branch

When considering a branch transformation, is it better for a financial institution to operate one 5,000-square-foot branch or two 2,500-square-foot branches?

Not sure? Good. It’s a trick question. Your answer depends highly on whether you’re repositioning an existing branch or opening a new location. And finding the right answer requires a deep analysis that factors in branch performance, market demographics and opportunities, staffing needs and even a building’s age and overhead expenses. The analysis is complex, but among those variables, branch performance provides the best indicator for success. It also offers a simplified performance benchmark for comparison: deposits-per-square-foot.

Generally, financial institutions should strive for a minimum of $10,000 in deposit balances per-square-foot for each branch. This magic number doesn’t guarantee a branch’s success, but it does provide a suitable benchmark that can help institutions right-size their locations and branch network. Let’s review how to calculate this figure and how to determine an optimal branch sizing strategy.

Deposit Calculations

Branch-deposits-per-square-foot is a simplified performance metric and is a common comparison point between competing institutions. Using a profitability metric like revenue-per-square-foot is less clear, as the calculation may be unique to each bank and more difficult to allocate to the branch level.

Deposits primarily comprise funds deposited in savings and checking accounts, money markets, Individual Retirement Accounts and time deposits. The deposits-per-square-foot figure represents an aggregate of all deposits associated with a branch at a given time.

Calculating total deposit balances for individual branches depends on how an institution assigns customers and deposits to branches. An institution may allocate all customers to its main branch instead of the branches in which customers actually do business. This practice can over-inflate metrics for the primary branch. Therefore, the institution should either add up all the square footage of its branches and calculate the average deposits for its entire network or determine a methodology that makes sense for the institution to allocate deposits to each branch.

A branch’s target of $10,000 in total deposit balances per-square-foot is based on an extensive proprietary analysis Diebold conducted on more than 500 branches across the U.S. The study covered branches of all sizes and compared their performance to their deposit levels and footprint. An evident “sweet spot” for all branches was $10,000 in deposits-per-square-foot. At this level, any particular branch may not necessarily be breaking even from an investment payback perspective, but it should be positively contributing to the financial institution’s profitability in the current period. Branches falling below this threshold are not capturing sufficient deposits and need to focus on acquiring new relationships and securing more deposits from current customers.

When redesigning and repositioning an existing branch, the size of the branch has little bearing on its success, as long as it’s performing at or above the $10,000 target for deposits-per-square-foot. If the branch is underperforming, it may make sense to reduce its size, which would reduce overhead costs and open up additional office space for leasing. It’s also possible the branch could be closed in favor of opening a new location, or locations, to better serve the market.

When building new branches, however, the size does matter. It has bearing on a financial institution’s overall investment, the time it takes to recoup that investment and the institution’s opportunity to reach more consumers. The combination of these factors often favors opening multiple smaller branches.

First, the investment required to build or lease two 2,500-square-foot branches is surprisingly less than what’s required to build or lease one 5,000-square-foot branch. Consider an endcap in a retail strip mall compared to a larger commercial property. The larger property is likely to carry higher overhead costs for construction (if required), utilities, security, monitoring, insurance, maintenance and other items.

Second, it takes less time to recoup the costs associated with establishing two smaller branches than one larger one. Most financial institutions are reticent to tie up capital for several years waiting to realize the payback on establishing a new branch. The deposit and loan volumes required to pay off expenses at a smaller location are much lower than those required for a larger location, especially in markets with high competition. However, institutions should note a potential trade-off here: an institution may realize a better long-term return on investment when operating a larger branch, but the investment payback will likely be much faster for a smaller branch.

Finally, and most importantly, multiple locations create the opportunity to reach more customers. More customer touchpoints enable an institution to provide higher levels of convenience and service, as well as enhance their branch deposits-per-square-foot ratios. Financial institutions should base their branch location decisions on where customers are located and where the greatest market opportunity exists to acquire new households. Most likely, they’ll consider areas with younger demographics, as well as higher household growth potential. A single, central branch located downtown will be less convenient for customers in the suburbs. Opening smaller locations on opposite ends of town, or even keeping the downtown branch and opening another location in a strategic growth area, will enhance convenience and offer growth potential.

What if your branch is overperforming? This may sound like an absurd question, but it’s a valid one. A branch performing well above the $10,000 in deposits-per-square-foot benchmark is highly effective at capturing market share. However, is the busy branch meeting customer expectations for service and convenience? Are wait lines long? Do representatives have time to build relationships with customers? An abnormally high deposits-per-square-foot volume may indicate that it’s time to open a smaller branch nearby to ensure the financial institution can maintain high service levels.

In any case, the deposits-per-square foot metric holds its own as a useful benchmark for making strategic decisions on branch design and location.

Mr. Detlefsen is director of market and channel analytics for Canton, Ohio-based Diebold, Inc. a leading provider of integrated self-service delivery and security systems and services. He can be reached at [email protected].