Why Community Banks and Credit Unions Should Consider Branch Network Optimization

A New England bank branch built from the ground up in an optimal location.

According to Keefe, Bruyette & Woods, a financial services research firm, it is estimated that over half of all America’s bank branches will disappear in the next decade.  Armed with this information, financial institutions should be looking very closely at their branch networks and anticipating competition from other financial institutions putting their branches on the market in the near future.

Bank branch location and financial real estate issues are more urgent now than ever before for community banks and credit unions.  The questions asked by concerned decision makers are many and varied, but chiefly include the following:

1) Why do some branches perform so much better than others?
2) What are the best new markets to expand into?
3) Which branches can be downsized without losing money?

A bank branch design in Southern Connecticut that complements the appearance of Fairfield County architecture.

Bank branch designs should complement local culture and optimize delivery channels.

The physical appearance and condition of an overall branch network should be a concern for financial institutions.  When banks grow by merger or acquisition this often creates inconsistencies across the branch network.  Branch architecture and interior designs will often reflect the highly contrasting styles and ideas implemented by different management teams over time.  Large legacy branches are particularly problematic.  Many legacy branches contain cavernous spaces that simply are not consistent with today’s more efficient branch models.  These older branches were built as impenetrable (though sometimes beautifully ornate) bunkers to protect cash and valuables, with teller lines fortified by bulletproof glass or grills.  They certainly did their job at the time, but they most certainly do not convey today’s friendly dialogue banking objectives.

A supermarket credit union branch has a highly visible exterior to bring attention from the neighborhood.

Credit Union members’ needs can differ markedly from one market area to another.

Making branches more efficient means changing branch configurations to optimize distribution channels and create cost savings.  Customer needs can change dramatically from market to market; clientele for a branch in a busy retail zone may have very different reasons for being there than customers at a less populous semi-rural branch.  This significantly influences which delivery channels are required to be present at each location, which can in turn mean radically different branch designs.  Radically different branch designs, however, are not the same as inconsistent branch designs.  The former benefits the organization when custom built and observant of branding standards, while the latter just gives an appearance of inconsistency.  Inconsistency is not a good look for a financial institution.

Strategic location specialists can analyze potential sites for bank branches for higher productivity.

Location is the single largest influence on the productivity of a bank branch.

How can banks and credit unions revitalize their real estate portfolio while simultaneously improving operational efficiencies in their branches?  The first step is to perform a branch network optimization study.  The efficiency and productivity of each branch in the network has to be investigated, as well as how existing markets are evolving relative to the branch models.  The goal will be to possibly re-engineer the branch network to minimize waste of any kind.

Identify Where Your Customers are Located and Who They Are.
These are usually the first two steps in the process of branch optimization.  Ideally, each of your customers or members should be mapped to visually show where they are located in proximity to existing branches. Customer mapping is then combined with Tapestry mapping to identify the dominant socio-economic segments your customers are coming from.  Sixty percent (60%) of your customers come from 3 to 5 of a possible 68 Tapestry Segments.  The socio-economic traits, presented as tapestry segments, will reveal who your customers are.  Such factors include median age, the number of people in the household, median household income, housing status and purchasing habits are identified.  When these results are then studied in conjunction with your most successful branches, a clearer picture evolves that demonstrates how your marketing messages resonate with your customers.

The next steps in the branch network optimization process deal with improving the existing conditions.  Improvements can be accomplished a number of ways.

Consolidate and close underperforming branches.
The branch network optimization will determine where the low- and the high-performing branches are located. As stated above, the analysis of each branch’s market area shows traits that correspond to better branch performance.  It’s then logical to assume that branch locations that are too far away from these groups are more likely incapable of hitting deposit, lending, and other goals.  One strategy is to close these branches.  Ideally, the customer’s accounts can be consolidated into other branches that are at least somewhat closer to the financial institution’s typical customer demographic.

Find a New Location.  In the course of a market analysis of the kind described above, the financial institution may find opportunities in new markets that they cannot afford to ignore.  It is critical to identify those markets that contain socio-economic groups that the financial institution already resonates strongly with.  Paying for a new branch may not sound like a way to save money, but new branches are significantly more efficient than those of yesteryear.  A brand-new space, with its smaller footprint and distribution channel aligned to its market, can lower operating costs significantly thanks to leaner designs, more efficient and specialized technology, and fewer full-time employees.

Renegotiate leases or sublet branches to offload unneeded space.
The larger legacy branch problem is receiving more attention than most other branch network issues at this point in time for several reasons; 1. They are prime candidates for disposition.  2. Their spaciousness is becoming prohibitive from a rent and maintenance perspective.  3. Legacy branches in markets outside potential “flagship branch” locations cannot be justified as full-service financial centers if the community can’t support them.  4. To create an efficient smaller footprint dialogue banking experience that encourages intimate community engagement in that kind of space, a “branch rationalization study” is required prior to renovations.  While smaller branches may need an upgrade to dialogue banking status, the issues faced by owners of legacy branches goes far beyond this.  These branches are the oldest type of financial branch.  They are literally from another age.  The cost of maintaining a space this size far outweighs the benefit, so financial institutions have to do something, anything, to keep these branches viable.

i) Re-Negotiate Leases.  Commercial leases can contain contentious points whose intricacies can best be negotiated by a commercial real estate professional.  Two of the most notable of these are rent and length of term for the lease.  The length of term may be a first step towards moving away from a poor location or, conversely, a way to extend occupancy in a prime location.  This is not something a financial institution should undertake alone.  A professional real estate broker with financial industry experience can be an invaluable asset in navigating this process. 
ii) Subletting.  
The financial institution can downsize by leasing unneeded square footage to another business.  Small business advisories, insurance companies, and CPAs are ideal for this, as they are somewhat closely related industries.  Some banks and credit unions have even created shared space with local gourmet coffee houses and libraries. 
iii) Sale-Leaseback.  
Another option is to create a sale-leaseback transaction, in which the organization sells the branch and simultaneously leases the building back from the investor on lease terms that are agreeable to both parties.  The financial institution can benefit from the capital raised in the transaction by reinvesting it in other areas of the business. Care should be taken, however, because there can be some contentious terms that need to be negotiated, including property renovations, insurance coverage, and general limits on usage. 
iv) Sale-Leaseback Downsize. 
If a branch is well located, but it is too large for a bank’s modern needs, a sale-leaseback downsizing is a logical solution. It may also be possible for the financial institution to negotiate with the investor to pay for the construction costs required to subdivide the extra space.

Financial institutions have to develop their branches to be compatible with each market area.

Financial institutions may have to upgrade their delivery channels in order to be compatible with their markets.

Financial institutions need to act now to stay ahead of the coming market upheavals.  Their strategic plan should reflect the importance of aligning new branch locations with the socio-economic groups where their brand message resonates.  They need to renovate or develop new branches whose delivery channels and supporting technologies are compatible with those markets.  They will also have to develop new recruitment and training approaches that value higher quality branch staff whose skill sets are more diverse, and who are sales-oriented.  Financial institutions that fail to act in this way will face the threat of extinction or assimilation.  The hiring and training challenges alone will be fatal for organizations that lack the type of forward thinking required to attract higher caliber employees.  Branch networks must be fully optimized, with every branch pulling its weight if they are to remain viable and valuable to customers.  It can be done, and it is no longer a matter of choice.