Culling the network of underperforming branches
What to do about low-volume branches, or LVBs, which weigh down the profitability of nearly every financial institution?
We define these underperformers as branches that process fewer than 3,000 transactions per month. As documented in FMSI’s 2014 Low Transaction Volume Branch Study, LVBs account for 25% of most retail branch networks, yet they constitute only 8% of total transaction volumes. Adding urgency to the situation, their numbers of such low-volume branches are increasing, by 3%, compared to the same study we conducted in 2011.
LVBs do more than pose a financial challenge to a bank’s bottom line. The low productivity rates that generally accompany them can also foster morale problems and reduce staff dedication to the success of the branch – and even the bank, overall. Fortunately, institutions that take proactive, curative action can mitigate the financial and productivity drains caused by LVBs.
There is no industry standard for LVBs, but FMSI developed its below-3,000 transaction definition based upon input and data from more than 1,000 branches. As such, we believe it is a practical and accurate measurement. However, an individual bank can choose to set its threshold either higher or lower.
Some banks may also determine they would rather analyze and measure transaction volumes in monetary terms – dollar value of deposits and withdrawals – rather than number of transactions. How a bank measures its LVBs will depend upon the mechanisms, including technological solutions, it has to record and report on transaction activity. The important point is to create an easy-to-understand, objective metric to create a baseline for executive decision-making.
Depending on the condition of a particular bank, it could have numerous LVBs with monthly transaction tallies far below 3,000. Among the hundreds of LVB bank branches we evaluated, some had fewer than 1,000 transactions per month.
Branches such as these can produce a productivity and financial drain that is highly detrimental to the health of a bank. For example, the paid labor cost per-transaction of LVBs is 142% higher than the overall average of all branches in our study. LVBs can also skew revenue and profit numbers, which can negatively impact customer, investor and stockholder sentiment.
On a more concrete level, the annual operating cost of every branch, at a minimum, is between $200,000 and $250,000. Other revenue streams, such as collectible loan portfolios or business from influential or wealthy investors, potentially can make up the difference, but in our experience that is rare. Once bank management has evaluated all its branches and taken a hard look at the current and future value of the LVBs, it can explore other revenue streams, if appropriate.
Despite the obvious drawbacks of LVBs, bank management often struggles to see these branches for what they really are, especially when their performance is marginal rather than truly abysmal. In these instances, management may be hanging on to the underperformers for subjective reasons, such as account holder loyalty, bank history or estimated future growth potential. In some cases, these reasons may be valid. In others, they are merely distractions that keep management from seeing the true picture.
Once bank management has determined which branches are not pulling their weight in transaction volumes, they will be in a position to make an informed decision about branch-level changes. For some branches, closure may be the only realistic option. For others, especially those that are closer to profitability or that benefit the bank in ways such as those mentioned above, making positive changes can help the branch stay viable.
Here are some proven strategies for improving LVB performance:
Reduce hours of operation. One of the first steps to take with LVBs is to trim daily hours of operation or close on a Saturday, if sluggish business volumes warrant. Such changes appear minor to account holders but can produce dramatic results. In 2012, FMSI helped a 21-branch bank perform such an analysis across its entire branch network. As a result, the bank trimmed approximately 1,300 weekly labor hours in its branch network for an estimated annualized labor cost savings of more than $1.2 million.
Hire or train universal associates. Another strategy that works well, either alone or in tandem with reducing hours of operation, is to hire universal associates (UAs) or train star-performers to assume this role. UAs are personnel that have been purposefully cross-trained to function in several branch roles with equal competence.
Having qualified UAs at an LVB gives management flexibility in making assignments and allows them to better adapt to unanticipated service and sales needs. It may allow a reduction in total payroll hours and, at a minimum, can possibly justify each UA’s higher payroll expense.
The best UAs are often proficient with multi-tasking and enjoy variety. As a result, they may be suited not only to performing many tasks within a single branch but also to “floating” between locations. This approach extends their benefit even more.
Redirect idle time positively. FMSI has long been an advocate of redirecting idle time, which we call “waiting-for-work time,” to a more productive outcome. Time when staff are not actively engaged in tasks is wasteful and reduces employee morale and efficiency. Banks, like restaurants and retail outlets, perform best when everyone is kept busy, but not overloaded.
Eliminating idle time is more important for LVBs, but it may also be more challenging due to low traffic counts. Rather than allowing workers to find their own “busy work,” branch management should create a program of tasks that personnel can perform when they are not expected to be busy.
These tasks should vary in complexity, completion time and location (e.g. off the line or on it) so staff can find an applicable task in most situations. Tasks should move beyond the obvious, such as filing or completing paperwork, and encompass sales and service builders such as outbound calling, appointment follow-up and other sales/marketing tactics. If an LVB has brought in UAs, it will give that branch even more options for idle-time task assignments.
Optimize staff allocations and efficiency. All of the above steps require banks to analyze (and likely reduce) their staffing levels. To obtain the best results, they should be able to forecast future traffic patterns and make their adjustments to reflect those predictions. Some of the steps we have seen banks take include:
- As full-time tellers depart, shift to using more part-time and/or flex-work tellers;
- Implement automated technologies such as in-branch ATMs and/or cash recyclers;
- Implement a solution (often technology based) that analyzes transaction data or other information to accurately forecast future branch traffic flow. Having this information will also make it easier for branch management to pinpoint when idle time will occur.
LVBs are often geographically and demographically diverse. Some may be marooned in decaying, economically depressed neighborhoods; others may be located in affluent areas where too many banks are fighting for market share. Despite their differences, LVBs more often than not have one thing in common: they are bad for business in their current states. Banks that identify and evaluate them and then take appropriate measures to either improve or eliminate their impact will have won a major battle in the war against inefficiency and lost profit.
Ms. Deen is chief operating officer of Alpharetta, Ga.-based Financial Management Solutions, Inc. (FMSI), which provides financial institutions with business intelligence and performance management systems for efficient branch staff scheduling and lobby management. She can be reached at [email protected].