Mar 1, 2019

The branch acquisition quandary: cherry picking profits versus the pits

As banks consolidate further, financial institutions have a chance to cherry pick good branch sites cast off by competitive mergers. The most dramatic example: the recently announced mega merger of BB&T and SunTrust. BB&T expects to divest $1.35 billion in deposits and close most of the 740 branches within two miles of each other.   

On the face of it, purchasing an existing branch seems like an exciting opportunity to acquire attractive sites and expand market share—and in some cases, it might be. But as the saying goes, “buyer beware.”  There are many reasons why you should proceed with caution.

As digital channels expand and branch traffic declines, we must ask ourselves whether we need as many branches. As fewer customers use branches, banks have gotten better at onboarding digital services so they can retain and even grow relationships in the absence of a convenient location.

OceanFirst Bank stands as a textbook example. The $7.5 billion New Jersey-based institution closed 33 branches in the last two years: 36 percent of its total. But they retained 94 percent of customers who used those branches. These excellent retention numbers reflected a concerted effort to understand customers’ digital experience, train staff members on digital onboarding, and a multi-month disciplined process to improve penetration and usage of non-branch services.

What happens when a bank acquires excess branches from an entity with strong digital onboarding?  We’ve heard for years that branch acquisition economics “just aren’t what they used to be.” This proved especially evident when Flagstar Bank acquired 52 branches from Wells Fargo in late 2018. While multiple problems plagued the systems transition, one major issue centered on the many customers who simply wanted to stay with Wells, despite the branch sale.

Given the potential to acquire potentially good branch sites versus limited capital and changes in consumer and business branch use, how should banks approach this crossroads?

We believe too many institutions become enthralled with the real estate “deal” and overlook the strategic implications. Competition for an attractive property in an appealing market makes it easy for buyers to be seduced by aspects of the branch that will have little to do with whether it turns a profit.

While consumers and businesses still value the physical branch, its utility is declining. The trend is undeniably moving toward non-branch channels such as the call center, online and mobile. That raises the relative cost of the branch per customer served and presents branch buyers with a tougher business case.

As we see it, a “look-before-you-leap” approach is in order. Consider these five factors: 

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 an area where your brand has low awareness presents significant marketing challenges. In contrast, adding a branch within or adjacent to your trading area bolsters your chance of success as you extend rather than introduce your brand.

Have a clear growth strategy

You invest in branches because you need them to penetrate a market and offer a “store” convenient to residents and businesses. But branches don’t automatically attract customers, so it’s critical to mount an effective outreach program to target the community and key prospects. In our experience, too many banks invest in the physical facility and not enough in marketing and sales to generate high returns on investment.

Also, most branches that larger institutions cast off have some deficit. They may be the less desirable of two neighboring branches or in stagnant or saturated markets. As a new entrant, how will you grow?

Don’t make customers wait

We’re not talking about teller lines here; rather, the customer acquisition strategy you’ll launch once the deal is struck. After all, the seller knew they were leaving long beforehand. They had plenty of time to consolidate customers into a nearby branch—at least those they wanted to keep. They knew the right incentives to retain those customers. Those remaining might give the new owners some outreach time, but not much.

This represents a real Achilles heel. Banks often assume customers unhappy about their branch closing represent pent-up demand. But consider this: It can take three months for a buyer to refurbish, staff and re-introduce the branch to the market. If customers choose a branch for convenience, three months or more is the opposite—and may feel even longer since the branch was likely closed, or customers knew it was closing, several months prior to the sale. Meanwhile, most truly dissatisfied customers have already moved on.

Purchasing banks must move quickly, within days of closing the deal, with a disciplined process to enter the market and build customer base.

Think local

Customers—or rather, prospective customers—don’t care about national averages; they care about what’s important to them. In this case, demographics can deceive. More important are the lifestyle segments within your market that predict how people make financial decisions for the future, what products they’ll buy, and who influences their decisions.

The same applies to commercial and small business prospects. If business banking represents a core competency, how will you capture the opportunity? On all matters related to customer strategy, the only relevant statistics and analytics apply to the new trade area.

Fill the box

Most branches are sold as real estate only, without customers or (all of them).  For example, many banks sell branches with deposits but not loans. You’re essentially buying a box and betting you can fill it with profitable customers.

But that’s hardly automatic. Even with the world’s best merchandising and neighborhood outreach, it’s remarkable how people who pass a branch daily can overlook it. We’re in the banking business and so are you, so we tend to notice branch changeovers. But what about new nail salons, dry cleaners or other retailers? Customers won’t notice you just because you are there. Before you invest in a new location, make sure the trade area can support your entry and that you have a clear, rapid strategy for market penetration.

So if you have a chance to acquire a branch, ask penetrating questions. Insist on well-researched, rigorously thought-out answers. Then—and only then—arrive at a rational, well-reasoned conclusion. It will dramatically improve the chances of solid return on your investment.

Finally, think less about “the deal” and more about your channel and customer strategy. After all, a huge gulf separates a branch building and building up a branch.

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David Kerstein is president and Tom Zayko a director at Peak Performance Consulting Group. They can be reached at dkerstein@ppcgroup.com or tzayko@ppcgroup.com

 

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