Super Community Banking: How to Avoid Swinging Wild When Axing Branches

As bankers focus more and more on the branch and what the future holds for it, their attention is moving away from the value of customers.

Debate has long raged on whether there is a future for the branch. Recently branches have come back into vogue, as they should. But let's not forget that though Fidelity and Schwab are branching, they are covering the whole nation with just 100 branches. Many banks cover a single state with more.

Rationalizing the branch network is at the top of every bank manager's agenda. However, most of us are going about it by adding distribution layers without replacing and rationalizing the existing network. In the process, we are adding costs and reducing customer profitability.

As we assess the profitability of the branch and of customers, we recognize that old measures are not as relevant as they once were.

Remember when we looked only at branch deposits and assets as critical measurements? Some of us felt sophisticated as we moved to marginal analysis and "full costing" per branch.

But the true yardstick is the incremental value that each branch is adding to the franchise, as measured through the net present value of the branch's customer base. That truly reflects the opportunity benefit and the cost associated with that distribution point.

Customer net present value complicates matters because it's not easy to measure. It is not enough to understand the revenues associated with a customer or a household. It is not even enough to know the costs incurred in servicing that household. You need to score for whether it uses low-cost alternative delivery channels, and whether you are likely to lose its business if you close the branch.

Tracking channel preference of active branch users is crucial to understanding the true profitability and net present value of the customers and of the branch itself.

We see today many premature and erroneous branch closings. Despite the renewed focus on branches, many banks are closing them because it's the "in" thing to do and they are costly to operate.

However, if you are closing the wrong ones, you are giving away the net present value of the customer base and the branch.

It is one thing to close a branch, retain the high-value of customers, and achieve savings. That's the right way to do it. Many banks, unfortunately, close branches because of asset size or deposit size, and do not understand the relative profitability of the customers in those branches and the likelihood of retention after closing.

The bottom line: Traditional branch networks are obsolete; rationalizing them is crucial. But that rationalization must be well reasoned.

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