There's no roadmap for how community banks can make their branch networks profitable, but efforts by Webster Financial in Waterbury, Conn., could serve as a guide.
Webster has been out in front of the banking industry's slow move away from branches and toward digital service. The $21.2 billion-asset company began transforming its network in 2010, and, while the changes aren't over, management has begun to see results.
Webster also has several years of experience addressing the trickiest issues associated with an overhaul, ranging from deciding when and where to cut branches to retraining employees while optimizing customer service.
Like other community banks, Webster has not only cut branches, but worked to reduce the size of those that remain. It's trimmed its floor space by about 50,000 square feet, with about 40% of the cuts coming this year, and plans to eliminate another 15% to 20% in the next five years.
Webster reinvested the savings to make its branches more efficient and automated, hiring facilities manager Jones Lange LaSalle to oversee the network. Webster also uses internal data to estimate the value of each product it offers, and has retrained its staff to focus on more profitable business lines. These efforts have helped lower Webster's efficiency ratio to 58.7% at March 31, compared to 70.65% four years earlier.
The company has also expanded its commercial operations by opening loan offices in Boston, New York, Philadelphia and Washington in recent years.
Webster Chief Executive Jim Smith and Chief Financial Officer Glenn MacInnes recently discussed their efforts in an interview. Here is an edited excerpt from that discussion.
What spurred Webster to overhaul its branch network?
JIM SMITH: The community bank is not earning its cost of capital and we are transforming it so that it will. We realized in 2010 that we weren't going to be able to offer totally free checking anymore, and we realized we were going to have to deal with our least-efficient branches. So we went ahead and changed our checking account offerings and reduced our footprint.
From 2010 through 2012 we took out 8% of our offices. Then we invested in automated image-capture ATMs for the entire franchise. We were able to upgrade our online banking and bill-pay services, and introduce online banking and mobile deposit capture. We're moving rapidly toward completing the transformation of the community bank.
Ultimately, we'll probably end up with the same number of offices that we have today, only they'll be a lot be smaller. Some of them will be moved to better locations, and they'll all be electronically outfitted.
What are the dangers of changing your network, and how do you address those issues?
SMITH: The biggest danger is you don't pay attention to your customers or how they bank. We've dealt with that by using location-specific information when we're making decisions to close, consolidate or optimize branches.
We know how our customers operate. If we're looking at a couple of branches in a single market, we know how many transactions a customer makes at a single banking center and at nearby banking centers, where they do their ATM business, where they do their online banking and mobile banking we have that all available to us. We know what the likely effect of consolidating a branch into another is going to be and, as a result, we're able to make better choices.
We're learning that our customer base is remarkably diverse. Some people are branch-wed, others are banking-center wed. Some people do 80% of their business through ATMs and some do 90% on mobile. We have a broad swath of customers with varying behaviors and we have to make sure that we harmonize the customer experience across all of the channels.
What's the next step?
SMITH: First we looked at our product set, then we looked at the number and location of our branches, then we said we've got to look at our automation. One-third of our deposits are made by electronic means, so we need fewer people to be facing customers in the branches for the purpose of transactions. When you have more automated transactions, you need fewer tellers. So you convert them to universal bankers so they can be more of a consultative person than a transaction person. We've been developing all of our banking center personnel to meet that standard.
GLENN MACINNES: We've also trained our branch managers to be certified business bankers. Then we redesigned our incentive program. We've looked at the net present value we earn on a typical account, and we've totally aligned the incentive program with that. Now we know what we earn per product. We also know what we earn per product at the banking centers and distribution network. When you align the incentive program along those lines, you get the right result.
SMITH: People are getting paid when they create value. We have 22% fewer people in our banking centers today than we did three years ago. At the same time, we have 40% more customer-facing sales people in the form of investment executives, mortgage bankers and business bankers.
What type of retraining do you provide for branch employees? How much have you invested in training?
SMITH: It's a significant amount. Every one of our branch managers more than 160 people has been certified as a business banker through an in-house, Webster university-development program. That is now being followed up by an intensive sales-development program for our banking-center personnel.
All of our bankers in the banking centers have been developed to be universal bankers. They're not all called universal bankers, but they've all had training to be universal bankers. That's been ongoing for about 12 months ago.
What customer behavior data would you like to have that you currently lack?
SMITH: There's always more to learn. The big thing I'd say is that, while we're transforming ourselves, the real question is are we moving fast enough to keep up with the preferences of our customers because they're moving even faster. The way that banking is conducted five years from now will be breathtakingly different from how it was five years before. The world is moving very fast to mobile and I'm happy to say I think we're up on that curve.
My father used to say, many years ago, that if we take care of our customers, everything else will take care of itself. The idea is you have to focus, focus, focus on the customers all the time. And if you serve them well, they'll be rewarded for it.
As we transform we have to make sure we're being responsive to our customers. If we're putting our banking centers in the right locations, and we're using the right information to make sure we're meeting our client's needs that's the ticket to success.