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Business Case for Branching in a FinTech World

Consumers strongly desire branches. Doing it well drives performance.

Measuring is key for improvement.  In today’s consumer-centric world, change is constant. In fact, the only thing that doesn’t change is change. However, if we can quantify the change, then we can measure, and improve.

If you build it, they may not come. The world of branch banking has and is changing rapidly. FinTech and consumer behavior has disrupted banking as we know it. Therefore, financial institutions (FIs) have to continue to change, always quantifying performance, measuring performance, and managing change to improve performance. Competition is fierce for FIs, and pressure from non-traditional sources force all decisions to branch to be supported by a business case. The perception by some industry experts, and pundits is this has not always been the case. Remember when you could build it, and they would come? Me neither!

So, branching has always been about establishing a business case, connecting with the opportunity, and execution. Each part of the plan is integrated with the next to eliminate unknowns, loss of information, and speed up the return on investment (ROI).

Measuring Effectiveness and Performance

Over the last decade, LEVEL5 have partnered with over 150 FIs across the US. Each FI has embraced process integration to define a business case, connect/design with the opportunity and construct to that case. In the last four years, we have completed over 100 design-build projects: branch and main office transformations, denovo branching, main offices, and operation centers. And, we have another 50 projects flowing through the system. Therefore, measuring the effectiveness of the strategies we create, quantify, and implement through construction is huge in measuring performance – our clients and our own.

The Research and Results

Last month, we completed a thorough examination of our client’s branch performance. We went back to our clients to quantify, and measure the effectiveness of the implemented branching plans, so we can improve. Processing their data, here is what we found:

Our client’s branches are producing an average of $35 million in net new business 

Our business case projections were 92% accurate

Our clients are growing total assets – 10% annually, compared to the national average of 3.2% 

An integrated approach to branching. The results our clients have experienced speak to what’s possible when specific strategies, tactics and actions occur. It is the integration of these components, through a specific project approach, that yields great returns for FIs investing in branching.

Consumers strongly desire the branch for connection and relationship. Doing it well with a defined and executed business case drives performance for all the FIs stakeholders.

For a deeper dive into the thought pattern and science behind earning a great ROI for branching…



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Close my branch? That’s fine, I’ll Choose Another!

Consumers are deciding the value of the branch.

When it comes to the longevity and value of branches, opinions really do vary. Depending on our own stories, experiences, communities and allegiances, the branch’s importance will ebb and flow. However, when we look at evidence, the opinions fade and the demands of consumers ring loud and clear. Especially, when their favorite branch might close.

Millennials and the Branch –  A recent Bain & Co. study of 137,000 consumers found that 90% of participants visited a branch in the last 3 months, including 86% of Millennials (25 to 34 years old). The same study revealed Millennials desire human interactions in a branch because mobile & web solutions provided by financial institutions (FIs) are inadequate to solve all their needs. Furthermore, the study found that Millennials are the most likely consumer to apply for and receive loans.

Bain also reports that mobile banking adoption is leveling off at 55% – growing from 52% a year earlier. And though digital solutions can provide tremendous scale to FIs – they have not closed the gap enough to provide a sustainable revenue source i.e. loans for FIs to outpace the need for branches.

Sales and Humans – According to a study produced by Ernst & Young (not PWC for all you Oscar fans last year) over 65% of consumer sales occur in a branch and over 72% occur with a human interaction. When it comes to the financial engine for banks and credit unions,  sales = loans.

Branch Preference – A 2016 TimeTrade report found that nearly 57% of consumers prefer the branch as their primary way to interact with their bank or credit union. Furthermore, a recent FiServ study said 44% of consumers still prefer the branch as their primary connection point to their FI. JD Power reports that 77% of all new accounts for banks and credit unions walk through the front door,  compared to 82% five years ago. Today, 19% of accounts come through mobile channels, compared to 14% five years ago. Obviously digital is closing the gap, but very slowly, and many consumers prefer the branch…especially in the community-scaled model.

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Are Community FIs Closing Branches? Consumer-based banking has been primed for disruption for a decade. However, less than 3% of all community bank branches have closed during that period. This is in large part because for the community bank, consumer banking is not their primary customer. Yet, Credit Unions who by nature serve the underserved, and are all consumer – are not closing branches either.

The Bain study also discovered that nearly 40% of consumers will switch to a competitor, if their local branch closes. No wonder FIs don’t close branches.

It would seem that much of the fuel for closing branches is aimed at the Mega Banks. After all, they have closed about 10% of their branches in the last decade.  But even after all this churn, there are still over 90,000 branches in circulation. Much of this because Mega Banks keep opening branches too. Bank of America recently announced they are opening 60 more in 2017 – double what they opened last year.

