April 20, 2010
CUES’ Credit Union Management’s online-only “Facility Solutions” column runs the third Tuesday of every month.
Facing challenging banking industry trends, a brutal economy, new restrictions on fee income and changes in market dynamics, many financial institutions need to focus on optimizing their branch networks and shift their new market planning approaches. Yet in recent years, only a small percentage of credit unions and banks have given much consideration to optimizing the performance and efficiency of the branches and networks they currently have in place. This blind spot is costing some credit unions millions in operating losses and even greater lost growth opportunities every year.
EHS Design, Weber Marketing and Momentum Inc. presented results of a survey of financial industry participants in the Branch Network Optimization Webinar sponsored by Bankerstuff.com on March 17. To establish a current and relevant foundation for this presentation, the team conducted a survey of credit unions and banks through Bankerstuff.com to gather information about how midsize credit institutions are utilizing their branch networks today. In this multiple-part article, we will first present the findings with brief comments and then discuss the responses and potential solutions in detail in a future article. If you would like to hear the full presentation, please contact pseibert@ehs-design.com.
Let’s take a look at how the credit unions and banks responded.
1. How important is maximizing branch network performance?
Very important – Critical 100%
Every responding institution stated that maximizing performance was critical to their success. With this in mind, look at the responses to questions #2 and #3.
2. How efficient is your current branch network?
| Efficiency | % of Respondents |
| 50% |
31% |
| 60% |
15% |
| 70% | 38% |
| 80% | 0% |
| 90% | 15% |
| 100% |
0% |
46 percent of respondents felt their branch networks were less than 60 percent efficient and 84 percent said they were less than 70 percent efficient. Using these respondents’ efficiency estimates to calculate the cost of underperforming branch networks, you can see how we can estimate ongoing yearly losses in the millions per year. How much is being lost at your credit union?
3. How often do you assess entire branch network efficiency and productivity?
| More than once a year | 38% |
| Once every two years | 23% |
| Once every five years |
8% |
| Do not assess entire network | 31% |
The above responses appear quite candid, as they aligned with our observations of hundreds of credit union and bank branch networks over the past 20 years, and the limited industry focus on squeezing the highest possible performance out of branch investments. Often institutions are more focused on the next new market and branch rather than the existing network. In our strategic branch planning work we regularly find that a lesser investment in an existing branch network will produce higher and faster return than in a high-cost branch in a new market.
Branch networks are not stagnant. They are made alive by changes in demographics, products and services, regulations, mergers, competition, retail and transportation evolution and new opportunities. Understanding and responding to these changes regularly is key to driving growth in the right markets at the right time, reducing operating cost per member and maximizing member service and ROI.
4. Will your branch network be larger or smaller in five years?
| 0 - 10% Larger |
46% |
| 10 – 30% Larger | 23% |
| 30 – 50% Larger |
23% |
| 0 – 10% Smaller |
8% |
| 10 – 50% Smaller | 0% |
We were a bit surprised by the responses, particularly that 23 percent of the respondents said their branch networks would be 30 to 50 percent larger in five years. There may be some correlation between the projected number of bank failures and NCUA’s estimate of over 900 credit unions with CAMEL ratings of 4 in two years and the possibility of mergers to gain new branches and market coverage. The issue for existing branch network optimization is that the focus may continue to be on new branch acquisitions over increasing existing performance.
5. Do you plan to acquire additional branches or branch networks in the next five years?
| Yes | 46% |
| No | 8% |
| Depends on opportunity |
46% |
These responses reinforce our findings from question #4 and again suggest both the expectation of building new branches and acquiring or merging in new branch networks.
6. Do your branches provide the desired level of productivity?
| Yes | 15% |
| No | 85% |
This question gets at individual branch productivity over network productivity. While the responses align with our observations, they represent a surprising self awareness across the industry. We find that existing branch productivity can be substantially increased through a number of methods, including powerful merchandising techniques, staff training, refocusing on primary products and services, the proper integration of technologies and enhancing member and staff experience.
7. Do your branches provide the desired branch image and experience?
| Yes | 50% |
| No | 50% |
Key to branch success is the strength of the brand and branch experience. Branch convenience remains the highest factor in selecting a financial institution, and the branded branch experience is what drives strong relationship development, advocacy and high share of wallet and ROI.
8. What is the average size of your newer branches in terms of square feet?
| 2,000 s.f. or less | 18% |
| 2,000 – 3,000 s.f. | 45% |
| 3,000 – 3,500 s.f. |
27% |
| 3,500 s.f. or greater |
10% |
The average size of branches has been declining over the past 10 years from an average of 4,500-5,500 square feet for free-standing branches to 2,800-3,500 square feet today. This small size allows more branches to be placed in large markets, increasing convenience and market penetration in target markets. But, even at the small sizes, many credit unions are overbuilding their branches in both free-standing and strip mall space and reducing the opportunity for greater market coverage and return.
9. What is the average branch square footage per full-time equivalent employee?
| Average of all respondents |
427 s.f. |
| Lowest | 163 s.f. |
| Highest | 700 s.f. |
| Most common range | 325 s.f. – 450 s.f. |
The square feet per FTE ranges widely from 700 down to 163 square feet per staff. In-store branches and high-efficiency express branches can operate successfully at 163 square feet per FTE while full-service, free-standing branches need 300 to 350 square feet per FTE at full occupancy. Above these numbers, a credit union may be wasting space and resources.
10. What lines of business do you deliver through your branches today and in three years?
| Business Line |
Today | 3 Years |
| Consumer Banking | 92% | 100% |
| Small Business Banking | 92% | 100% |
| Commercial Banking | 73% | 82% |
| Private Banking | 42% | 58% |
| Wealth Management |
58% | 73% |
The biggest change in bank business lines is in private banking and wealth management. The big branch and network efficiency question is: Are your branches properly positioned, configured and designed to successfully promote and deliver these new services?
11. What is your mix of branch types? (Average of all respondents)
| Free-standing | 88% |
| Strip Mall |
6% |
| In Store | 2% |
| On Work Site | 4% |
Free-standing branches remain the most prevalent branch type among the respondents. The cost of these branches is high, but they are typically the most productive by a factor of two to four for many institutions. The current economic situation and redundancy through mergers is causing some institutions to sell off a portion of their branch assets much below replacement value creating many opportunities for credit unions to buy in below cost. But beware; there may be other reasons than just redundancy driving the sale price.
12. What is the percentage of owned branches?
Ownership remains high at 75 percent and is strongly supported when taking the long financial view over time. But for some credit unions, the need to build and own a $2-3 million branch may be restricting their growth. It may be worth considering a mix of strategies that will allow faster branch placement, more flexibility and the ability to evolve with shifting market opportunities.
13. What are the critical factors that will drive future branch network success?
| Factor | Ranking |
| Branch network efficiency and productivity |
#1 |
| Application of technologies | #1 |
| Branch business model optimization |
#2 |
| Expansion of customer relationships |
#3 |
| Marketing | #3 |
| Branch network expansion |
#3 |
| Training | #4 |
| Customer retention |
#5 |
The respondents stated a number of critical factors that will drive branch network success at their credit unions. Above are listed the factors within the top five ranking. In future articles, we will address each of the above and other factors that our clients are finding critical to their growth and success.
Paul Seibert, CMC, is VP/financial services at CUES Supplier member EHS Design, Seattle, and the author of CUES Complete Guide to Credit Union Facilities.
P.S: Additionally information about branch and branch network optimization is available in CUES manual titled: CUES Complete Guide to Credit Union Facilities.
