June 2009

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Branch Efficiency Breakthroughs Part I of III: Solving for Locations

By Robert Vokes and Kevin Travis

Branch networks became conspicuously overgrown during recent expansion years and now pose an immense burden — over half of the total expense base in retail banking — in the wake of the U.S. mortgage crisis and economic slowdown.

The challenge now is balancing the need for significant expense reduction with the need to preserve customer relationships and position the bank for future growth. Underscoring the degree of management conflict on how to respond, some banks are mandating across-the-board branch expense cuts, while others are according veritable kid-glove treatment to their networks, given their pivotal role in deposit formation.

Ultimately, we believe there is an innovative middle path that will allow progressive institutions to achieve transformative changes in branch efficiency. But to get there, banks will need to avoid the temptation to fall back on conventional approaches that, while specific about short-term savings, often overlook new ways to think about markets, customers, services and technologies. There is a risk of further embedding current network flaws, limiting the potential for long-term efficiency improvement.

In Part I of a three-part series, we look at how conventional principles and management practices can undermine efficiency as it pertains to branch locations. In Part II of the series we will look at branch formats; and Part III will examine branch network activities and operating models.

Location Equation

There are three major ways that location-related branch banking practices can work against efficiency improvement, including: 1) basing closure decisions strictly on individual branch profitability; 2) seeking to retain broad geographic coverage no matter how thin it might be; and 3) writing blank checks to preserve de novo branches.