Banks Face Big Risks Shrinking Branch Networks as Pandemic Recedes

COVID-19 precautions have had a dramatic change on how people bank. Is that the future and should institutions trim branch networks accordingly? While this may seem a smart and attractive move, banks and credit unions must prune branch systems with care. Careless trimming may harm both retention and future sales — far outstripping current savings.

In the last several years the number of bank and credit union branches have been declining by about 2,000 annually, with about 3,000 closures and 1,000 new branch openings. Today, many branches are closed or offering only limited services due to COVID-19 and state stay-at-home orders. While some industry observers believe we will go back to “normal” as soon as states fully reopen, I don’t agree. Many industries will be forever changed, and I think banking will be one of them.

I have written about this post-pandemic retail financial world before, and discussed how demand, branch traffic, and branch financials will all be reduced over the next several years. Due to all those pressures, I predicted that branch closures will increase. Therefore, it’s important to revisit some lessons about closing branches while retaining customers. This topic is something I understand well, having closed more than 2,000 branches in my career.

During that 40-plus-year career I was fortunate to work in an environment that allowed us to develop and test some creative analytics. I want to share some of them here.

Three Key Strategies to Make Sure Closings Don’t Backfire

1. Obtain some immediate expense savings. The first item deals with timing of the closure. Financial institutions must have a longer-term plan for their branch and ATM networks. Otherwise one-time hits can completely offset any immediate expense savings. A long-term plan also guides basic items such as the repair and maintenance of some expensive infrastructure. For example, would you want to invest $500,000 in a new heating and air conditioning system for a branch you’re going to close in two years?

2. Retain the vast majority of impacted customers. This item is driven by two key metrics: How much do consumers depend on the closing branch, and does your institution have adequate capacity to handle their needs at nearby branches and remote ATMs?

In my research, dependency represents one of the key predictors of consumer attrition in closures. It’s a behavior largely driven by the state of your local branch and ATM network. The stronger your local network is, the more likely that your customers will depend less on any single site.

However, you need to be careful. I’ve found many situations where the majority of customers using the closing site also bank at multiple sites — but a small group exclusively chose only the closing site. So be warned. If a retirement center offers local bus service for retiree shopping and banking needs, and is located near your closing site, you have exclusive users you could lose immediately and as a group.

A related consideration involves the need for adequate servicing capacity in the local market after you close the branch. If you shutter a busy “transaction” branch and lack adequate capacity at nearby “receivers,” you’ll create a poor customer experience for both the displaced consumers and those already using the receiving branch or remote ATM. Left unresolved, these situations will drive incremental attrition and lower customer satisfaction. This will hurt future sales volumes.

If the receiver can’t accommodate the increased volume and has no room for additional ATM capacity, you may need to conduct a site search to leave behind a new remote ATM near the closed site to handle the volumes. In my experience, finding a new remote site can take six months, followed by another six to 12 months to deploy if it involves construction and permitting.

You must plan ahead. It doesn’t take much customer attrition to offset the expense savings.

3. Retain the vast majority of future sales from the closed branch. The third item builds on the second. Remember that there are two facets of retention. If you have successfully retained 90%-plus of the impacted customers, you also have a good shot at retaining 90%-plus of future sales from the now-closed branch.

The majority of sales still happen in branches today. If you abandon a market by closing its only branch and don’t leave behind some reasonable alternative, you may retain the existing customers but you will lose a significant amount of future sales volumes.

Over time, those reduced sales levels will fail to offset normal attrition — and your expense savings will evaporate. Retaining the sales generated by the closed branch is crucial to sustaining long-term, lasting savings.

Financial Institutions Must Think Physically and Digitally — Simultaneously

Nothing in retail banking can be planned in a vacuum. If you are planning to close part of your branch network, start promoting the use of online and mobile banking channels now, before the closures.

Less than 30% of consumers are “digital only,” according to a 2019 J.D. Power study. They are the least satisfied group. Only 10% of consumers are “branch only.” The majority of consumers fall in between, using multiple channels. The more customers you can get comfortable using these digital channels, the more likely you can retain them after closing a branch.

Pursue a branch closing strategy with honest answers to these essential questions:

Can I retain the customers? Only if those consumers were already comfortable using multiple bank sites and you’ve left behind adequate options, with ample capacity, to absorb the additional traffic. Customer dependency and distance to the receiver branch are the key drivers of attrition.

Can I retain the future sales of the closed branch? Only if you first retain the customers, then provide convenient branch access at a nearby location.

Can I sustain the expense savings? Only if you retain the customers and future sales, while timing the closing to minimize any major write-offs.

Successfully closing a branch means you’ve captured the expense savings and protected them long-term by keeping the customer base. Make a plan and plan ahead.

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