Wanting to place branches in convenient locations is the easy part. It's identifying those convenient locations that's the challenge, noted two experts who offered advice on the process.
Gary Raddon, chairman of Oak Brook Terrace, Ill.-based consultancy Raddon Financial Group, told attendees at a recent CUES conference here credit unions should weigh a variety of factors prior to investing millions of dollars into opening a new branch. Bill Handel, RFG's vice president of research, said such expansion is one of the most important considerations a CU can make, because the major benefit of branch convenience is the ability to attract households.
According to Raddon, there is a "Field of Dreams" misperception regarding branches: "if you build it, they will come." Instead, he cited the need for a strategic focus.
"Folks, these are your branches, your credit unions," he said to the audience of CU executives. "You have to consider potential growth with existing members, as well as potential members. I have to know what is out there before moving ahead with new branches."
The two speakers said CUs should weigh two numbers before pulling the trigger on expansion: the branch convenience score and the branch performance index. Eighty percent of the branch convenience score is determined by the distance from a household to the closest branch of its financial institution. The other 20% is measured by the number of branches within five miles, they suggested.
The branch performance index, or BPI, is calculated from six performance factors: member density, services per household, household balance, checking penetration, weighted core deposits and total loan penetration. The branch percentile for each ratio is multiplied by a weighting factor to yield the overall index, Handel explained.
The branch convenience score is important, Handel said, because branch distance matters.
"Our data shows households that have access to multiple branches are more likely to use checking and carry higher core deposit balances," he said. "Financial institution customers with multiple branch access provide over 50% of deposit dollar volume, but only 41% of all loan balances."
The reason for the latter figure, Raddon said, is the financial services industry has failed to develop a credit relationship with members and customers. "And, it indicates loans do not depend as much as checking on convenience."
The BPI is used to examine member/customer convenience at the branch level, and to determine how well an individual branch is performing, said Handel. Member density tells a CU if another branch is needed. Statistics on product penetration and balances reveal if new marketing initiatives should be launched, he said.
The impact of convenience especially is felt at CUs with a community charter, said Raddon. A community credit union with branch convenience tends to enjoy better growth in number of households, cross-sold households, number of services per household and total deposits. Expense per household declines because there are more households per square mile.
"Cost of funds is lower, also," Raddon said. "Without convenience, community credit unions must turn to higher cost-of-funds deposits, such as CDs, IRAs and MMAs to fund their loan growth."
Raddon recommended CUs develop a branch-driven market plan that will allow them to increase their number of new members, grow fee income and core deposits, and develop new small business relationships.
