Marketing: Branching Strategies

From 1990 to 2010, the banking industry was driven by a branching philosophy of "build it, and they will come." Little regard was paid to the location; they simply followed retailers such as Walmart, Target, McDonalds or Wendys. Later, with the advent of electronic alternatives such as ATMs and mobile banking, many banks turned to the idea that branching was finished. As usual, the advocates behind both these schools of banking distribution failed to do their homework and their simplistic concepts were doomed to failure..When I worked for McGladrey, the nationally recognized banking, accounting and consulting firm, the lesson they preached was "profitability." In most cases, understanding branch profitability was about understanding the customer segments served and their profit contributions. What made a branch profitable was largely predictable using "site modeling." One of the most interesting conclusions that came from the McGladrey studies was that the most profitable customers — largely the older, established segments and the business customers — greatly preferred branch banking and its "relationship" factor. As a bank moves along the electronic spectrum of distribution toward less "relationship" banking, there becomes less and less product differentiation and therefore you are faced with only the "price" option. .Today, a bank must develop a branching philosophy that incorporates all of the electronic options available into their distribution network while placing their branches where the optimum number of preferred and business customers will use them. This is possible using "modeling" and the type of program weighted to the "preferred customer" concept. This type of strategy is also what will produce the greatest profitability in the long run..We recently did work for a bank in Minnesota that had a number of branches that dated back many years. Upon examination of their branch distribution, we found two branches that were not only in poor production but were much too big, rendering them very inefficient. Using modeling we were able to discover two high-scoring sites nearby to where the branches could be moved. This freed up the original spaces to be reconstructed as smaller facilities. The bottom line was greatly improved growth potential and lower costs to boot.."Predictive modeling" has become considerably more sophisticated during the past 20 years and has given the financial services industry the same tools used by all the major national retailers. The model was developed based on what research had shown were the major "factors" that makes a site a high-producing site. The model will forecast the exact location (i.e. corner or lot) that is the top potential site in a given geographic area. This information is extremely valuable as it will forecast the level of deposits generated in five to 10 years and therefore gives you negotiating information in the purchase of the land and a value in understanding site comparisons. Simply put, modeling takes most of the guesswork and risk out of a decision that today usually involves a $2 million to $3 million investment..I believe this is the future of banking over the next 20 to 25 years. The idea is not so much how many branches a bank has but rather, where those branches are and how efficient they are from a production and operating standpoint. Today, banks must develop a cost-benefit approach to their branch network. This means looking at each branch, its current profitability, and its future potential. For starters, McGladrey estimated that any branch that had less than $18 million to $20 million in deposits was most likely unprofitable. This is probably even conservative in light of recent legislation on fees. Therefore, a branch must generate preferred customer growth while at the same time looking for ways of making the branch more efficient. This means that study considerations must not only be given to where a bank puts its branches but also what kind of branch it puts there. The trend is definitely toward less footage per office and toward more productive and sales-oriented branches..In summary, branching is not over, but rather it must be approached with a scientific and well-thought-out plan. Consideration must be given to all the options (ATMs, mobile and the new smaller branches), and these options must be aligned with an understanding of the profitable target customers..Bill Winter is a marketing consultant and branch site-selection professional. He can be reached at wdwinter@aol.com.