Throughout my 40-plus years driving distribution strategies at banks and credit unions, branch closures have always been part of the overall plan. After closing over 2,000 branches, I’ve had the opportunity to experiment with different strategies and approaches, measured their impacts and gained insights into what works — and what doesn’t.
Total branch closures have been inching up and there is speculation that the Covid-19 period will boost those numbers further. Whether that happens or not, branches aren’t going away anytime soon. And trimming branches in one market to invest in another is a great strategy.
When you think about changing your branch network in any way — through expansion, contraction or rebalancing —remember that any change in the current status has risks. Change requires careful study and analyses. Today’s big data analytics capabilities provide the opportunity to dig into your branch and ATM network, the markets it serves, and the customers who use it. These analytical insights can be used to mitigate those risks.
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The Elusive Math Behind Branch Cost-Cutting Decisions
Customer attrition occurs all the time. Customers move, marry or divorce, become dissatisfied with service, or receive better offers, all leading to a need to change their financial services provider. Acquiring new customers at a high enough level to cover and exceed those losses leads to growth. Branch closures may lead to above-normal customer attrition levels, and it doesn’t take much incremental attrition to offset any expense savings.
Let’s look at the math. A $40 million deposit base yields about $1.6 million in annual revenue. (This assumes a 2020 credit union average of 4% margin that includes fee income, per NCUA, for illustration’s sake.) Branches that size have average annual operating expenses of about $800,000 fully loaded, in my experience, but that figure can be slightly higher or lower depending upon the market.
Executed well, you can expect to save about half that expense level following a closure. Basically, you save all the occupancy expense-related line items. On the other hand, you retain all the employee expense line items. If customers are retained, your people need to be retained and relocated to continue serving those customers.
The potential annual savings in this example is $400,000 but, again, it doesn’t take much incremental attrition to offset those savings. As the table shows, incremental attrition eats into that planned expense savings.
A 25% attrition level completely wipes out any savings.
How branch closures to save expenses may work out in practice
Source: TerraStrat Group LLC
3 Factors Influencing Attrition in Branch Networks
What can be done to mitigate those attrition levels? Start by understanding why customers leave. I’ve found three important factors:
- Dependence on a particular branch.
- Distance to the next comparable service point.
- Customer usage of digital channels.
1. Dependence refers to what percentage of a customer’s transactions are done at a given site. Customers who use multiple branches and ATMs, such as near where they work and live, are less likely to leave if you remove one of the many places they transact.
For Some, One Branch Makes or Breaks It:
The more a customer depends on the particular site that you close, the more likely they will leave after closure. People and businesses that exclusively use one branch, and may in fact have opened their accounts there, have the highest likelihood of leaving.
One approach you can take is to divide customers into behavioral groups based upon their transactional behavior at every branch and ATM site. For every branch:
- “Casual users” conduct less than half their physical transactions at that branch.
- “Dependent users” conduct 50%-99% at that location.
- “Exclusive users” conduct 100% of their physical transactions there.
Casual users generally represent the largest group. These people use multiple sites, and typically other channels as well. Closing one of their usual branches doesn’t disturb them and rarely causes attrition.
Dependent users are more reliant on the site, and closing it has a greater impact on their routine, so they are more likely to close their accounts. But it’s not just the closure that affects their decision-making. Many other factors influence whether they stay or leave.
Finally, the exclusive users only use that one site, so the disruption to their daily lives is high. You can expect their attrition rates to be double or even triple the attrition rate of dependent users.
2. The distance to the designated “receiver” branch has an impact too. If you have another branch, or in some cases a remote ATM, nearby, customers will generally adjust and switch to the receiver branch. Customers have a fairly high tolerance for being inconvenienced and having to switch branches.
If the receiving branch is reasonably close, such as within three miles or a ten-minute drive, there is limited attrition. But once you get beyond a reasonable distance, attrition rises rapidly. You are unlikely to lose much more than 50% of customers in any case, even at excessive distances of more than 20 miles if you offer them alternative digital options.
3. Customer behavior has a significant impact on attrition. At the institutions where I worked, we made concerted efforts to migrate routine transactions to whatever new channel rolled out to our customer base. First, it was the rollout of ATMs with basic functionality. (Yes, I’m that old.) That was followed by upgraded ATMs that could take deposits, followed years later by multi-deposit, no envelope machines, and ultimately by interactive teller machines (ITMs) where you can connect to a live teller if needed.
When online capabilities arrived, we pushed that too, especially for account balances, transfers and then billpay transactions. All these options gave customers the chance to bank on their terms. Mobile banking provided another breakthrough, initially matching online capabilities, but now offering so much more, including mobile deposits.
What to Watch:
The idea was to create a base that made more use of multi-channel opportunities. We knew the more we could reduce the dependence on any one branch, the greater the opportunity to trim the network in the future without driving customers away. This takes time because behavior changes over time, not overnight.
4 Ways You Can Reduce Risk of Attrition
Attrition can be combated. Here are some starting points:
If you haven’t invested enough in online and digital channels, now is the time to do so, especially mobile. Your ability to spread your customer’s transactions across multiple channels and locations provides a future where you have more options for changing your physical branch and ATM network. In my experience, customers adopt new channels but don’t abandon old ones. People and businesses accumulate channels because they want more options to interact with the bank.
If you haven’t yet deployed remote ATMs as satellites around your current branches, start planning them now. A well-sited deposit-taking ATM can help offload transaction volume from nearby branches and give your customers another choice.
“The worst thing you can do is close a branch and drive customers to a busy branch where they will wait in long lines.”
These remote, or non-branch ATMs, should be viewed as mini branches, as they can support 90%+ of the transactions that occur at a branch, but at a much lower cost. Generally, a remote ATM costs about 5%-10% of the capital cost of building a branch and about 5% of the operating expense level of a branch. A good blend of remote ATMs and branches creates a more convenient network at a lower average site cost.
If you have made the decision to close a branch, first study the likely dispersion of transactions that are conducted at that site. You need to determine which nearby sites would likely “receive” the disrupted transaction and whether you have enough capacity at each receiver.
Once you know those volumes, examine the receivers to determine if you have the capacity to absorb those volumes. In many cases, you may determine you need to add a teller, or platform officer, or an ATM. Adding required elements before closing the targeted branch can greatly reduce attrition and improve the customer experience.
The worst thing you can do is close a branch and drive customers to a busy branch where they will wait in long lines.
In some cases where you can’t add ATM capacity or the receiver is more than three miles away, look at adding a remote ATM site near the closing branch.
Communicate with customers and staff members early and often on any closure. Let them know the rationale (e.g., changing customer behaviors, new channels, etc.). Keep sharing updates about timing so there are no surprises. Consider staging an event where customers can meet the new branch manager. It’s important to avoid surprises.
Taking all these steps can reduce attrition. At my last bank, we had detailed processes for all these steps and were able to close 100s of branches with minimal attrition.
Preparing Your Network for Eventual Branch Closures
Closing branches disrupts customer shopping patterns and runs the risk of driving customers away.
Some key points to remember:
- The more branch and ATM sites your customers use, the lower their attrition rate.
- The greater the distance to the “receiving” branch, the greater the attrition risk.
- The greater your customer’s multi-channel usage, the lower the risk.
- That risk can be mitigated with the right analytics and routines.
Some key actions to take:
- Drive multi-channel usage. It not only makes your customers “stickier,” it reduces attrition risk.
- Consider leave-behind ATMs when the receiver branch is too far away or too busy.
- Make sure receiver branches have the capacity to absorb incremental volumes.
- Communicate change early and often. In an information void, people will make things up.