It seems like every week you hear about another bank’s plans to close some large number of branches. Some analysts predict (though I don’t agree) that half of all branches open today will close in the next few decades as online and mobile banking fully takes hold with consumers and small businesses.
Due to today’s very low interest rate environment, margins have been squeezed for several years. Banks have felt unrelenting pressure to cut expenses. And branch closures represent a natural target because customers have migrated many of their transactions to the newer, more flexible e-channels rolled out over the last ten years. There are even seemingly ubiquitous phrases that CEOs and CFOs trot out when announcing closures. Like these:
• “The retail bank is undergoing a dramatic transition,” Fifth Third Bank CEO Greg Carmichael told shareholders in a meeting earlier this year. “It’s driven by consumer behavior. But our branches are still critical to driving products and services to customers.” Just last month, Fifth Third announced it would shed 44 more branches, in what Carmichael said would be “an annual exercise.”
• The bank continues to "experience a shift in consumer behavior patterns away from branches and towards more self-service," Bank of America CFO (and now vice chairman) Bruce Thompson told analysts during a 2015 conference call.
• "Any retail business should always be growing in new communities, subtracting in some, having the branches adjust to the new reality,” JPMorgan Chase CEO Jamie Dimon said in 2015. “We’re not getting smaller because we’re guessing at this stuff. We are getting smaller because of the lessening need for operations in branches now as people are doing far more on mobile phones."
During my 30-plus year career I was fortunate to work in an environment that allowed us to develop and test some creative analytics. In the past dozen years or so I’ve had the opportunity to use those learnings to close more than 2,000 branches successfully. Branch closures can only work if the bank can do three things:
1) Get some immediate expense savings
2) Retain the vast majority of impacted customers
3) Retain the vast majority of future sales from the closed branch
The first item deals with timing of the closure. Banks must have a longer term plan for their branch and ATM networks; those one-time hits can completely offset any immediate expense savings. A long-term plan also guides basic items such as the repair and maintenance of some expensive infrastructure. Would you want to invest $500,000 in a new heating and air conditioning system for a branch you’re going to close in two years?
The second item is driven by two key metrics: How much do customers depend on the closing branch? And: Do you have adequate capacity to handle their needs at nearby branches and remote ATMs?
In my research, dependency represents one of the key predictors of customer attrition in closures. It’s a behavior largely driven by the state of your local branch and ATM network. The stronger your local network is, the more likely that your customers will depend less on any one site.
But you need to be careful. I’ve found many situations where the majority of customers using the closing site also bank at multiple sites – but a small group exclusively chose only the closing site. So be warned. If a retirement center offers local bus service for retiree shopping and banking needs, and is located near your closing site, you have exclusive users you could lose in a heartbeat.
A related consideration involves the need for adequate servicing capacity in the local market after you close the branch. If you shutter a busy “transaction” branch and lack the adequate capacity at nearby “receivers,” you’ll create a poor customer experience for both the displaced customers and those already using the receiving branch or remote ATM. Left unresolved, these situations will drive incremental attrition, lower customer satisfaction and hurt future sales volumes.
If the receiver can’t accommodate the increased volume and has no room for additional ATM capacity, you may need to conduct a site search to leave behind a remote ATM near the closed site to handle the volumes. In my experience, finding a new remote site can take six months, followed by another six to 12 months to deploy if in involves construction and permitting. So you must plan ahead. It doesn’t take much customer attrition to offset the expense savings.
The third item builds on the second. If you have successfully retained 90-plus percent of the impacted customers, you also have a good shot at retaining 90-plus percent of future sales from the now-closed branch. Do you leave behind access to a convenient branch location? The vast majority of sales still happen in the branch today. If you abandon a market by closing its only branch and don’t leave behind some reasonable alternative, you retain the customers but lose a significant amount of future sales volumes. Over time, those reduced sales levels will fail to offset normal attrition – and your expense savings will evaporate. Retaining the sales generated by the closed branch is crucial to sustaining long-term, lasting savings.
So to sum up the three key questions and answers:
1) Can I retain the customers? Only if those customers were already comfortable using multiple bank sites and you’ve left behind adequate options, with ample capacity, to absorb the additional traffic.
2) Can I retain the future sales of the closed branch? Only if you first retain the customers, then provide convenient branch access at a nearby location.
3) Can I sustain the expense savings? Only if you retain the customers and future sales, while timing the closing to minimize any major write-offs.
The bottom line is that successfully closing a branch means you’ve captured the expense savings and protected them long-term by keeping the customer base. And to be sure, the smartest banks know all about savings and serving customers.
Mr. Voorhees is an advisor at Austin, TX-based Peak Performance Consulting Group. He can be reached at firstname.lastname@example.org.