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The Hidden Costs in Your Distribution Network

You just closed a bunch of branches.
How do you get even more costs out of your network?

A confluence of events over the last year has resulted in many banks announcing the largest branch closure plans in their history. In just the last few months alone, banks have announced the shuttering of more than 1,000 branches. Expectations for sustained low interest rates, a surge of deposits driven by government relief efforts and customer behavioral changes exacerbated by COVID-19 have given executives the confidence to move forward with these large branch actions.

The benefit of branch closures, of course, is that they create big chunks of savings for the bank. But with earnings under pressure and revenue growth slowing, where can additional savings come from? Novantas believes that two areas that are often under-appreciated for cost savings are the branch workforce and specialty salesforce. A restructuring of these areas can lead to an additional 6-9% of distribution operating expense savings for a typical regional bank.

BRANCH WORKFORCE

Even before the pandemic upended our lives, more than half of the country’s branches were “sub-scale” in 2019 (fewer than 4,000 teller transactions a month) due to historical transaction migration trends. (See Figure 1.) Additionally, sub-scale branches are most commonly at or near minimum staffing levels with sub-par sales and service productivity.

As a result of COVID-19, teller transactions per branch are currently 25% below pre-pandemic levels and branch sales are depressed by roughly 15%. (See Figures 2 and 3.) During this period, banks have made limited efforts to reduce staff by the same proportion — both out of a sense of commitment to their employees and communities amid the pandemic and with a belief that volumes would eventually return.

Figure 1: Benchmark Branches by Transaction Volume

Small (0-4,000)
Medium (4,000-7,499)
Large (7,500-10,000)
Extra Large (10,000+)

Source: Novantas SalesScape | Branches are sized based on transactions per branch per month, Sub-scale branches are defined as those with fewer than 4,000 transactions per month

Figure 2: Benchmark Teller Transactions Per Branch

Figure 3: Benchmark Accounts Sold Per Branch

2017
2018
2019
2020

Source: SalesScape Comparative Analytics, Large Regional Bank Benchmark

2017
2018
2019
2020

Source: SalesScape Comparative Analytics, Large Regional Bank Benchmark

Figure 2: Benchmark Teller Transactions Per Branch

2017
2018
2019
2020

Source: SalesScape Comparative Analytics, Large Regional Bank Benchmark

Figure 3: Benchmark Accounts Sold Per Branch

2017
2018
2019
2020

Source: SalesScape Comparative Analytics, Large Regional Bank Benchmark

Novantas doesn’t believe those teller transactions will return, however, resulting in a permanent reduction of at least 20% (with continued annual declines in line with 5-7% historical average). But teller employment, which is already down 15% since 2001, is expected to only fall another 15% by 2029, according to the U.S. Bureau of Labor Statistics.

As for sales, while we believe that most sales per branch will return to pre-pandemic levels, some may permanently shift to digital channels. Even so, benchmark sales productivity of fewer than one account sold per non-teller FTE per day suggests there is plenty of excess capacity on the platform.

Even with a slew of planned branch closures, the result of these permanent implications will shift more branches to “sub-scale.” Given current minimum staffing constraints, banks won’t find cost savings without a fundamental re-thinking of the branch staffing model, including further refinements to the roles and responsibilities.

Novantas sees a handful of levers that can help to remove additional costs from the distribution network.

Minimum Staffing Levels

Our benchmark shows a fairly wide range of minimum staffing levels across banks, from 3.5 to 5.5 FTE with the most typical being just above 4 FTE. With so many branches at minimum staffing levels, shifting the floor to reduce those minimums even further can drive significant savings. Other banks have achieved 4.0 FTE and so can you.

Branch Roles

While most banks have eliminated the assistant branch manager role over the last decade, some still have the position in place — or similar roles like operations manager or service manager. With average branch staff of 5.9 FTE, including the branch manager, it seems unnecessary to have any management layers except for in the very largest branches. While many banks have implemented universal banker roles, the success of these positions have been mixed. Going forward, there should be continued focus on flexibility in role design combined with improvements in branch choreography to maximize the benefits of cross-training.

Hours of Operation

One lesson from COVID-19 is that banks have more agency than previously thought in dictating the rules of engagement with customers, whether for appointment banking or changing hours of operation. We believe that banks can revisit branch hours to drive more efficiency with limited customer impact. Some banks are finding that interactive teller machines can help reduce branch hours while extending drive-up services.

