“It’s not whether you win or lose, it’s how you place the blame.”
In the last five years, the banking industry made a big bet on branching, opening nearly 4,000 new offices ranging from the traditional brick and mortar to in-store. This was no small bet. The initial investment in a new office can range from $500,000 to several million, which means we have bet between $2 billion and $5 billion in capital dollar chips alone on the de novo branch strategy. The ongoing costs of running these new branches can double or triple the initial investment amount.
The goal? Deposits, bro/sis. Branch banking was a play largely based on the rediscovery of three great truths:
Looking back at the branch bet, it’s pretty clear that it was a really good idea at just the right time. Let’s look at the results.
According to FDIC stats, at the end of 2004, there were 89,000 brick and mortar branches in the United States, roughly a 12 percent increase since 1999. At the same time, total deposits at U.S. banks grew a whopping 45 percent, from $4.5 trillion to $6.5 trillion. Deposit account fee income grew 48 percent, from $22 billion to $32 billion. Even taking into consideration that the stock market decline spurred a fair amount of money movement, the fact that deposits and deposit fee income grew at four times the rate of new branch offices is very impressive.
While a pat on the back is certainly warranted, bankers must also look forward to the next two to three years and realize that another 45 percent-like growth spurt is iffy. What is on the branch to-do list and scorecard for the next two to three years? The high-level answer is expanded, deeper relationships. We see four keys to this effort that Gonzo readers should mull in 2005 planning:
A recent study by Financial Institutions Consulting showed that getting a business customer’s personal accounts, or vice versa, doubled the profitability of the relationship. Interestingly, these customers now use, on average, 2.3 financial institutions to meet their needs. There is a tremendous opportunity to mine these customers with the right product/pricing strategy and build lasting relationships
Suggested branch scorecard measurement: The percentage of business customers that also have personal relationships.
Although deposit fee income grew substantially, there is a funny trend behind it – a substantial drop-off in monthly service charges (remember all the free checking ads?) offset by huge jump in overdraft privilege fees and debit card income. With no totally new source of fee income through branches obvious on the horizon, the focus will need to be on expanding fee income from existing sources.
Now, we in the land of Gonz may be in the minority here, but does anybody else think the OD privilege payoff is at or near peak? It clearly has made banks tons of money, but we question any long-term fee income strategy that relies on the premise that consumers will keep behaving stupidly and that some U.S. senator who is in a tough re-election battle won’t gladly jump on this as a populist issue. (Not stupid, you say? OK. How many of you use OD privilege all the time? How many of you are glad you do?).
Debit is another story. All that is holding back debit income growth is usage, and there is a win/win environment that can cause it – convenience for the customer, fees for the bank.
Suggested branch scorecard measurement: Take the percentage of checking accounts with active debit cards and add the number of debit transactions per card per month. This can also go on the Marketing scorecard.
Although growth was impressive and helped by good sales efforts, we must also admit that there just might have been the teensiest bit of pricing that helped it along. However, the “attract with price, retain with cross-sell” strategy isn’t a bad one if it can be executed right.
While sales skills are important, the truth is that relationships are retained and expanded with industry knowledge, product expertise, and service. The need for better banking knowledge in branches has never been more apparent. Customers who are using PCs and cards more to access accounts need help and guidance. Business customers are sifting through a maze of payment system options. At the same time, they are trying to save money on benefits, insurance and payroll costs – all part of a bank’s product line, many of which can be cross-sold. Borrowers struggle to decipher the best terms on a credit card or HELOC (honestly, I read my credit card agreement and gave up trying to understand it).
Nothing seals a relationship like knowledge. Banks must get more proactive in building knowledge experts in branches. Programs that certify these knowledge experts in key product lines will become increasingly important.
Suggested branch scorecard measurements:
And for the HR/training groups:
It’s not a big jump to conclude that if the deposits grow at four times offices, we ought to get some productivity boost. This is no trivial issue. We have tracked branch productivity at Cornerstone for several years, and the dollar value of performing at the 75th percentile of branch efficiency as opposed to the median is substantial, enough to fund a large part of the training we discussed.
Suggested branch scorecard measurements, most tried and true:
As any branch person will validate, efficiency in these areas will help sales.
The theme of these suggested scorecard items is pretty clear – take the great deposit growth success and deepen, migrate, convert, and deliver more efficiently.
And a final thought, for those not exposed to the wisdom of newer rock stars via loud music played by teenage girls, I leave you with a pearl of wisdom on scorecards and benchmarking from Mr. Violent J of the Insane Clown Posse, who said, “It’s great to be named the best at something…even if it’s sucking.”
‘nuff said. We learn from our youth.