Oct. 19, 2010
Credit Union Management magazine’s Web-only “Facility Solutions” column runs the third Tuesday of each month.
Branches are a very expensive but necessary delivery channel for the vast majority of credit unions. Even Bank of America, which is now planning to close more branches than the 10 percent promised last year, sees the continuing importance of branches. An emphasis on the branch continues at BoA even as it moves from a community to regional branching strategy, backfills with ATMs, and introduces its “Talking” ATMs at all locations.
In our 2010 Branch Network Optimization survey we asked, “What is your mix of branch types? The survey responders told us that 88 percent of their branches were freestanding, 6 percent were in strip malls, 4 percent in work site locations and just 2 percent in stores. The mix for each institution, of course, depends on its growth and service strategy. Let’s take a quick look at each of the delivery types.
In-store branches are falling out of favor for some institutions while increasing in numbers at others. A number of big banks are moving out of these small locations, often considered costly transaction centers, and betting on virtual banking technology and smart ATMs to fill the transaction gap. Capital One’s Chevy Chase Bank moved out of its Giant Food Store locations in 2009. Zions Bank closed its offices in Smith Food & Drug all across Utah.
Many credit unions are likewise finding it difficult to successfully grow within their community charters from just one retail relationship. Conversely, other credit unions are finding good success with in-store branches. For example, $8.8 billion BECU, Seattle, ranks 23rd among U.S. credit unions in terms of five-year member growth. The CU has driven high growth with the savvy deployment of in-store branches in markets where Boeing (the “B” in BECU) is a household name, plus excellent marketing, advertising, service delivery and virtual channel delivery integration.
In-store branches are not for everyone. To be successful, the delivery type must align with a credit union’s brand image, business model, multi-channel delivery strategy, and culture. There are many stories of credit union in-store branches underperforming and failing. The questions remain: Will an in-store branch be just a costly transaction center? Does the hosting store deliver customer traffic that matches your target member characteristics? What kind of lending can I generate from an in-store branch? Can we drive high share-of-wallet or could we get a better ROI and faster break-even from another branch type?
The reason for the low 4 percent use of work-site branches is in part due to banks being about half the survey responders. It is interesting to note that banks have been moving onto work sites for the past 10 years through their business banking relationships and, in some cases, locating branches on the same campus as credit unions.
Credit unions once owned this delivery model and it was the first branch type for most. A few credit unions (like the HP and Honda credit unions) still enjoy a strong bond with their employer groups and locate most of their branches on site. Today, the majority of credit unions with select employee group, trade industry and professional, or community charters realize work-site branches are often necessary and productive, but alone limit their ability to grow through serving family members and/or their community FOMs. Often the right solution is a balance of on- and off-site locations tailored to maximize ROI.
Strip Mall Branches
Strip mall branches are much more popular among credit unions than banks. The 6 percent figure reflects the influence of banker responses to the survey. The reason they are most attractive to credit unions is their lower development cost compared to freestanding facilities, speed to market, and adjacency to high repetitive shopping locations. We know from hundreds of studies across the nation that market penetration increases with branch convenience. Community-chartered credit unions find that if multiple branches are located to create overlapping convenience radii of three to five miles, household penetration can be increased by 50 percent. This requires a community branching rather than a regional branching strategy, and more branches in each market. A strip mall branch costs about a quarter to a third what a freestanding branch does, and offers the flexibility to follow evolving markets. Lower cost means faster deployment and faster growth and payback.
Strip mall branches are an important retail delivery option, but care should be given in site selection. Does the mall deliver customers with desirable member characteristics? Is the site highly visible and adjacent to the primary repetitive shopping draw, or squeezed between less desirable neighbors or at the back of the mall? Is there sufficient parking for members during lunch time? Can you get street signage? Can you get an “end cap” space and possibly a drive-up? What are the long-term prospects for this mall? What is your next step if this location is very successful and you need to expand or move?
Our survey respondents said 88 percent of their branches are freestanding. While we know banks typically employ more freestanding branches than credit unions, I think if we all had our way, all credit union branches would be freestanding. They offer control of the internal and surrounding environment and provide high visibility, drive-ups, dedicated parking and the opportunity to deliver a strong brand image and experience inside and out. We also know from many studies that a freestanding branch typically grows faster and has higher deposits and more accounts per household than in-store or strip mall branches in similar locations and with similar maturity.
The cost of a 3,500-square-foot branch today can range between $1.7 and $3.5 million depending on the cost of land, building type and construction economy. Construction cost is high but, for many credit unions, owning a high-cost freestanding branch is less expensive than leasing a smaller strip mall location over time. This is due to long-term capital depreciation, low cost of capital, no lease rate escalation and appreciation of the property. If the location is a long-term hold of 20 to 30 years, as most branches are, a freestanding facility may be the right investment answer, but it may be the wrong growth answer if speed to market with multiple facilities is the goal. Freestanding branches could then be the next play in a strong market.
Selecting the right branch type is one of the key decisions in creating a highly efficient and productive branch network. In most markets, a mix of delivery types is required to maximize target market growth opportunities or to optimize performance of an existing branch network. Branches should be located, sized, configured and budgeted for based on specific target market characteristics. These characteristics can be analyzed down to the block level to provide a clear picture of how a branch will perform now and in five to 10 years in terms of attracting the right households and businesses.
The depth of analysis should go beyond member household locations, age and income in concentric circles around a potential branch location. Such elements as member use of specific products and services along with other market-specific characteristics, should be considered. This analysis may suggest you place an ATM in a market for three years then develop a strip mall branch, put in hybrid lending centers that can evolve into a branch, locate freestanding branches, or build an 8,000-square-foot regional financial center that is the hub of a branch network and radiates such high-value services as mortgages, investments, business banking and wealth management to the surrounding target markets.
No matter what our survey respondents say, it gets down to selecting the retail delivery location, type and size that will be most efficient, productive and timely to maximize the productivity of each target market. The result will be a high performance branch network that delivers high ROI.
Paul Seibert, CMC, is vice president of CUES Supplier member EHS-Design, Seattle, and author of the CUES Complete Guide to Credit Union Facilities.