General Factors:
Trends in branch usage and alternative channels: Demographically, we may be approaching a generational tipping point resulting in the acceleration of a recent trend of declining branch transaction volume due to the push by bankers for self-service channels. We may now be at the point where the majority of the population is technologically and electronically oriented and has little use for the traditional branch-centered transaction services. This new demographic reality should lead, in the short term, to changes in branch configurations; from networks that operate mostly transaction-oriented designs to branches that support - customer assistance, sales, merchandising and information-oriented configurations. The industry has talked the talk here, but with few exceptions (i.e. WAMU - now being replaced by Chase traditional branches, Umpqua, Barclays) has yet to walk the walk. In the longer term fewer branches will be required, with a minority of branches being fully transaction-capable. A major challenge will be in migrating to smaller, reconfigured branch networks while remaining competitive with banks that continue to hold dearly onto the traditional model.
Market Level Factors:
Branch network decisions are largely driven at market level factors such as 1) branch outlet share (still a primary factor in determining the target number of branch locations - see below), 2) the bank’s competitive position/market share and rank, 3) competitive/branch intensity (households per branch) 4) channel preferences (branch vs. self-service) for the market 5) the market growth prospects (population, business growth) and 6) current and prospective market economic conditions and correlation with the national economy.
Branch outlet share is still a major determinant of deposit market share, especially for those operating as full service institutions serving the entire market. Low branch outlet shares below (generally below 8%) usually result in suboptimal market share. The optimal outlet share range is normally between 12 and 16%. At these levels banks typically garner market shares in excess of outlet share. By enlarge; once outlet share exceeds 16%, the excess share begins to contract. Overall market share can also be impacted by the number of outlying branches in the banks’ branch network. In most cases, “outliers” should be sold or closed unless they hold dominant local market share.
Also a consideration is the bank's alternative delivery offering versus the competition including 1) its technology based offerings (internet and mobile banking platforms) and to a lesser extent 2) the size and location of its full-service ATM full service network. Banks with a significant emphasis on alternative delivery that have been successful in attracting more than their fair share of the technologically oriented segment can usually get by with much fewer branches. But this is the exception, not the rule, for most banks are still quite traditional and consider the branch network a centerpiece to their value proposition. Historically a branch network’s value has been increased if accompanied by significant bank-branded ATM network. This appears to no longer be the case with the advent of ATM networks (Allpoint, Money Pass, Credit Union sharing, Correspondent Bank network sharing) and rebate/nationwide free access programs.
Customer and Target Market Segment Channel Preferences:
Lastly, but also potentially quite significant are the channel preferences and behaviors exhibited by the Bank's existing customer base and target market segments (if different than existing customer base) as well as the profitability or relationship value of these customers. An analysis of transaction and account opening data should reveal in aggregate and on a sub-market basis, the degree to which the bank’s customers are branch dependent, self-service or mixed. Usage based customer profitability and relationship measurements are needed to provide guidance on resource allocation. These analytics, along with an analysis of information available on the channel preferences of the bank’s target market segments (for growth) will not only help the bank determine the appropriate size of its branch network, but where new branches will be needed and where the branch network could be scaled back.
