Are Your Bank Branches in a Death Spiral?

There is a lot of debate regarding the fate of the bank and credit union branch. With a significant proportion of transactions moving to digital channels, it is easy to surmise that the death of the branch is imminent. Without creating branch banking benchmarks, and measuring against these standards, you may never know until it is too late.

According to some studies, branch banking is alive and well in the United States. Research published by in March 2014 shows that 70% of retail consumers still use the bank or credit union branch. Despite the fact that Americans are still embracing the bank branch, you probably remember articles that quoted this same research that focused on the 30% of customers who have not stepped inside a branch in the last six months.

Is this good news about the health of the retail banking branch? No. Despite current usage, traditional branch-based retail banking is changing dramatically and eventually will come to an end as we know it today. The question is … are you measuring this behavioral shift?

The Background Research

According to Bankrate,com,  “30 percent of respondents said they hadn’t been in a bank or credit union branch in the last six months.” This research was widely-quoted and used in articles related to branch closings. The research was conducted via telephone interviews with 1,003 adults living in the continental USA. The telephone survey used data from landlines and cell phones. This method of research is the correct way to create a sample dataset that is statistically representative of the population at large. The vendor who conducted the research, Princeton Survey Research Associates International, says their margin of error is plus or minus 3.5 percentage points.

The Financial Brand also published an article based on the Bankrate research entitled, “One Third of Consumers Are Now Banking Without Branches.” The sub-headline mentioned that, “…half of all Americans still bank in person.” What this research tells me is that the centuries old branch-based retail banking method of consumer engagement is coming to an end.

Have Bankers Noticed the Behavioral Shift?

Does someone at your bank or credit union measure how many consumers use the branch and frequency of that branch use? This is vital information for the management of your organization. It impacts staffing decisions, product and service offerings, technology selection, and other aspects regarding the operation of your institution.

Some financial executives are looking at this research. There have been published articles, blog posts, and research about branches closing, downsizing, or changing their format. Chase Bank is one of those banks whose bankers have noticed.

During their earnings report, Chase Bank said they will be downsizing the size of their traditional branch. The Chase “Branch of the Future” will have fewer employees – a total of 6 staff, down from the current levels of 9 – 10. The remaining 3 staff roles will be sales-driven positions, including lending officers, business banking relationship managers and financial advisors.

The New York Times published an article on April 1, 2014, entitled, “Inside the (Smaller) Bank Branch of the Future” that focused on what Chase is doing with branch design research “…to offer more services for customers in a far less space.”

Branch-Based Metrics for Success

A survey question asking a consumer what behavior they performed at a banking branch is different than the actual behavior they performed. I am sure some of the responses to the Bankrate survey were based on wishful thinking than actual behavior. I am not saying to disregard the Princeton Survey Research Associates International survey data. There is a group of consumers who would rather not visit a branch, and their responses to a survey question may differ from their actual behavior.

What should the banks and credit unions do about the information collected by Princeton? The Princeton survey was a representative survey of people who use financial services … not a survey of people who transact at your bank or credit union. I suggest using the insight as a reference point to compare your customer’s transaction behavior. Financial institutions should use their core systems to measure the actual branch behavior of their customer and member bases.

A simple analysis of your transaction data should be able to answer the branch frequency question. A financial institution has different types of customers and members. Since most consider the checking account to be the anchor account for a retail banking relationship, we should start there. To start, we need to define the data that we are going to measure. The data should be collected as of month-end and not be based on traditional core operational reporting. All measures should be custom built to ensure that the data collected is as defined and vetted for accuracy.

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  • Total number of non-closed checking accounts – This is an aggregation of all checking accounts except for fully closed accounts. It will include accounts in the process of being closed, in escheat status, abandoned accounts, etc. Our analysis will be a subset of this data point.
  • Total number of active checking accounts – This is a subset of the non-closed accounts. In this group, we are eliminating accounts that are in the process of being closed or are in some type of suspension. For example, accounts that have been inactive for a long period of time may be transferred to the state. This measure is the total quantity of checking accounts that can be used for any transaction by your customers right now.
  • Total number of engaged checking accounts – These are accounts that are actually being used by your customers/members. To keep it simple, only one customer initiated transaction during the last month needs to qualify for this category. Do not qualify accounts using earned interest payments, test ACH transactions or similar operational transactions. The focus is to capture at least one normal deposit or payment (bill pay, debit card, etc.)
  • Percentage of engaged checking accounts – This would be the ‘Total number of engaged checking accounts’ divided by the ‘Total number of checking accounts with active status.’ This is a basic measure for the types of accounts a financial organization should strive for. In simple terms, we want account holders to use our products and services, not someone else’s. The higher the percentage the better.
  • Total number of branch-based engaged accounts – This is an aggregation of checking accounts that have at least one branch-based* deposit, withdrawal, etc. The focus is on branch-based account level transactions.
  • Percentage of engaged checking accounts transacting at the branch – This would be the ‘Total number of branch-based engaged accounts’ divided by ‘Total number of engaged checking accounts.’ Before direct deposit, ATMs and online banking, this would almost always be 100%. The goal is to manage this percentage lower as branch based transactions cost more than online/mobile transactions.
  • Percentage of active checking accounts transacting at the branch – This would be the ‘Total number of branch-based engaged accounts’ divided by the ‘Total number of active checking accounts.’ This measure compares the active accounts with at least one branch transaction to all active accounts. It measures your branch-based activity to that of the overall account base.
  • Total number of engaged accounts with zero branch transactions – This would be the number of engaged accounts that did not have a branch transaction during the previous month. This group only engages with the online channel.
  • Percentage of engaged checking accounts transacting online only – This would be the ‘Total number of engaged accounts with zero branch transactions’ divided by the ‘Total number of engaged checking accounts.’ The goal is to manage this percentage to a higher level.
  • Percentage of active status checking accounts transacting online only – This would be the ‘Total number of engaged accounts with zero branch transactions’ divided by the ‘Total number of checking accounts with active status.’ This measure compares the active accounts with only online transactions to all active accounts. It measures your online-only activity to that of the overall account base.

