March 15, 2011
Credit Union Management magazine’s Web-only “Facility Solutions” column runs the third Tuesday of each month.
Bill Gates’ statement that “Bank branches are dinosaurs that will be extinct by 2005” is now part of our folklore. We know that in the years following his statement we experienced one of the biggest booms in branch development in U.S. history. But, doomsday predictors remain. Steve Cocheo, executive editor of the ABA Banking Journal, said in a recent article that “once mobile banking really hits the industry, brick and mortar will be like Blockbuster Video stores.”
Futurist Brett King, author of Bank 2.0 takes a more modest view, suggesting that branches need to focus on consultation and sales as in-branch transactions drop. “Banks need to become delivery channel agnostics – every channel is equally important,” he writes. “The objective must be about deepening relationships.”
At the other end of the branch viability spectrum is David Cavell, author of The Branch is Back, Global Case Studies in the 21st Century. Cavell’s objective is to visit with 70 directors of the most innovative and successful financial institutions around the world. In a recent interview he stated, “Over the next five to 10 years, I would place my bets on branches driving the highest profits. Today relationship-building is best delivered through the branch.”
These divergent views suggest that financial institutions should (1) develop a plan to sell off most of their branches, as they are unneeded or (2) re-engineer the branch business model to reduce costs and enhance the brand experience while rightsizing, closing, relocating and opening new branches. Run for the hills vs. evolve and grow.
These opinions are influencing boards’ decisions by suggesting one answer is right for all. This is far from the case. True, some credit unions have placed branches in the wrong locations and invested too much in facilities compared to the opportunity. They may need to close some branches. A few others suffer from lack of resources necessary to maximize market performance through multiple branches or timely relocation. But does the current lack of individual and/or branch network profitability in a specific market mean that branching is wrong?
Look at Umpqua Bank in the Northwest. It is pursuing an aggressive branch expansion program by developing new neighborhood focused “stores” that are smaller than most institutions’ branches after the same market. In many markets they hold two to three times the deposits and loans of their local, regional and national competitors. The same holds true for North Shore Credit Union in Vancouver, British Columbia, where this institution has re-engineered its brand and customer experience to a level that has allowed it to triple in assets ($750 million to $2.2 billion) in five years while adding only one branch.
I must admit I am prejudiced toward branching and agree with Cavell’s notion that branching can be good for business. But, there has been a lot of money misspent in branching. Unfortunately, this trend continues today. Branches continue to be placed for the wrong reasons and overbuilt for the opportunities at hand.
A few years ago, I stood before a board and was told that four free-standing branches were needed and where they should be placed. After our study we explained why none of the locations would support a free-standing branch. Branches were needed, but the delivery strategy needed to align more closely with the target market’s preferred method of doing business and its expectations of the brand experience. More free-standing branches were in this institution’s future, but not until it built the business needed to support the cost.
We continue to see a number of weaknesses in credit union branching strategies.
Retention of on-site select employee group branches. These remain necessary at large employer groups in remote locations. But branches located on SEG sites adjacent to retail convenience areas can often be relocated to a high-visibility community location that significantly increases business and keeps the SEG happy. An ATM then replaces the staffed branch on site.
Restrictive real estate strategy. Will you only own facilities or lease? While owning is typically the best long-term play in terms of lowering operating cost and benefiting from appreciation, an own-only strategy might mean you are missing the best opportunities. Also, the cost of developing a new owned free-standing branch ranges between $1.5 and $3.5 million vs. the same ability to support the market from a leased facility that costs $750,000 to $900,000. If you need to quickly cover multiple adjacent target markets, leasing as a first step may be the most productive short- or long-range solution. Building and owning could also be the right answer as long as the breakeven period is reasonable and the use of capital does not negatively impact the overall delivery strategy.
Timing. Does your board require that you develop one branch at a time? Branch “A” must be developed before branch “B” and so on. This is not unusual and can be very frustrating as availability of the best sites may not follow in the board’s prescribed order, causing you to lose big opportunities. Better to gain approval of a three- to five-year placement plan that allows you to acquire the best sites out of order. By doing this you set yourself up for success and board satisfaction.
Always believing the Realtor. There is often a trusted Realtor in the wings who has helped a credit union acquire property and negotiate leases for years. We have seen a number of strategic plans both enhanced and marginalized by their input. We recently experienced a situation in which a credit union had purchased a new site and was building a building to the far west of a very successful branch. The Realtor had suggested terminating the lease and relocating accounts to this location. Seemed like a good real-estate move as it would fill the new costly branch. On deeper analysis, though, this move would likely have caused members of the second-most successful branch in the system to go to another institution, as the new branch was 11 miles away. It’s best to develop a sophisticated branching plan and stick to the strategy unless there is significant local change.
These and other issues like inconsistent staff training, lack of marketing and poor brand convergence through all delivery channels cause branches and the branch networks to underperform and appear too costly as a foundation for future sustainability.
Today, credit unions have one of the greatest opportunities for growth due to the banking crisis. Well-planned and operated branches and networks can be highly productive and will be necessary member development and service channels well into the future for the majority of credit unions. To take advantage of this once-in-a-lifetime opportunity, credit unions need to optimize the performance of their branches and re-engineer their branch networks. The branch is not dead again. Rather, it is alive, evolving and a key component of successful delivery strategies for financial institutions across North America and the world.
Paul Seibert, CMC, is vice president of EHS Design, a CUES Supplier member based in Seattle, and author of CUES Complete Guide to Credit Union Facilities.
