Facing conflicting pressures to reduce network expenses while maintaining reassuring local presence, banks will need to emphasize branch visibility, or “billboard value.”
Traditionally when consumers selected a bank for their primary checking account, the key decision factor was branch proximity. Often it was a simple matter of street corner convenience: find the branch nearest to the home, workplace or along the local commute.
Digital banking has steadily chipped away at this foundation and retail distribution has reached an important turning point. In 2014, 30% of survey respondents selected “branches near me” as the top convenience factor. This response rate fell to only 18% in the recent 2015 survey, a 40% proportionate decline in one year.
Stealing the convenience crown was “leading online/mobile banking,” cited by 26% of respondents as the single factor that would do the most to make a bank convenient. This score has roughly tripled in Novantas surveys over the past five years.
The situation has introduced a profound conflict in network planning, in that many shoppers still demand some degree of local branch presence when considering where to open a new checking account. Although branch proximity is no longer the leading convenience driver among shoppers, 62% of survey respondents state that they would not even consider a bank that does not have any branches in the community (Figure 1: Branch Convenience Slips; “Safety Net” Role Continues).
To rectify lingering customer preferences for branch presence with the pressing realities of accelerating network consolidation, banks will need to emphasize the visibility of the network, or “billboard value.” Reflecting specific branch site advantages such as a prominent location and general customer traffic density in the area, billboard value helps to sustain local brand awareness and puts the best face on convenience.
Our research shows that today’s bank networks are quite uneven in their concentrations of high-value site locations. Banks that do a better job of optimizing networks around these locations will gain a growing advantage in maximizing the consumer perception of local network scale. Helpful both in scenarios of local network expansion and consolidation, billboard value is also a pivotal attribute for players seeking to enter new markets with selectively placed thin branch networks.
Digital vs. Branch Influences
It is important to keep sight of customer acquisition and sales in an era when distribution is in flux. What is important to consumers when they select a bank these days, and what do those preferences mean for network consolidation and multi-channel competitiveness?
Convenience is front and center in the discussion. So long as convenience was tightly defined by physical proximity, banks with dense branch networks could win an outsized share of local market deposits, “punching above their weight class,” while banks with only a few locations saw deposit share lag branch share.
But as is evident from our consumer research, “convenience” is no longer strictly about having the nearest branch. In fact a non-physical factor — online/mobile — now is the top influence on how consumers perceive banking convenience. Nearby ATMs matter, including the fees for them, as do hours of operation to a lesser degree. Branch proximity and market density are still important to be sure, but not the total picture.
Shopper purchase rates have been directly affected by these evolving preferences.
In our shopper survey, we asked respondents to rank the top three banks in their local market in terms of convenience. We took these rankings, assigned weights for first/second/third, and constructed a “perceived convenience” index for each bank by market. Then to verify the relevance of the index, we applied statistical tests that contrasted perceived convenience with checking account purchase rates for each bank in each market included in the study.
The upshot was that perceived convenience surpassed raw branch share in explaining purchase rates for individual banks in a given market. Compared with an 85% explanatory power for perceived convenience, branch share explained a lesser 52% of the variation in purchase rates — an even wider skew than what has been seen in similar Novantas studies over the past three years (Figure 2: Checking Purchase Drivers — Branch Share vs. Perceived Convenience).
While customers may be using the branch less and less, it still plays an important role in checking acquisition. Local visibility is a must.
Starting with an example drawn from general retailing, consider the shopping/commuting patterns of a typical community resident. Over time as she drives back and forth between the places she visits most — grocery store, gas station, dry cleaners, movies — she can likely name most major businesses and their signage in each of shopping plaza she frequents. These familiar stores then gain prime consideration when new shopping needs come up.
The same premise works for retail banking, both with branches and ATMs. The more that installations are situated in high-visibility areas, the more awareness and consideration they receive when people have banking needs and think about where to turn. Billboard value reinforces customer perceptions of convenience, even among people who have little need or desire to visit a lobby. Plus it provides critical reassurance to online-oriented shoppers: “If I ever have a problem, at least I know where I can go.”
For all of these reasons, it is dangerous to make network cuts strictly on the basis of individual branch performance. Perhaps a given branch is in the right area but located on the wrong street corner. Or it should be doing better, given its locale, but is dealing with execution issues. Billboard value is essential to the discussion.
Looking systematically across each market, the bank should identify the very best locations — high community visibility; active customer traffic — and then examine how its current array of local installations compares with the optimal. This assessment of billboard value typically reveals stark disparities in current branch site placement, with real consequences today and in the future.
In a national study, Novantas looked at branch placement strength within the top 150 U.S. bank networks, ranging all the way from 5,000+ units down to roughly 50. Two conclusions emerged, with powerful implications for future competitiveness:
1) All networks are affected to some degree. Based on a minimum of having at least 60% of branches placed in top-decile locations, fully half of the top U.S. branch networks have weak footprint billboard value. Although there are advantaged networks in each size tier as well, every bank has room for improvement (Figure 3: Significant Variation in Branch Billboard Value Across Branch Networks).
2) Strong billboard value is highly correlated with better deposit performance. Looking at average retail deposits for all of the branches included in the study, top-decile locations had an average of $75 million in retail deposits, compared with only a $45 million average for the rest.
Of course, top-decile locations will be located in the best areas and it does cost more to procure those sites, often significantly affecting decision economics. But there is no denying that sites with top-decile billboard value are the most likely to provide the growth the bank is looking for.
Looking ahead, billboard value is pivotal in addressing two major network issues:
1) Network evaluation. Many factors are pushing banks to reduce their networks to find expense savings, but it is not a simple matter of cutting the weakest branches. Billboard value provides context on how each installation supports the overall local network, in some cases helping to justify preservation, in other cases making a stronger case for consolidation. It also provides a basis of comparison across local markets within the network footprint, helping to prioritize investments and guide network strategies.
2) Site decisions. In considering locales for expansion and growth, a number of sites may have prime locations, but how does the bank tell which ones will best contribute to local network presence overall? Billboard value allows the bank to systematically identify market coverage gaps and the upside potential in plugging them.
Billboard value plays directly to a continuing strong consumer preference for a reassuring physical presence when choosing a bank. The requirement is not as strict as before, given the dramatically reduced need for on-site transaction services. But some level of branch visibility and accessibility is still needed to anchor customer acquisition and retention. Additionally, branches are a key driver of unaided awareness, so there is an important marketing value of the branch network.
There are a number of management implications:
- Fewer branches are needed, and increasingly the billboard value of the network, rather than sheer utility, will be the key driver of performance.
- Building and promoting digital capabilities will be critical to gain consideration from customers and cement their perception of convenience.
- New levels of agility in distribution planning will be required.
- Consumer attachment to the branch should be closely monitored for further signs of erosion. If physical presence collapses in consumer influence, even its anchor role as a reassuring market presence, it could open the door for aggressive direct players, provoking a potentially serious tilt in local competition.
Chris Musto, Brandon Larson and Alex Lee are Directors in the New York office of Novantas. They can be reached at email@example.com, firstname.lastname@example.org, and email@example.com, respectively.