INSIGHT

Channel Optimization strategy is designed to best align your delivery channels with growth opportunity, customers’ expectations of access and convenience, and the capital and staff resources needed to support long-term competitive advantage and profitability.

Branches have long been the primary sales and service channel for community FIs. And even as the use of digital channels increases, especially for transactional services, the branch is responsible, on average, for 65% of new product sales (Galapagos, 2021.) However, as usage of digital channels increases, a growing percentage of an FIs customer base can potentially be serviced by a fraction of its current branches.

STRATEGY

For one Midwest bank client, the traditional branch network remains the most important channel in servicing and acquiring customers, yet because of changing market factors and customer behavior, the bank made the strategic decision to analyze its branch distribution network annually to ensure it plays an optimal role in effectively servicing customers and capturing new growth opportunity.

The following methodology was used to conduct the analysis:

• The transactions conducted at every branch were analyzed and tracked to the individual customer performing the transaction

• Every branch transaction was given a value based on the value of the customer performing the transaction and the percentage of transactions that customer performed at the branch

• The value associated with the transactions performed at each branch was thus totaled, indicating the relative value of each branch in servicing the needs of the current customer base

• The available wallet share of each customer using a particular branch was estimated and, together with the frequency of that customer’s branch usage, used to estimate the potential for cross-sales for every branch

• The total non-customer sales opportunity within each branch trade area was calculated, based on the type of customer household and the density and historical performance of competitors

• A total sales opportunity based on both current customers and prospective customers was assigned to every branch

• All branches were then mapped in a matrix based on their growth opportunity and the value of the business they serviced

• Using market growth, household and business density, and competitor density and performance, heat maps of the market were developed to identify areas of high growth potential. The current branch locations were overlaid onto the heat maps to identify current branch coverage of opportunity and potential new markets

• Further analysis of market coverage and opportunity was conducted to identify optimal locations for full-service banking offices using concentrations of key segment households

• “What If” models were generated to identify optimal coverage of the greater market area

• Finally, opportunities to optimize market coverage and branch network resources were identified, including reassignment of staff based on branch need and employee skillset, branch consolidation, and redesign of branches as transactional service centers versus sales hubs

For this client, at the time of the first analysis, customers were heavily dependent on the branch for transactions. Their 22 branches were servicing 34,000+ customers and it was estimated that closing a branch could lead to significant attrition —between 28-44%— of the customers served by that branch were at risk of attriting, depending on location. But based on projections assuming migration rates for transactions conducted via digital channels and demographic changes in the bank’s customer base, the estimated attrition rate two years later for a branch closing dropped to just 9%. Under this scenario, the bank could service 85%, or 29,000, of its current customers with only five branches and its current distribution of ATMs.

EXECUTION & MANAGEMENT

While the numbers were compelling, it was important not to overlook the reputational issues of significant branch closures or the important role branches play in sales and delivery of consultative service. Merely closing branches could not be the solution. Additional work was undertaken to design a phased rollout and to ensure the success of the optimization strategy.

First, the Finance team calculated the cost and ultimate savings of the strategy. Second, the facilities planning team began work on acquiring locations for proposed new branches targeting growth trade areas. Next, a branch refurbishment plan was developed to enhance those branches identified as sales hubs and reconfigure those identified as service centers. Staffing models were developed that assigned branch staff based on their skillsets. Lastly, a communications plan was designed to accelerate the adoption of digital and other channels for transactional services to further mitigate the risk of customer attrition as a result of branch closures or consolidation.

Ultimately, the client decided on a more cautious and phased approach, focusing on the optimization of one market region to test the concept. Four branches were consolidated into two, another branch was refurbished as a sales hub, and two others were scaled back to serve as transactional centers. Increases in annual customer attrition within this test region were negligible.