SEATTLE — The credit union grip squeezing more efficiencies out of branches could get even tighter as a new threat to income looms.
Paul Seibert, VP, financial services, for EHS Design, here, and author of CUES Complete Guide to Credit Union Facilities, said that a "re-examination" is more important than ever, as looming overdraft fee legislation threatens to reduce branch income by as much as 25% in some markets. Already, many credit unions have had to make hard choices with facilities.
"One of the ways to reduce branch network cost is to close branches," he said. "If a branch is underperforming, has no hope of profitability and is not run for philanthropy alone, it should be considered for closure."
But credit unions must be very careful about how the closure of a branch will impact the branch network, Seibert said. "Closing a branch may have very little impact on members and the bottom line or it may be devastating in terms of maintaining overall market penetration," he said. "Our studies show that closing branches without maintaining market efficiency can cause a credit union to not only lose members in the immediate market, it can cause a decline in marketshare in the best target markets, as well. Credit unions should conduct a full branch network analysis prior to closing any branches."
Seibert said that credit unions with remote branches should consider the "long-term viability of branches that are not within a reasonable radius of their core network - unless they are of sufficient size to support profitable long distance operations, service and marketing."
Seibert offered this example. "Last year we completed a strategic branching plan for a credit union with 17 branches," Seibert said. "Three of these branches where underperforming and were located in remote markets and in another state. The size of the markets, level of competition and limited growth opportunity suggested limited opportunities. The credit union did not want to let go of these branches as they had been acquired through friendly mergers and it would look bad to the communities. Due to the distance and limited potential it was harder and more expensive to serve the communities than through branches within their core markets. We suggested selling the branches to small credit unions within the markets to enhance member service and community involvement and refocus resources on their core market where they would enjoy better opportunities and could delivery a very high level of service."
What About Smaller Branches?
But what about downsizing the footprint of the branch itself to reduce development and operating costs? "Some credit unions operate oversized branches," Seibert acknowledges. "Today branches must be sized to match market opportunity rather than based on one standard that is placed in every market."
Indeed, in small markets it might not be a traditional "branch" at all, Seibert said. It could be a "financial center" with a smart ATM and one or two member service staff — "very efficient and safe while providing a high level of personal touch at a very low operating cost," he said. "During the recent boom years credit unions pioneered in new markets based on the assumption that the old economy would drive them to viability. Or, some credit unions have located expensive new branches in poor market locations that may not break even for seven to 10 years, if ever. While it is hard to swallow mistakes, credit unions should look at how a branch will truly perform in the new economy or at the existing location."
