Should You Reopen All of Your Branches?

This was excerpted from the article “The State of Banking Amidst the Pandemic” in Bancography’s Bancology newsletter.

Whenever banks and credit unions face earnings challenges, the branch network emerges as an obvious target for expense reduction. At typical retail-driven institutions, branch operations account for about two-thirds of total noninterest expenses. In that the forced closing of branch lobbies during the pandemic has driven consumers into other channels, it has correspondingly raised a question of whether institutions need to reopen all their branches.

In assessing this, first keep in mind the fundamental role of the branch is not as a transaction processer; that is simply a cost we absorb for the convenience of our accountholders. Rather, the branch exists to add new accounts, to recruit customers into the institution and to ensure bankers meet clients’ continually evolving needs with the appropriate products and services throughout their lives. In this role, the personal interaction that branches deliver can provide both value and differentiation, especially for smaller institutions.

Still, earnings constraints may demand cost reductions and, if so, the top consideration should be to consolidate around existing strongholds. This would include paring one-off forays into markets where the franchise lacks the critical mass to leverage the network effect—the phenomenon whereby larger branch networks capture a disproportionate share of balances as consumers seek omnipresent live/work/shop branch coverage. Correspondingly, it also implies maintaining branch depth in areas where the institution already enjoys a strong incumbent position.

Further economies may lie in converting from a traditional operating model—where each branch functions essentially as a miniature bank unto itself—to a hub-and-spoke model, where only certain functions are delivered by on-site personnel at every branch, while other functions migrate to centralized delivery.

For example, in a cluster of four branches within a three-to-five-mile span, one hub might maintain on-site personnel for all functions. The three other branches might only fulfill such basic requests as checking, savings and installment loan openings with on-site personnel while addressing more complex requests—such as business loans, mortgages and wealth management services—by appointment via officers domiciled at the hub.

The hub-and-spoke model can be expanded to include management as a centralized function, wherein the manager of the hub of the branch cluster oversees all branches in the cluster in their sales agenda and operations, leaving a senior customer service manager as the highest-ranking officer on site at the spoke branches.

If those actions cannot deliver sufficient expense reductions, an institution may need to consider in-market consolidations. And while incremental branch contraction represents the most risk-averse approach, any evidence that the pandemic has permanently shifted consumer preferences to remote channels could allow more radical configuration. If financial services executives believe consumers have adapted to reduced branch availability, that could allow migration to a model where electronic channels assume the role of spoke branches. Under this “hub-and-hub” model, institutions would retain only the highest-volume branches as flagships offering the full array of products and services but shunt simple account openings and maintenance requests to online, call center or interactive teller machine channels.

Inherent in this approach though, is that the surviving hubs, the flagships, become essential representations of the institution’s brand, meriting investment in interior and exterior design and merchandising. With fewer outposts to create brand awareness, the flagships gain increased prominence as “financial superstores” presenting the full extent of the institution’s offerings.

Note also the visible evidence of investment in remaining facilities would mitigate the adverse perceptions of broad branch closures. Presented as part of a strategic shift that enhances the service experience at the surviving branches, the strategy can plausibly reduce noninterest expenses without risking attrition. However, if widespread branch closures occur without offsetting investment in surviving branches, consumers may (rightfully) perceive a distressed institution focused more on survival than client needs, accelerating the institution’s decline.

Even with profitability challenges forcing an examination of expenses, stronger banks and credit unions may still want to consider expansion opportunistically. Commercial real estate trends could reduce land and lease prices for new branches (and also give financial institution executives favorable leverage in renegotiating current leases). Further, given the long lead time between the decision to add a branch and actual opening, the branch you start pursuing today could open into a reviving economy in mid-2021.

Irrespective of long-term branching strategies, leaders of financial institutions must adopt several immediate changes to the branching model for the duration of the COVID-19 crisis. First and most important, plan for the contingency of having to close branches due to customer and/or staff COVID-19 infections. Don’t wait until the first outbreak to develop a strategy, but have on retainer a vendor to clean and sanitize the facility; plans for contact tracing of the affected employees relative to others at the branch they may have visited; plans for how you will notify customer and regulators of temporary closures; and the like.

One strategy may involve grouping branches in geographic clusters; and then opening all but one, keeping the closed branch in reserve as a “clean” facility, ready to bring online should an outbreak affect an entire community. Plan also for float and call center staff to backfill branch roles. Keep in mind that a branch can be sanitized in a couple of days for reopening, but exposed staff may need to quarantine at home for two weeks.

The COVID-19 crisis has rendered drive-thrus imperative, and every institution should consider how best to utilize those. For example, is there benefit in extending hours to offset closed lobbies? Even as lobbies reopen, social distancing requirements may be a catalyst for consumers to adopt interactive teller machines driven by remote representatives and for financial institution leaders to initiate or accelerate the deployment of that technology.

Similarly, leaders should evaluate deployment of contactless ATMs that allow consumers to place their cash orders online or through a mobile device, receive a Quick Response code on their phone, and then wave the phone under a scanner on the ATM to receive the ordered cash. Though invented for speed and security, contactless ATMs would reduce the user touchpoint to only the actual cash dispensed, giving a safety-based predicate for consumers to select an institution.

The degree to which you pursue branch network reconfiguration and new technologies should reflect beliefs regarding the duration of the COVID-19 crisis, and the extent to which branch activity levels will return post-crisis. Although there is a defensible viewpoint that the crisis will precipitate acute permanent declines in branch transaction levels, a counterargument could posit that the early adopters of electronic channels exited the branch channel long ago, and the remaining mixed-channel and branch-dependent users will drift back as lobby availability returns.

As such, bankers should prepare business cases for various points along the continuum spanning from “current depressed activity levels turn permanent” to “everything reverts to prior state.” As long-term trends emerge, they can then pursue the appropriate tactics in reconfiguring branch networks. But in the immediate term, all bankers should be considering opportunities to increase branch network operating efficiency to offset near certain declines in revenue and increases in credit losses as the recession drags onward.

Steven Reider is president of Bancography in Birmingham, Alabama.