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How cost shifting helps banks make the most of branches


Ultimately, every organization shares an identical purpose: to create operating leverage by growing revenue faster than expenses. Over time, organizations that focus on achieving this goal become more productive and efficient. Conversely, organizations that fail to recognize the importance of creating operating leverage become inefficient. Simply put, layering on additional expense over time without a corresponding lift in revenue equates to inefficiency.

In an Exponential Age where technology and changing consumer behavior reshape the banking industry, it’s a must to navigate a financial institution’s legacy cost structure to build a scalable business model. The challenge lies in remaining relevant in a changing competitive landscape reshaped by technology. Competitors that successfully traverse this obstacle will emerge with the ability to capture present and future opportunities.

Cost Shifting

Every institution has a defined capability to absorb change—one determined by the organization’s ability to cost shift. Cost shifting cognitively recognizes legacy expense reduction opportunities that define the organization’s capacity to layer on additional investments. Cost shifting removes expenses that the organization should no longer support to encourage and fund necessary business line investments.

The branch system, once thriving with traffic, has grown quiet: a result of changing consumer behavior.  As a result, the branch network of organizations large and small requires inspection. To accomplish this goal, branch rationalization requires the examination of both client usage and market-based growth opportunities; this helps to determine the optimal branch configuration that’s needed to penetrate and serve a given market. 

It’s critical to evaluate and mitigate the business risk associated with attrition to execute a robust branch rationalization strategy. How then to accomplish this? Branch consolidation benefits represent a vehicle to fund expansion into new markets or deploy technology within the remaining network. 

The contemporary cost shift that requires evaluation at every institution follows a path from people to technology. Nowhere is this more prominent than in the branch system as branch-based transaction volume continues to drop in the face of alternative delivery channels. Clearly, less transaction volume equates to less staff and this generates a significant reduction in salary and benefits expenses. With branch-based employee turnover customary, this financial advantage is achieved through attrition.  Further, the universal banker model that evolves as a result improves the client experience. To say the least, the customer service and financial benefits that result are compelling. 

To illustrate the financial benefit that comes with implementing a universal banker model, we recently worked with a five-branch financial institution that recognized roughly $750,000 in rationalized annual savings.  Furthermore, the legacy cost structure is removed in perpetuity as cost shifting provides the financial flexibility to develop a capital reinvestment strategy that help institutions remain competitive. The deployment of technology is a capitalized expense; with an assumed expected life of four years, the bank’s reinvestment plan is amplified by $3 million.

If banks want to fulfill the mission they were founded upon—and remain relevant to the communities they serve—then examining cost shifting potential represents the single most important activity to undertake. Navigating today’s ultra-competitive environment is essential; choose a partner that can assist your institution with this challenge and visualize the opportunity. Moreover, it’s vital to discover how much cost shifting potential your financial institution possesses, while ensuring a consistent service quality level.

Each organization has more financial flexibility than imagined: Financial institutions that most appropriately deploy economic resources will create operating leverage. They will survive. And in the end, they will turn cost shifting into benefits shifting in their favor.

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Tom Long is the principal at The Long Group LLC, based in the Greater Boston area.

If you enjoyed this article, check out: Podcast: Branches, branch tech and the future of banking in 2018 and Excellent executive execution: How to save retail banking.