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The Case for the Branch – The ongoing case for the branch lies with the value that consumers place on the human interaction. That interaction at present drives lending, which continues to be another human interaction. And lending drives the financial engine of banks and credit unions.

Therefore, value is decided by the market and consumers. And today consumers value, the branch.

The Business Case for the Branch in a FinTech World is no longer a mystery. New research shows the ROI for branching.

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Return on Investment for Branching

Is the deck stacked against the physical branch?

Priorities, priorities. A recent study released by the Financial Brand revealed the top priorities for financial institution (FI) marketers. In order of priority: 1) Increase Wallet Share, 2) Increase Loan Growth and 3) Acquire New Customers. Given the branch has historically been a dominant tool in the FI tool belt, it would appear that these goals are challenged.

Too many branches? In an increasingly omni-channel consumer society where branch visits are down, and population per branch is low (thanks to the proliferation of branches), it would appear the deck is stacked against FIs trying to get a return on investment (ROI) from branching, while reaching its goals. This is especially true when we consider how branch use has changed. No longer is the branch the primary channel of choice for consumer transactions. Consumers today use branches for different things than they did even 10 years ago (see graph below). Branch use for depositing, withdrawing, and transferring funds is a shadow of its former self. However, when we consider what the branch IS for today…there is more than a little light at the end of the tunnel.

Branch Use


Survey says…
 According to an Ernst & Young survey, 65% of sales occur in a physical environment i.e. the branch. So for FIs looking for a ROI for branching look no further than sales and service for your key driver of success. With this shift in mindset comes the opportunity for a new result.

Consumer Channel Preference

Great brands think alike. Marketers of brands like Apple and Disney keenly identify that brands change over time – they evolve. Furthermore, they know that the brand and the business are intertwined as they seek to make emotional connections with their customers to drive sales. A good example is Coca-Cola. Coke’s market cap is attributable not just to the commodity of soft drinks, but also to Coke’s iconic bottle, a physical embodiment of the brand. In fact, without the Coke brand, its value is half.

FIs can learn from other retailers and develop specific strategies to get a ROI for their efforts to market their company’s brand in its primary channel, the branch.

HOW TO DO IT

Is opportunity knocking? The journey begins with market research and analysis that drives to a business case for or against branch investment. Understanding the loan and deposit potential in a market can quickly start an effective narrative for branching by defining goals and expectations based on facts. Those facts frame our investment in land, building and people so we can predict with greater certainty what the future holds.

Execution is everything. Then based on these facts, we build a plan to connect with the opportunity. Our engagement begins by tailoring the interior space to the culture and desired customer experience.  The focus is on enabling “bankers” to easily connect with their clients.  The physical identity (architecture) and signage of the branch is an extension of the culture and makes a statement to the market at large, so the market knows we are different.  This means we don’t run the same play every time and in every community. Specifically, we don’t always use teller lines, or pods, or self-service, but look at each market’s components and then tailor our connection.

Make your intentions clear. As we build the connective environment, we are intentional to communicate our brand message in graphics, colors and materials. Our value to the community and customer cannot be guesswork because these components drive action – action taken by our employees to use these materials to cross sell, and action by the customers who are now educated on what we can offer.

What we can learn from the major players. Bigger banks have taken these components to heart and are leading the way on branch experience, and getting great returns. Earlier this year, JD Power revealed that customer satisfaction at big banks is at an all time high, which is remarkable given the attitude of the marketplace toward big banks after the financial crisis. Big banks have learned that customer engagement in the branch is powerful, and they have learned how to clearly communicate value proposition.

ROI Venn Diagram

ROI in action. The great news is we can quantify the ROI for branching using the tools mentioned above. For example, a FI in Michigan wanted to create a new customer engagement model in its community to achieve more loan opportunities. The plan included relocating a branch and remodeling a second facility with a new way of connecting, and the glue that held it together was training. The FI changed the engagement model to focus on asking questions and relationship building. They also changed their branch environment, and moved away from teller lines and used technology to automate routine activities. When the brand message became specific to the community, and the FI’s mission, then the culture changed. Within the first two years, the FI has grown its loan to deposit ratio from 88% to 92%.

More proof. Furthermore, a FI in the Southwest grew from $1.0 Billion to $3.5 Billion in 5 years through a similar shift. The shift included a new engagement model in the branch, and messaging throughout the customer experience. The exterior also changed, which was important; it helped the community identify with the change. By the way, the bank quantified the business case through research before each move.

