"Branch transformation is about enhancing the effectiveness of the delivery chain."
Those 11 simple words were spoken at the onset of one of the most interesting lunch discussions I've ever had, and began an appetizer, sandwich and a couple of sodas' worth of fascinating talk about what role the branch should and can play in a credit union's operations.
They were spoken by Jim Hughes, director of Solutions Development for Diebold North America. Hughes was joined at our lunch by Gerald D. Verdi of Verdi & Co., a Buffalo-based delivery network and distribution planning consultancy that was acquired by Diebold six years ago.
If you think of Diebold's only relationship to the branch being the ATM in the wall, as I admit I did, think again. It has considerable resources dedicated to the evolving financial institution branch and answering the question, "How do I apply this technology and what is the business result." Of course, it remains a dominant player in ATM manufacturing, but as Hughes explained, "Conditions changed when our customers started to become more interested in strategic issues, such as retaining their members."
While some megabanks buy ATMs in the same volume credit unions buy shirts for their employees, Hughes said the country's not-for-profit co-ops typically have a leg up on those same money-center banks. "Credit unions are more at the forefront of applications of new technologies," he observed. "It seems like credit unions in many markets are the pacesetters and banks try to keep up."
"The credit union focuses more on the member," added Verdi. "The community bank focuses more on taking customers from the larger bank."
Where credit unions differ in their approach, said Verdi, is in being more self-service driven, including in the way they position their ATMs. He noted that credit unions will frequently ask Diebold for direction on where to place branches, when that question should really be part of a larger issue, which is what members want. "When you study member behavior of delivery channels you find they often vastly underestimate how much members want more ATMs," he said.
Still, Hughes reminded, "You have to do the analysis first. The equipment is for the end of the discussion."
Hughes said one aspect of working with credit unions that is enjoyable is the willingness to experiment and pilot different delivery approaches across the entire enterprise.
Where both credit unions and banks often fall short, agreed both gentlemen, is in two areas. The first lies in organic growth opportunities, with Hughes noting credit unions are often attuned to new members at the time of account opening, but they still underestimate the amount of business that could be had during that captive moment. The second shortcoming lies in not recognizing that the composition of the delivery channels may not be what members and prospects will say they are looking for, but it is every bit as valued as product characteristics. "If you look at (the business) members do with all financial providers that tells you there are numerous other relationships to be captured," pointed out Hughes. "It costs so much to serve members, but the growth opportunities are huge."
Hughes said Diebold's research and analysis has consistently found that members whose relationships place them in the low (to no) quadrant of profitability frequently live in higher-income neighborhoods and zip codes, and that just because your credit union may find a plum branch location at the corner of Rodeo Drive and the Yellow Brick Road, profitability is not a lock. In fact, added Hughes, another interesting finding about members who are higher income but low usage when it comes to their credit union is that most have a very high perception of the value of the credit union.
Where Diebold seeks to mine data isn't just in the demographic or census data; instead, it often finds gold right there inside the credit union's walls. "A lot of times credit unions don't realize all the data they have," he said. "They have the data to tell a strategic story that can be quantified with financials."
So what about the branch building craze, especially among banks?
"The number of branches they envision is not the number they need," responded Hughes. "They still have the traditional bank mentality that they need to be on every corner. The issue of saturation is quite real. The average balance after the first year of business (at a branch) continues to go down. It also ignores the issue of interest rates. The cost of acquiring deposits has gone up."
But what about the boom in the "branch of the future" that has somehow evolved into a combination coffee shop/Internet cafe/public meeting house, where financial transactions are just a sidelight?
"There is a limit to how much people want to hang out at a branch, but we will see fewer waiting areas and more educational areas," said Verdi. "No one is ever going to say 'I'll meet you at the branch.' It has a different dynamic than a restaurant."
But then the real issue of eating for most credit unions when it comes to branches is eating costs, which is why both Hughes and Verdi say there is so much to digest first.
Frank J. Diekmann is Publisher of The Credit Union Journal.
