Branch Performance: A Critical Issue
For a number of years now, industry observers have been virtually unanimous in their view that the traditional bank branch channel is facing strategic challenges. Decreasing traffic and increasing costs have been driving branch productivity steadily downward.
As technological advances and changing customer preferences reshape their channel mix, banks must reassess both their branching strategies and their branch operating models. A good place to begin is by comparing branch performance to industry benchmarks.
The annual Crowe/Independent Community Bankers of America (ICBA) Branch Benchmarking Survey offers valuable information in this area. The 2016 survey included detailed performance information covering 305 branches operated by 19 banking organizations and representing a cross section of the industry by size and demographics. The survey was conducted in the fall of 2016 and gathered 12-month branch performance numbers for each branch.
The survey results provide metrics and benchmarks for branch productivity and account portfolios, as well as information on staffing levels and the uses of new technology within the branches. In addition to highlighting the continuing challenges banks face in branch operations, these results also can provide insight into some potentially viable solutions.
Branch Productivity – 10-Year Trends
The 2016 Crowe/ICBA survey confirmed that branch staffing levels have decreased significantly in recent years. It is important to recognize, however, that decreases in branch staffing levels have not kept pace with an even more rapid decline in the number of branch transactions.
Exhibit 1 compares the 2016 survey responses with those from the same questions in the 2006 survey. During that 10-year period, the average number of total full-time equivalent (FTE) staff members per branch declined by 45.5 percent, although the number of FTE staff members in teller positions declined by only 16.7 percent.
One clear indicator of the challenge facing branches is the 47 percent decrease in teller productivity, as measured by the total number of transactions per teller FTE. In 2006, the average full-time teller handled 26,815 monetary transactions over the course of a year. By 2016 that number had dropped to 14,223. Under a standard of 261 workdays per year, a full-time teller in 2006 could expect to handle 102.7 transactions in an average day. By 2016, that average dropped to just 54.5 transactions per day.
Moreover, branch sales productivity numbers have dropped even more dramatically during the past 10 years. The number of new personal savings and money market deposit accounts (MMDAs) per total FTE is down significantly – a drop of 61.8 percent – due in part to customers’ increasing ability to open deposit accounts through other channels. The numbers for new CDs and new home equity loans per FTE are down even more dramatically – more than 90 percent for CDs – reflecting changes in the interest rate environment and the lessened interest in home equity products since the last recession.
Regardless of the causes, these comparisons suggest there will be continued challenges to the traditional branch model for some years to come.
Demographic Market Differences
The Crowe/ICBA survey data can be even more useful when demographic data is appended to individual branch responses. Adding demographic data reveals how branch performance can vary significantly according to geographic location and the population and demographics of the surrounding community. This analysis can be particularly important for community banks, in which performance and overall bank strategy are directly affected by local economic conditions.
For example, the survey responses suggest that branches in rural areas appear busier, with higher sales numbers and significantly more transactions per teller, as shown in Exhibit 2. Rural branches generated much higher numbers of new personal checking, savings, and MMDA accounts per branch, but branches in urban areas generated more new business checking, savings, and MMDA accounts per branch. These differences by population density may be due to legacy customer behaviors and the extent of competition.
Not surprisingly, both personnel and facility occupancy costs per FTE were significantly higher in urban areas. Such variations must be factored in when making strategic decisions and adjustments to improve branch performance. Decisions regarding staff capabilities, local decision-making authority, operating hours, self-service technologies, and other management issues should reflect the various branches’ local market characteristics.
Business Focus – a Critical Differentiator
In addition to demographic differences, another leading differentiator of branch performance is the relative emphasis placed on business accounts, such as business checking, savings, and CD accounts.
For example, it probably comes as no surprise to learn that average checking account and CD balances have grown over the past 10 years, while average savings and money market account balances have declined. Such trends are likely a reflection of today’s lower interest rate environment. What is more instructive, however, is to compare the relative size of the changes between personal and business accounts, as shown in Exhibit 3.
Average business checking account and CD balances grew at substantially faster rates than balances for personal accounts, while average balances for business savings and money market accounts declined at a much more moderate rate than the sharp drop in average personal account balances.
Bank managers can expect these differences to be reflected in branch performance, as higher average balances improve the relative productivity levels per FTE. As a result, many industry leaders are developing targeted approaches for growing the business segments of their account bases. Typically, this effort requires enhancing branch staff capabilities and knowledge, implementing business-friendly policies and hours, developing a proactive approach toward building business relationships, and offering a suite of products such as merchant services and treasury management services, which are designed specifically to meet business customers’ specialized needs.
Universal Bankers – a Growing Trend
Another widely noted industry trend in recent years has been the continuing growth in the use of so-called “universal bankers,” who have multifaceted job responsibilities ranging from cash handling and basic transactions to product and service sales and referrals to other lines of business. In addition to helping reduce employee headcount in the branch, the universal banker strategy also is intended to provide better support for all three essential functions performed in the branch:
- Sales: Selling new products and services to customers
- Service: Handling routine transactions, responding to inquiries, and making changes to accounts
- Retention: Handling relationships and providing convenience to maintain customer loyalty
As Exhibit 4 shows, the branches in this year’s survey that employed a universal banker strategy tended to be slightly smaller in terms of average overall branch value and employee population, but they produced a higher average value per FTE. (Value in this context was measured using a multifaceted metric that combines quantitative measures of branch performance in the areas of sales, service, and customer retention.)
According to the 2016 survey responses, the sales and service values generated by branches using the universal banker model generally are comparable to those generated by branches using a more conventional structure. Branches using the universal banker model on average have smaller deposit balances as indicated by the lower customer retention value. Industry experience indicates the universal banker model is continuing to show increasing popularity.
Making Branches More Effective
Regardless of whether they formally adopt a universal teller model, many banks today are opening up floor plans and eliminating traditional teller windows and lines. The goal is to remove physical barriers and encourage better interaction between customers and staff.
At the same time, some banks are moving in what might be seen as a somewhat different direction, using technology to reshape the customer interface. One example is the introduction of interactive ATMs, which handle routine transactions like conventional ATMs, but that also offer optional live on-screen support from staff members working remotely.
Regardless of the specific tools and techniques they employ, banks today must continue to take an increasingly proactive approach to branch productivity. This effort typically encompasses a variety of tactics, including:
- Aligning staff levels to business volume
- Managing branch consolidations and expansions strategically
- Restructuring product lines to align with local demographics and the branch’s business focus
- Pursuing a targeted approach to business customers
- Shifting focus from handling transactions to building relationships and solving problems
- Adopting technology to reduce cash handling and improve employee mobility within the branch
- Enhancing staff capabilities through training and focused recruiting
- Establishing clear expectations with monthly goals and scorecards
- Offering “line of sight” incentives that are directly and clearly related to employee duties
As the 2016 Crowe/ICBA survey results clearly indicate, branch productivity is almost certain to remain a critical banking industry concern for some years to come. The strong declines recorded during the past 10 years show no signs of abating soon, which means banks will need to continue adapting both their branching strategies and their operational tactics.
By measuring their performance against industry data and benchmarking their improvement efforts against industry best practices, boards, executives, and bank management teams can actively work to adapt their organizations to today’s fast-changing customer expectations.