To recap. In review, FIs can reach their goals of increased wallet share, loans, and customer growth in the branch. Here are the steps:

  1. We are clear on what we want and whom we serve. Our customers are diverse and changing, so our channels must appeal to all generations.
  2. We tailor the message of the branch to the market. This includes doing our research and quantifying the loan and deposit opportunity – upfront. Then we focus the branch experience on the opportunity.
  3. Our goal is to establish an emotional connection with our customers and community to drive results. Our focus is on engagement and inviting the community in, so we listen more and talk less.

ROI for branches can be justified by clearly defining the role of the bank and its value to customers.

Engagement in the branch takes a new kind of banker…welcome to the age of the universal banker!
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Millennials and the Branch: Strange Bedfellows

How do financial institutions connect with Millennials? Answer: A marriage of Science and Art

Earlier this year, shock waves were sent through the financial industry as study after study echoed the same message – Millennials highly value the branch. Though millennials and all consumers look digital-first for connection from their bank and credit union of choice, the branch is equally as important to consumers.

Human Connection. The research by Bain and Fiserv point to an inherently human response during the banking process, establishing trust and demonstrating value through relationship. Relationship is the heartbeat of the financial services industry and relationships are established over time.

Branching is about relationship. Banks and credit unions all offer similar products and services (perhaps at slightly different rates), but the motivation to buy (a loan) from one company over the other comes down to relationships. And consumers of all demographies are coming to the branch for that connection. In fact, the Fiserv study found that Millennials are the most likely demographic segment to visit the branch, and they are the most-likely to apply for and receive a loan through the branch.

Therefore, a key question for all banks and credit unions should ask is: How can we better connect with a demographic that wants what we have?

Science and Art. When it comes to branching there are no silver bullets or secret sauces to success. However, there are guiding principles, call them natural laws that govern victory, and it’s a marriage of Science and Art.

Science of branching. If there is one step we witness financial institutions (FIs) skip over in their pursuit of connection with consumers through the branch is developing a business case. In our industry, we have data at our fingertips and its plentiful. But, the science of branching is not about the data, it is the interpretation of the data for a specific outcome.

Market conditions. Collecting specific data about the local market conditions around your existing branches, or proposed new ones reveals more than you could imagine. It reveals the preponderance of consumers who desire what you have – loans. It shows how they want to connect with you (mobile, automated, and the branch), and it reveals the specific products and services we should offer in branches.


The index data above is much more than good local information about product and service demand. With this data in-hand we can go to the next level to establish the total headcount, and the function of the branch. So instead of staffing branches “how we always do” we can staff for a specific outcome based on what local consumers want today, and what they will need, tomorrow.

Loans and Deposits. Furthermore, all data collection for branching should result in a specific loan & deposit forecast for that opportunity. Only with this information can we build a business case that will allow for measurements of return on investment. Historical experience has proven that a freestanding branch’s profitability comes into focus at $25 Million (deposits & loans). Nevertheless, as branches get smaller and more flexible perhaps lower opportunity can be feasible. In any case, understanding opportunity and starting to develop a detailed plan – if it’s a 70% one – will create a greater likelihood for a predictable outcome.

 

Art of branching. Certainly, much of the business case for the branch is art as we interpret the data; however, the art also flows into design. The function and headcount of the facility are finite components so that is science, but how we integrate those into our consumer experience is unique to the local community we serve, and your business, and that is an art.

A unique consumer experience. Connecting with the local demography, the community and your consumers is unique to your business. The experience should be well planned and purposeful, always remembering your personality and value proposition are unique to you. A consumer experience that begins before the consumer walks through the door, and continues through the branch environment. And the beauty is though again we have guiding principles that govern victory, we have freedom of creativity to build connection, so the branch experience it takes on different personalities in each community we serve.

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Training drives performance. And the glue that holds all of it together is your human capital – your people. Nothing in branching drives success better than training your staff to learn how to connect with people and opportunities. For many FIs, this means adopting the Universal Banker model for their business. This means we combine skills training to optimize each opportunity our staff has to connect with consumers. To shift the employee mindset and branch purpose from order-taker to advisor, teacher, council and guide through the consumer’s financial journey. Every consumer is at a different stage, and they look to their bank or credit union for help. Your success depends on your ability to capitalize on those opportunities.

So, what’s next? That’s really up to you. The process outlined above is but an overview, a 30,000-foot glimpse into a portion of the process of connecting with consumers who want what you have in the branch.  So, a good question follow-up question might be:

What is the Business Case for the Branch in a Fintech World?

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