Repurposing Capacity

With branch teams increasingly underutilized, banks may consider addressing capacity in creative ways. In Australia, NAB changed operating hours at all rural locations to mornings-only and redeployed branch staff to customer service in the afternoons. During COVID-19, many banks leveraged branch staff to process PPP loans. Creating programs for structured repurposing of capacity can allow banks to maintain necessary efficiency levels.

Community Staffing

Most banks currently staff associates at a single bank branch. We believe this results in a bit of “spare capacity” in each location for unplanned vacancies. There is an opportunity to reconsider staffing models that use a larger pool of associates who support a cluster of branches. A larger pool can create improved efficiencies in aligning schedules and addressing vacancies. It may also provide for the ability to create “cluster managers.”

Management Spans of Control

While many banks have continued to revisit their management reporting structures at the district and region level, our benchmarks show a wide range of average spans of control across banks. (See Figure 4.) While some of these ratios are constrained by geography, the use of desktop video (WebEx, GoTo Meeting, Teams, etc.) has made it easier to manage remotely. For a typical 300-branch bank, just changing the gearing ratio by two branches/districts results in $1 million of salary expense savings.

Figure 4: Gearing Ratios

Branches to Level 1 ('District')

Maximum
Average
Minimum

Level 1 (‘District’) to Level 2 (‘Region’)

Maximum
Average
Minimum

Source: 2019 Novantas SalesScape
Benchmark gearing ratios based on traditional branches open as of 201912
Branch count categorization: Small Regional (<500), Large Regional (500-1,000), Super Regional (>1,000)

SPECIALTY SALES

As banks have moved quickly to consolidate branches, few have taken the same steps with one of the other big cost drivers: the specialty salesforce. Depending upon the institution, we have seen anywhere from two to five sales and sales-management employees per branch across the various lines of business. This includes roles such as mortgage loan officers, financial advisors, private bankers, business bankers, commercial relationship mangers and treasury management sales officers

For some banks, this means there is easily twice as much salary expense tied up in field-facing salesforce as in branch operating expense. And just like the branch operating expense, much of this expense is being paid in salaries to maintain an existing portfolio versus growing a new one.

Depending upon the bank’s strategy, specialists may be critical to ensuring revenue growth in the future. As simple branch-based products are increasingly sold digitally, personalized advice will become the one remaining differentiator between institutions. But the salary expense associated with these teams needs to be managed aggressively.

Typically, the specialists are spread across regional fiefdoms that have little incentive to give up their headcount in order to benefit another region with higher growth opportunity. In some of the banks we have worked with, there is a direct and consistent relationship between the number of branches in a market and the number of specialists. This would suggest that all markets have the same opportunity, which we know isn’t true. We see several opportunities for potential cost reductions in this area.

Alignment of Salary to Opportunity

As noted above, there is a bias towards giving all markets their “fair share” of specialists. We believe that a realignment of salary expense that matches potential market opportunity is necessary. The opportunity drivers for each type of specialist area are different and therefore line-of-business specific metrics need to be used to support this change.

Ruthless Performance Management

While all organizations leverage some form of variable compensation for specialists, incentive compensation is too often confused with performance management. Specialists who aren’t achieving target performance levels need to be coached, or, when appropriate, moved out. Just minimizing bonus payments isn’t enough and doesn’t send the right message. We have worked with institutions where more than half of the specialists in some areas weren’t meeting expected performance targets. Specialists need to be driving customer and portfolio growth, not just maintaining existing portfolios. Using base salary dollars for insufficient growth isn’t a fair trade for the bank.

Management Spans of Control

Given the small size of most specialist teams in a market, optimizing management spans of control while maintaining “local leadership” is a challenge. At many banks, managers have to be a player-coach and also maintain a portfolio. As noted above, video conferencing is breaking down the geographic barriers and best-practice sales management routines are perhaps more important than local leadership.

Central Portfolio Management

One area where many banks are seeing improved productivity is through the use of central support models. Phone/video-based specialists can support a larger portfolio field-based staff and, in many cases, can provide improved industry specialization. Another tactic used by some banks is the separation of local specialists for acquisition (“hunting”) from centralized specialists for ongoing portfolio management (“farming”).

The wide-ranging closure of branches in coming years just won’t be enough to remove costs from the distribution system. Banks also need to focus a significant amount of time on the next-generation branch staffing model. These actions, working in tandem with the optimization of specialist salary expense, will provide both an opportunity for cost-cutting and a strategy for efficient growth.

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