From “Network Optimization in a High-Rate Environment,” a Curinos webinar featuring Andrew Hovet, head of distribution and sales performance, and Chad Watkins, Solutions Sales Executive.
Despite the ongoing trend of consolidations, branches continue to matter – and that’s especially true as we experience what Curinos believes will be an environment of higher-for-longer interest rates. Branches need to be considered not cost centers but ongoing investments in an integrated strategy for acquiring and retaining deposits. They’re central not only for attracting core customers but for keeping them, which can contribute to efficiencies in an institution’s marginal cost of funds.
Here’s food for thought for how to think about network planning to maximum advantage in 2024:
1. In today’s high-rate environment, branches matter because they generate and retain deposits from core consumers and small businesses.
In a higher-for-longer rate environment, the value of branches, especially those in markets of relatively dense market share, can be more valuable than they were during the recent prolonged period of low interest rates. That’s because they tend to attract and retain the relatively low-cost deposits that core consumers and small businesses generate. Core consumers keep their no-cost personal “operating account” at the bank and are generally less rate-sensitive with their savings balances. Small businesses keep much of their deposits in non-interest-bearing checking accounts, and they value other factors in the banking relationship over rate.
Consumer Deposits Have Diverged From Other Deposit Pools, While Retail Deposits Are More Valuable Than Ever
Cumulative Balance Growth | Indexed To Jan ’19 | Jan ’19 – Jun ’23
2. Branches are integral to the overall omnichannel experience.
Drivers of primary customer acquisition have shifted dramatically in seven years from branches to marketing and branding, which include direct mail and cash offers, but it doesn’t mean branches aren’t important. Research tells us that customers still look to branches for their more complex needs and for resolving problems. Their design, density and mere presence as brand-building billboards add significantly to the overall customer experience. And they can be a dependable and welcome complement to a bank’s digital and ATM presence.
Drivers Of Primary Customer Acquisition Continue To Shift Away From Branch Density Toward Marketing And Brand, But Branches Still Matter
Primary Checking Acquisition Drivers – Changes Over Time
3. High interest rates can exacerbate the impact of branch consolidation because of forgone revenue from attrition and lost sales.
A branch closure can provide immediate savings in operating expenses, and the savings can be significant. But then what? Our research shows that when an institution closes a branch, it loses on average 50% of future new-to-bank acquisition plus a small amount of customer attrition. While this seems like a reasonable price to pay in the near term, the effect compounds over years, and it’s amplified in an environment of high rates. Because of the elevated cost of replacing those low core deposits, any savings from closing a branch could evaporate within five years. That can turn a “good” closure into a ”bad” one.
In A ‘Higher For Longer’ Rate Environment, The Cost Of Replacing Deposits Can Turn A ‘Good’ Closure Into A ‘Bad’ Closure
Low-Rate V. High-Rate Impact Of Closure
4. Network planning needs to consider all markets and integrate all investment levers – interest rate, branches and marketing.
To optimize the overall deposit portfolio, all elements contributing to cost – interest expense, branch operating expense and marketing – need to be considered market by market and trade-offs need to be weighed. In the illustration below, because of the density of the market to the left, there’s an opportunity to drive core-customer growth because of strong brand awareness and market presence. But there’s also the need to be as defensive as possible in pricing to retain balances while minimizing the repricing of the back book. In the market to the right, where density is low, it’s difficult to grow core customers, so rate may be used to drive incremental deposits. But this market may also call for branch consolidation because too many branches may make a thin-market rate-based play inefficient. The lesson here is that any strategy for deposit growth needs to be institution-wide. That way, it can drive the most growth most efficiently across all markets collectively, rather than reducing the all-in cost of deposits in every market.
Institution With Same Number Of Branches (25) In Three Distinct Markets (Illustration Only)
Source: Curinos Analysis, 25 Branches @ $500k OpEx, Target SOV 4%
5. De novo branches provide potential access to new deposit pools, but their operating expense is high and deposit ramp-up is slow.
The all-in cost of deposits from de novo branches can become competitive with wholesale or rate-based deposits after several years. But considering the marginal cost of deposits that takes into account building a new branch, they typically don’t generate enough growth to adequately cover their operating expense compared with attaining the same growth across a fixed-cost network. The incremental growth to deposits simply isn’t enough to bear the burden of the investment, as reflected in the ongoing operating costs. These branches become prohibitively expensive compared with alternative funding vehicles like top-of-market rates where there’s an existing network or even wholesale funding.
All-in Cost Of Deposits – De Novo
Marginal Cost of Deposit Growth – De Novo
Source: Curinos Analysis; OpEx $600,000k/year, Assumes a blended cost of funds for a mix of checking and rate-based deposits