How to Accurately Assess the Value of Individual Bank Branches
For more than 60 years, retail real estate professionals have relied on sales forecasts generated for proposed locations to assist them in the financial assessment of a site’s viability. However, ascribing this practice exclusively to “retailers” is misleading – restaurants, gyms, healthcare providers, childcare centers, and other businesses that cater directly to businesses and/or consumers with brick and mortar locations leverage sales or a derivative of sales (i.e., customer count, patient count, etc.) as the dependent variable used to measure the strength of a location’s performance.
However, sales as a measure of a location’s performance is decidedly inappropriate when it comes to the banking industry. Unlike most consumer-facing brick and mortar providers, it is quite difficult to quantify the performance of an individual bank branch. The reason: unlike most other consumer-facing outlets, banks are patronized on a network rather than a site-specific basis. When a consumer makes a decision as to which coffee shop to patronize, they are generally focused on the immediate shopping occasion – the fact that Starbucks operates thousands of stores across the United States has no impact on a customer’s decision to patronize the Starbucks unit located down the block.
Banks, however, are patronized on a network basis, and therefore the market wide deployment of a bank’s branches and ATMs contributes significantly to the performance of individual bank branches. Bank patrons want to have access to no-fee ATMs near their home, workplace, shopping areas, and possibly vacation destinations. As a result, increases in bank branch and ATM deployments within a market (and beyond) can significantly drive market share growth.
In this context, what is an appropriate means of measuring the performance and viability of individual bank branches? Many banks assess existing branch performance by allocating or domiciling customers and their accounts to individual branches, and then aggregating their accounts to estimate the branch’s total performance. This is currently conducted in several ways:
- Bank of Origin – Some (mercifully not many) banks allocate a customer to the bank at which they first opened their account. Obviously, the choice to open an account at a particular branch could be linked to the branch’s convenience to their residence, but also potentially to the customer’s workplace or shopping patterns. While domiciling customers using this approach has the benefit of simplicity, it does not account for the fact that a customer may move, change jobs, or change shopping habits, all of which render the choice of branch selection irrelevant in the context of their changed circumstances. As such, for customers that move (or change jobs, etc.), the bank of origin to which they have inadvertently been assigned is of no relevance and is an inaccurate means of measuring a branch’s performance.
- Redomiciling – Many banks will “redomicile” customers on an annual or semi-annual basis, typically based on a hierarchy of behaviors (e.g., opening a new interest-bearing checking account at Branch #1 trumps using a drive-thru ATM at Branch #2). This approach has the benefit of re-allocating customer allegiances based on recent transaction activity. However, most banks take an “all or none” approach – a customer is either fully aligned with Branch #1 or Branch #2, rather than providing for an allocation of customer activity between branches, thereby fully crediting a single branch for 100% of a customer’s banking activity rather than accurately reflecting the significance of potentially multiple branches with respect to customer banking activity.
- Branch Closures – Banks take different approaches with customer reallocations after individual branch closures. Some banks will redomicile all closed branch customers to a nearby branch and keep them there, while others will redomicile customers to a nearby branch and then re-domicile in the future based on post-closure customer activity.
Regardless of approach, by domiciling customers, banks are attempting to quantify the performance of their branches in terms of the total value of their respective deposits and loans. Typically, customers are first segmented by customer type (such as consumers, small businesses, and sarge businesses/commercial), and subsequently allocated by deposits and loans. The latter categories may be further segmented (i.e., checking accounts, savings accounts, CDs) to account for the relative profitability of each product offering.
Intalytics respectfully suggests what we believe to be a more appropriate means of quantifying the performance of a bank’s individual branches. In our opinion, there are three basic metrics that should be used to quantify individual branch performance:
- New Account Generation – How many new accounts were opened at the branch, and how profitable were those accounts? New account generation represents a critical function of bank branches – either by convincing new customers to open accounts or convincing existing customers to open additional accounts. While a consumer’s decision is predicated on a number of factors (such as interest rates, required collateral, or minimum deposit levels), the convenience of a bank branch is an important consideration and is a critical component of a branch’s performance.
- Customer Retention – How many customers continue to stay with the bank because of the presence of an individual branch? This is a more challenging metric, but no less critical. Because customers view bank branches as a network rather than an individual branch, the fact that their most commonly used branch closes does not mean that they will automatically move their accounts to another bank. Banks which have closed branches over the past few years can analyze their customer patronage patterns post-branch closure, and leverage the results to develop models designed to project anticipated customer run-off in the event of a closure. The key is not how many customers have their accounts with a branch, but how many of those customers would be at risk of leaving if the branch closed.
- Existing Customer Service – How many customer transactions – including tellers, drive-thrus, and ATMs – are handled by the branch? Some banks view transactions as a cost center (more in-branch visits translate to higher staffing costs), and therefore a negative. In our opinion, transaction counts are a key measure of the importance of a branch in meeting the convenience needs of existing customers. Banks are actively trying to provide customers with the ability to meet their needs remotely, but the fact remains that many customers have a need (real or perceived) to visit a branch, and the ability of a branch to meet that need is a positive. If one branch handles considerably more in-person customer transactions than another, then it is doing a better job of meeting customer needs.
These three metrics provide a customer-focused approach to assessing bank branch performance and help assess the true contribution of an individual bank branch to the overall network. Contact us to learn more about our approach to the banking industry.