August 17, 2010

CUES’ Credit Union Management’s online-only “Facility Solutions” column runs the third Tuesday of every month.

Over the past four months we have shared the findings from our 2010 branch network optimization survey of credit unions and banks across the country. The first seven questions and the responses of those surveyed have been discussed. In this installment we will be addressing questions eight and nine which deal with branch size standards.

8. What is the average size of your newer branches in terms of square footage?

                        2,000 sf. or less                         18%

                        2,000 – 3,000 sf.                        45%

                        3,000 – 3,500 sf.                        27%

                        3,500 sf. or greater                         10%

The majority of branches range in size between 2,000 and 3,500 square feet. This is a significant decline over average branch sizes of 10 to 15 years ago.

In the past, many banks and credit unions pursued the perfect branch business model to fit all location requirements. This standardization provided consistency, which translated into less decision-making for each branch location, simplified HR, and made estimated cost, scheduling and branch design much simpler. The average size was in the range of 3,000 to 5,000 square feet. The problem with standardization was that, in some markets, branches were built far beyond maximum potential and a rational service radius while others were built too small. Investment in branching did not match a realistic return.

There are many factors behind the “rightsizing” of branches. While the number of transactions per customer is increasing, branch transaction averages are dropping as technology replaces a percentage of branch visits. But, the percentage of customers that visit a branch each month has only dropped a little over the past seven years from a high of 46 percent to about 43 percent today.

It takes less staff today to operate a branch. Ten years ago the average number of staff in a branch was between nine and 11, plus staff handling special offerings such as small business and commercial banking, mortgages, and insurance. Today the average is five to seven plus the staff handling the special services. This staffing efficiency can come from cross-training tellers, simplifying the branch structure and transforming staff from process workers to knowledge workers and centralizing support. For example: Umpqua Bank, famous for its innovative branch business models and designs, has just two job titles in each branch; store manager and associate. Is this successful for Umpqua? Using one of the simplest of measurements, their branches enjoy nearly twice the deposits and loans per branch as do their industry peers.

Some banks and credit unions are starting to size, staff and configure their branches based on specific target market characteristics rather than just applying a standard to every market. This means that the branch “tool” matches the market characteristics and that break-even is quicker and branches are more profitable. The process of detailed geodemographic analysis coupled with market financial product use analysis means that a branch can be constructed with the components that will maximize performance and evolve with market change.

A key factor missed by most institutions today is to understand branch retail efficiency. This is the amount of space used for developing customer relationships and selling vs. back office space. Most of the branches we audit today realize between 65 and 70 percent retail efficiency. Our goal in branch planning is 80-85 percent. This means that more of the purpose of a branch can be accomplished in less space at less cost, creating a higher ROI.

Over the past 20 years, more institutions have been increasing the number of leased strip mall branches vs. owned freestanding branches because of the lower cost and the desire to be positioned adjacent to retailers with matching customer characteristics. The average size of these strip mall branches is less than that of freestanding branches due to the lack of needed building infrastructure. What can be done in a 3,500-square-foot freestanding branch can often be accomplished in a 2,500-to-2,800-square-foot leased facility. These smaller and lower-cost facilities mean more branches can be constructed to accelerate market penetration while providing a level of flexibility.

Is down-sizing the right answer for all institutions? While it can reduce cost and increase efficiency, it is not the right solution for some institutions. The right branch size depends on an institution’s strategy.

Bank of America, for instance, recently stated that it will be reducing the number of its branches by about 10 percent. The prime targets for closure will be community branches as the bank moves to create destination banking locations that offer a wide variety of services in one location. To quote B of A’s James Mahoney: “What we are after is a model where we have fewer but more robust branches that incorporate the investment and mortgage services that we have picked up with the acquisition of Merrill Lynch and Countrywide.” The brand is “global” rather than “regional” or “neighborhood.” Bank of America is moving from gathering customers through physical convenience to acquiring them through its product array, constant innovation in delivery technology, and providing high value services at fewer locations serving large geographic areas or dense urban areas.

9. What is the average branch space per full-time equivalent?

                        Average of all responders                        427 sf.

                        Lowest                                                  163 sf.

                        Highest                                                 700 sf.

                        Most common range                               325 sf. – 450 sf.

What should be your branch square footage standards per FTE? The correct amount of space depends on such factors as whether you provide privacy by distance between staff or by using offices, conference areas, sound control panels and materials or “white noise.” Is a certain spaciousness part of the desired branch experience? Is your building design efficient in terms of storage, systems accommodation and circulation?

Over the past 10 years, we have seen a decline in square feet per employee from an average of 425 to 475 square feet down to today’s range of 325 to 375 square feet for full-service branches and 75 to 150 square feet for in-store branches and express service centers.

Square feet can provide a useful measurement. How many members are being served per square foot? Two to three is considered good. What are the deposits and loans per square foot? What is the profitability of each branch per square foot? These “retail” measurements can be used to compare branches within your network as well as be used to compare your branches with peers.

Whether your branches are getting larger or smaller, decision concerning size, number of staff and composition, or whether to lease or own should be based on accurate and clear member and market analysis, brand mapping and geodemographic projections to align resource allocation with the highest market potential.

Paul Seibert, CMC, is VP/financial services for EHS Design, Seattle. To learn more about how to successfully develop and apply brand wraps, visit Weber Marketing.