Network optimization continues to evolve, and the tools of choice have moved from the hatchet and scythe to the scalpel and spade. The first wave of optimization lasted several years and focused on underperforming branches, along with curbing attrition as customer behaviors slowly shifted to digital channels. Banks realized savings but not growth.
The second wave saw accelerated closures because of the rapid changes to customer behavior spawned by COVID-19. The consistent 2% branch decline per year doubled to almost 4% in 2021. Closures further constrained customer growth, but the downside was masked by surplus deposits from government stimulus programs and reduced consumer spending. As a result, many banks were left with a network that was delivering lower levels of customer acquisition.
This year, the net decline to retail branch count has slowed to 3%, according to the latest data from the FDIC. Banks are still trying to catch up with behavioral shifts, but probably not fast enough. Curinos believes there’s still excess capacity in the system and, depending on the upcoming economic cycle, banks may be forced to accelerate closures once again to bolster earnings.
Many realize, however, that while they may need to continue to trim excess, all the savings won’t automatically fall to the bottom line as in previous cycles. Savings must now be invested in customer growth. At the same time, banks must rethink job roles in the branches. Welcome to Wave 3. (See Figure 1.)
In the third wave, branches that may have been spared in the past because of one-time charges, such as severance and lease settlements, are now under the microscope. Networks are repositioning for the future through relocations and select two-for-one consolidations. Branch personnel are becoming more advisory and less transactional. Unless banks can shift from paring to growing, they risk losing the cost-saving benefits from the consolidations.
Figure 1: The Three Waves of Branch Optimization
- Reduced staffing levels in line with gradual customer behavioral shifts
- Action taken on significantly underperforming branches
- Focus on cost savings while minimizing attrition
- Accelerated consolidation spurred by pandemic
- Reduced staffing levels (where possible) because of dramatic shift in branch visits
- Less customer acquisition and surplus deposits mask customer and balance attrition
- Further reductions needed but constrained by minimum staffing levels
- Surgical savings need to be accompanied by customer growth and investing correctly in branch personnel
- Requires repositioning network through 2-for-1 actions to ensure maximum “billboard value”
Source: Curinos Analysis
The Need To Plan, Not React
Because of the inherent conflict between cost savings and growth, the branch-trimming part of Wave 3 needs to be selective, not reactive, and based on a thoughtful long-term plan for the market. Act too quickly on near-term cost considerations, such as a pending lease renewal, and you’ve narrowed the set of closure candidates by excluding those that may be better targets. If, for example, you need to sustain customer acquisition in a market, some branches – just by being there – can lend their intangible but much needed “billboard value” to the brand. In these cases, branches need to be weighed not in the context of convenience, but in what they can do to stimulate customer acquisition. Indeed, in only three years between 2018 and 2021, “convenient locations” as an important banking attribute declined from 49% to 32%, according to Curinos research. Such a consideration is telling evidence of the push/pull dynamic that the third wave can present, and requires looking beyond simply near-term savings.
Selective Thinning In Dense Markets
Because of fewer teller transactions and changes to channel buying behaviors, banks in the third wave should continue to scale back in dense markets. The good news is that, done selectively, thinning doesn’t mean losing existing customers. Many of them either are willing to travel a bit farther or adapt to more non-branch forms of service delivery. Furthermore, any potential attrition can be countered with nimble, data-informed cross-selling efforts.
But most of the low-hanging fruit has been picked, so third-wave consolidation will require more precision and some hard choices. Our research shows that the difference between a “good” and “average” choice can be worth $350,000 in savings per branch over five years.
Winning In Thin Markets
Thinly branched markets mean fewer branches and typically lower levels of brand awareness. Closing branches in thin markets exacerbates the challenges for most banks. Winning in thin markets will call for informed segmentation to reveal higher-value prospects. These may include those who are either more upscale and less branch-dependent (such as the mass affluent) or a younger cohort that may favor remote digital delivery.
Some banks seem to have gotten the message, but many haven’t. When asked in a recent Curinos poll about their highest priorities for 2023, only about 40% cited branch closures even though transactions per teller continue to tank, wages remain an acute pain point and digital sales are surging.
Fortunately, most respondents at the same time appear to be embracing growth as a high priority. About 60% said that their highest priorities included growing revenues through increased customer acquisition, and more than half said they plan to accelerate their investments in digital channels. Fully 70% say they will emphasize cross-selling to existing customers. But while cross-selling makes sense as a near-term lever for revenue growth, the lack of customer growth caused by continued branch consolidations will eventually lead to a “shrink to success” strategy.
Investing After Divesting
Curinos research has shown that the hazard of branch thinning is less about attrition than it is about foregone acquisition opportunity, which compounds every year. We estimate that within six years of a branch closure, lost potential sales, along with incremental attrition, on average surpass any cost savings reaped in the early months of a closure. Depending on how deeply the bank has already cut into branches, that period could be even shorter. New customers will need to be sourced in different ways through marketing that is funded by the savings gained. (See Figure 2.)
Figure 2: Net Impact of Typical Branch Closure
The first step in sourcing is for banks to identify a promising segment and align their value proposition accordingly, including tangible, believable proof points. To be sure the value proposition is realistic, a concurrent step needs to size up the bank’s current assets within the market. Besides sufficient branch and ATM coverage and market penetration, these assets will likely include brand awareness, share of voice and perceived convenience. Finally, targets need to be set for each lever of success such as sales penetration, product mix and pricing. (See Figure 3.)
Wave 3 investing also means investing in branch personnel who can effectively migrate from transactions to customer engagement and in establishing KPIs accordingly. Enhanced duties could include promoting account usage and primacy, deepening relationships and helping to move more customers to digital channels. To attract and retain these types of workers, banks may need to reconsider front-line compensation brackets and target people who not only excel at client engagement but also aspire to higher-salaried positions. They may also have to give them more flexibility in how they work. Putting technology to good use, branch personnel may be able to be just as effective in customer outreach while working from home and even to cover shifts remotely within customer contact centers.
As difficult as the first two waves of network optimization have been, in some ways they’ve been easier, or at least less ambiguous, than Wave 3. In today’s wave, network optimization calls for a data-derived, analytically driven plan that looks beyond near-term gain to longer-term success. That requires a delicate balance: surgery and divestment on one side of the scale, nurturing and investment on the other.
Figure 3: Strategy Framework for Thin Markets
Source: Curinos Analysis