One of the key trends in banking in recent years is the steady decline of branch transaction levels. As more customers have begun to take advantage of the convenience afforded them by such simple things as direct deposit and online banking, fewer customers make their way to their local branch. It’s a trend that’s all but certain to continue as technology and alternative delivery channels gain a foothold in the industry and reduce the need for customers to do their banking in person. The significance and mainstream nature of this trend were highlighted recently in a front-page Wall Street Journal article.

Since there is a direct relationship between declining branch transactions and declining customer traffic, banks need to understand the strategic and financial impacts. It has become more important for banks to take a close look at the profitability of their branch system and at individual branches due to the direct impact of this trend on the bank’s overall efficiency ratio.

Examining the profitability of a bank’s branch system seems like a relatively simple—if involved—task, by analyzing basic branch information such as revenue, expenses, loans, deposits and so forth. However, the picture this paints lacks depth. To gain a better vantage and to achieve a clear understanding from a strategic perspective, a more concentrated and deeper effort is needed.

When addressing the issue of branch system profitability and viability, it’s important to look beyond the immediate numbers and take a comprehensive look at all of the variables that impact branch profitability including:

  • Physical location, physical setup, and proximity to competitor branches
  • Customer buying habits, traffic patterns and demographics
  • Local market and economic conditions
  • Direct and indirect branch expenses and revenue
  • Customer growth and attrition trends
  • Staff training, knowledge, and experience
  • Customer service and satisfaction levels

Of course, these are not the only factors at play. There are many others, some more tangible and some less, such as the bank’s level of technology capability or the degree of presence or importance a branch has in the community. The key is a structured approach to considering the factors collectively in order to get a clear picture before making decisions about the future of a given branch, which may result in some surprises.

A banking organization that just takes the high-level look at their branch system may conclude that their branch expenses are high relative to branch-generated income, but still believe their branches are either generally performing well, or they may be unable to pinpoint which branches are not performing well and why. We addressed a similar situation in a recent client engagement. There was a perception that performance at several branches was less than ideal from a profitability perspective. As an initial step toward achieving a sharper picture of where the branch system stood, a strategic team was formed to oversee the process as a steering committee. A representative set of branches were selected for greater scrutiny, and comprehensive branch profiles were created to establish benchmarks and offer a vital baseline for comparing performance levels and best practices across the branch system. Branches were comprehensively reviewed not just for their current state, but for how they would fare relative to their markets and with an eye for the trends influencing the future of the industry. The data from this effort provided new and significant insights into the branch system and offered a more reliable roadmap for sound decision-making and ongoing monitoring of individual branch profitability.

The changes made resulted in immediate net expense savings and projected income increases, while in the longer term, tremendous dividends are anticipated, due to the structured framework and analytical review process which was established. The ongoing expectation is a significant positive impact on the branch system’s efficiency ratio, not to mention the bank’s overall efficiency ratio.

Taking a tailored and comprehensive approach to branch analytics provides a basis for strategic decision-making relative to current and projected future branch profitability, ultimately yielding a healthier, more prosperous organization. We have found that participation in our annual Bank Performance Study is an excellent first step in this effort. If you would like additional information on Nolan’s Bank Performance Study or would like information on the case study cited above, please contact me at mike_meyer@renolan.com.