*note: ATM-based transactions are included in the branch transaction category. If you are monitoring your branch activity to see if a branch closure is warranted, the ATM transaction should be considered a branch transaction. Some firms may consider closing the branch and retaining (or adding) ATMs.

The transactions for the above measures should be aggregated over different periods of time. Start by isolating the last 30, 60, and 90 days as well as the last 6 months, the last 6 to 12 months, and then annual measures.

Using These Measures

The measures provided above will allow for the creation of a simple measurement framework to track engaged accounts and the number of those accounts that perform transactions at the branch and online only. Deeper analysis will allow you to develop marketing tactics to improve product engagement and the migration from the branch to self service channels.

ABC Financial Institution

Total number of non-closed checking accounts 105,000
Total number of checking accounts with active status 100,000
Total number of engaged checking accounts 50,000
Percentage of engaged checking accounts 50%
Total number of branch-based engaged accounts (at least one branch-based transaction during the last month) 25,000
Percentage of engaged checking accounts transacting at the branch 50%
Percentage of active status checking accounts transacting at the branch 25%
Total number of engaged accounts with zero branch-based transactions 25,000
Percentage of engaged checking accounts transacting online only 50%
Percentage of active status checking accounts transacting online only 25%

The data table above shows an illustrative example of the measures discussed. In the example, only 50% of the 100,000 checking accounts are engaged. This is an important metric to track as it is an indicator of whether the account is being used.

Of these 50,000 engaged checking accounts, 25,000 have at least one branch based transaction. These 25,000 represent 25% of the 100,000 active checking accounts. Of the 50,000 engaged checking accounts, 25,000 have zero branch-based transactions (online transactions only).

The example is telling us that only 50% of the checking accounts are being used. Additionally, half of the engaged checking accounts have at least one transaction in the branch and half transact online only. The engagement metrics tell us that our engagement level is low and should be higher.

If you can identify those customers/members who have profit potential, you should focus on getting them to actively use your organization. The data also indicates that we should analyze what transactions our accountholders are still doing in the branch. If they are transactions that can be handled better and more cheaply online, you should work at migrating those consumers to do more online.

Keeping track of these three measures will help you manage your operating expenses. If you can successfully increase the number of engaged checking customers you want to make sure they adopt the self service channels and not focus on more expensive branch-based transactions (unless that is a strategic goal).

After performing these measures, you should aggregate other branch transactions that your account base is transacting. For example, buying a money order, checkbook reorder, etc. We can use this framework to commingle all account types (checking + savings + money market + CD) etc. Additionally, you should do this analysis for your business account base as well. But don’t include safe box transactions in this analysis. We want to know about the bank account transaction behavior in the branch.

When analyzing your accountholders, think of different ways to segment the data. This may shed additional insight. Not all insights are actionable or provide ways to improve the customer experience or the bank’s financials … some are just simply interesting.

What Can We Discover with the Analysis of Actual Transaction Data?

Most institutions will find that the majority of their branches are still alive (albeit sometimes on life support). Its role is changing and measuring this change is important. Knowing where your account holders transact is important, as is knowing the types of transactions being performed at the branch.

Ideally, we want this analysis to show where there are opportunities to expand your self-service capabilities so that you can reduce the cost to serve consumers. Many institutions have over built branch networks with oversized/over staffed branches. This data can help you define the number of branches and type of branch network you need to engage with your base. Additionally, it can help you manage the types of products and services you should be creating to meet their needs.

This is a simple framework to describe the impact of transactions on your institution. Many financial executives just look at aggregate behavior. Segmented analysis is important to uncover additional opportunities. The key is to measure, measure, measure.

Bonus Measures

A bonus measure I like to review is the new to organization relationships started in the branch vs. started online (split out if possible desktop, vs smartphone vs tablet). This measure is important since account opening is markedly different then account transactions.

For some organizations, all new retail deposit accounts are originated in a branch. Online account opening has existed for many years. Now, the expectation is for consumers to be able to open a deposit account via a smartphone or tablet. Neo-banks like Simple and Moven and bank technology companies like Andera have made it very simple to open accounts online across many device types.

If a bank or credit union can not open retail deposit accounts online across a multitude of device types, they are at a disadvantage to those that can. If you have the best in class online tools and your new customers/members use the branch more to open accounts, you have the best of both worlds. If you do not have the best-in-class online tools, you are neglecting a sizable and growing segment.

Consumers know branches are not required to open retail deposit accounts anymore. Make sure you offer new and existing consumers a choice.

gerbino3David Gerbino is a direct and database marketer with experience in retail and commercial banking, digital marketing, database marketing, marketing analytics, product/household profitability, business performance management, data visualization, business intelligence, and KPIs. A frequent speaker and publisher of his own blog, Gerbino has an affinity for marketing analytics and profitability deeply rooted in his experiences in the direct marketing industry.

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