Branch closures have been a staple of the banking landscape for years and have only intensified during the COVID-19 pandemic. Many institutions are evaluating which branches should be retained and which should be closed. Headlines over the past few months highlight examples of banks wrestling with the issue of branch network optimization:
- “People Aren’t Visiting Branches. Banks Are Wondering How Many They Actually Need.”, Wall Street Journal, June 7, 2020
- “U.S. banks told not to use COVID-19 as cover for branch closures”, Financial Times, July 12, 2020
- “U.S. bank branch closures could accelerate amid pandemic”, Banking Dive, May 29, 2020
Assessing the value of any individual bank branch poses a unique challenge. By comparison, for retailers, the process of evaluating the impact of a store closure is relatively straight forward:
- Subtract the top-line sales and contribution (P&L) generated by the store
- Account for any remaining leasehold liabilities
- Forecast the projected sales recapture and corresponding profit gains (if any) that will be experienced by nearby surrounding sister stores and/or e-commerce
In banking however, the whole (network) is greater than the sum of its parts (branches). A customers’ decision to establish a relationship with a bank is often driven more by the overall network within the community or region than by any one individual branch. Given this behavior, the process of evaluating a single branch’s contribution to the network becomes more complex.
Our experience with predictive analytics in banking suggests that a bank should account for the following when evaluating a potential branch closure:
Customer Retention – How likely is it that customers who frequently transact at a particular branch will be well-served by the remaining branch network should their primary branch close?
The most effective way to measure this is to evaluate previous branch closures and the surrounding network to quantify customer run-off. Identify customer activity at the branch prior to closure and track how many customers remained active versus those which closed their accounts. This assessment is ideally conducted over time (preferably several years) to account for the fact that bank customers are often slow to act.
In addition, natural customer run-off must be considered – if a closing branch’s customer dies or moves out-of-state, that attrition should not be attributed to the branch closure. (This can be accounted for by calculating typical customer run-off rates for existing branches and subtracting that from the run-off experienced by the closing branch).
New Customer Acquisition – How many new customers will the bank fail to acquire if an existing branch is closed?
Again, the most effective way to determine this is to evaluate markets with historical branch closures. Compare the number of new accounts generated in the area surrounding the closed branch before and after the branch closure to determine the relative shortfall.
Alternatively, a bank can develop and/or leverage a new account forecasting model (calibrated against actual new account generations over time) that quantifies the relationship between household characteristics, business characteristics, competition, and (most significantly for this exercise) proximity to a bank’s closest branches. Running with model with and without the branch in question would assist in quantifying the projected decrease in new accounts.
Together, an estimate of existing customer run-off and the loss of new accounts attributable to the branch closure will provide the lost revenue metrics necessary to conduct a financial assessment of the viability of closing the subject branch.
The optimal way to conduct such assessments is on a systematic basis – rather than evaluating individual branch closures on a one-off basis, the aforementioned methodology could be used to evaluate every branch in a bank’s network. This information can then be evaluated together with operational considerations (branch operating costs, lease term/amounts (if leased), potential land/building value for resale (if owned), and other relevant information to identify the portfolio of branches that represent the most economically viable consolidation opportunities.
¹ With apologies to the Clash.