Every week, it seems like another bank announces plans to close branches. Some analysts, not including me, even predict that half of all branches open today will close in the next few decades.
For years, banks have been under unrelenting pressure to cut expenses and branch closures are a natural target. Customers have migrated many of their transactions to digital channels.
But a branch closure itself can be costly for other reasons. Industry research indicates that about two-thirds of banks that close branches lose deposit share in the impacted markets over time. Why do some banks lose market share while others don't? There are three common mistakes to avoid when reducing your physical footprint.
The first mistake is to focus too much on a branch's current performance in determining closure locations. Other questions about customer behavior and the bank's entire network need to be considered. Does the targeted branch overlap with other bank branches and remote ATM locations? Perhaps the problem is the current branch is not positioned appropriately to respond to the needs of the local market, and relocation rather than a closure is warranted. Do customers of the closing branch already use other locations for their banking needs today or are they more exclusively tied to just the one location?
That last question is critical. Banks must understand how their customers are using their various channels and other physical locations. You will retain customers only if those customers were already comfortable using multiple bank sites and you have left behind adequate options with ample capacity to absorb the additional traffic. If too many customers are dependent upon that one location for their transactions and servicing needs, attrition will be higher than normal when the branch is closed. In my experience, dependent customers attrite at three to four times the normal rate. It doesn't take much incremental customer attrition to offset the expense savings.
The second mistake banks make is failing to consider capacity at the remaining physical locations, called receiving branches. If you close a busy branch and don't have adequate capacity at nearby receivers, you will create a poor customer experience for both the displaced customers as well as those customers who are already using the receiving branch.
Banks need to ensure that staffing levels increase at receiver locations. Failure to address staffing levels will increase customer wait times, and ultimately, drive incremental attrition, lower customer satisfaction and hurt future sales volumes. You may think you are maximizing your expense savings by cutting staff; however, in reality, you are setting up a situation where those savings will be lost in just a few years.
The third mistake that banks make is not taking into account special situations. You can't identify all relevant facts from your desktop. For example, take safe deposit boxes, which are typically not profitable for banks, but are important to certain segments of the bank's customer base. Boxes come in all shapes and sizes, and banks need to ensure they have a plan for them. Do they have available boxes at nearby locations for their best customers? Are they giving customers enough notice to empty or move their boxes? What does a bank do with boxes when customers don't respond within the closing notice time frame?
Another special situation that pops up from time to time deals with retirement homes. Early on in my career, I found that branches that served a local retirement or assisted living residential home experienced an unexpected spike in attrition upon closing – even if there were additional branches within a half-mile of the closed facility. That is because those customers were generally driven to the branch by the retirement facility's bus service. The closed branch was on the route but the retained branch was not. Since these elderly customers often held high levels of deposits at the branch, losing them to a competitor was costly.
The bottom line is that successfully closing a branch means two things: You've captured the expense savings and kept those savings sustainable by retaining the customer base.
Jon Voorhees is a consultant and adviser with Peak Performance Consulting Group Inc.