Inside Financial Services

Banks Need to Rethink Their Cost of Distribution

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I’ve mentioned before how surprised I am that the banking industry hasn’t spent more time figuring out how to cut its distribution costs. This shouldn’t be a secret problem. The backbone of banking distribution is almost as old as the industry itself: the branch. But branches are expensive to maintain, and the transactions that happen in them are rapidly getting disintermediated by technology. (The latest example: deposit gathering.)

Nor should it be news that consumer banking fees are under huge pressure. NSF fees, swipe fees, you-name-it fees. Most have either fallen or disappeared entirely.

So costs are up and revenues are falling. As I say, a problem. Yet I’m astonished at how simple-minded have been the proposed solutions to it that have so emerged. “I believe that the new earnings dynamics in retail banking suggest that branches may be more important than ever to future profitability,” writes Mary Beth Sullivan (free sub. required) in BAI Banking Strategies. She’s a banking consultant at Capital Performance Group in Washington. “Consolidating branches and cutting staff may make sense in some markets and for short-term profit improvement. But taking these steps before the bank has a clear plan for building new sources of revenue – and defining the branch role in delivering on that plan – may be a mistake.”

So banks should simply keep their branches as is, and concoct a “plan for building new sources of revenue” for them. Easy! Sullivan even has a few suggestions: investment management retirement planning and insurance, for instance.

There’s only one problem: Sullivan is living in dreamland. Of course banks would love to develop new sources of revenue to run through their branches. They’ve been trying to do that for years. No, decades. But it’s not so easy. Businesses like investment management and insurance happen to be highly competitive. (If you doubt it, ask Allstate.) At the vast majority of retail banks, Sullivan’s recommendation simply won’t work-but not for lack of trying.

Alternatively, analysts like consultant Steve Topper, of Acton Marketing, seem to think that for branches, this time the end really is nigh. “I’m aware that others have been predicting the end of branch banking for years and have been wrong,” he writes. “Actually, it’s just that their timing has been wrong. If we’re honest with ourselves, we’ll acknowledge that we’ve entered a new era of rapid changes in both technology and consumer behavior that could mean the end of bank branching as we’ve known it all these years.”

Topper is on to something-almost. On the one hand, some of the best-run and best-regarded financial institutions, such as USAA and ING Direct, have no branches at all and operate at no competitive disadvantage whatsoever. Just the reverse. But they serve extremely narrowly defined markets nearly custom-made for branchlessness. (USAA, for instance, serves military personnel, who of course relocate regularly and are often overseas.) But even on-line providers such as TDAmeritrade and Schwab have found that they have to have some brick and mortar around to serve customers. If a Schwab customer wants to have a branch to duck into now and then, the typical Mr. Main Street banking customer will insist on one.

So bank branches in some form or another aren’t going anywhere. Yet, to date, the argument about the future of branch banking-of the cost of banking distribution generally-apparently hasn’t gotten past the-status-quo-won’t-change vs. branches-are-totally-obsolete. That’s overly simplified. I haven’t figured out yet what the right answer will be. (Thoughtful suggestions welcome below.) But I do know this: the Distribution Cost Question is one of the most profoundly important ones the banking industry faces. How many branches is the right number for a bank of a given size? How big should they be? Where should they be located, and when should they be open? The companies that get the answers to these questions right will be among the big winners in the future.

What do you think? Let me know!

11 Responses to “Banks Need to Rethink Their Cost of Distribution”

  1. david fostere

    At the same time banks have spent vast sums on their branch networks and the expansion thereof, they have systematically disempowered the branch personnel. Many banks discourage customer phone calls to the branches and direct such calls to a central call center. The manager of my local BofA branch said that she is not even allowed to select the verbiage to be used when customers do call that branch.

  2. David Dove, Dove Capital Partners

    The bank branch is an artifact of history. The fact is that there are far more efficient ways to serve customers. Just ask Cardtronics, with a distribution network of well over 22,000 ATMs in the U.S. (more outside) that smart banks are branding as their own. Consumers speak with their feet, and they’ve demonstrated that going into a premium branded retailer like CVS, Target or Walgreens is every bit as safe and a lot more convenient than schlepping to a bank branch to get cash or make a deposit.

  3. Frank

    I agree, I haven’t been inside of my bank’s branches more than once or twice a yr. @ most for years. The questions is” how do they cross sell more profitable services otherwise. maybe those fools in the Crutchfield era @ FUNB will be right in the end ( although they were about 10 years early!) they actually refused to let their customers into their branches and ‘funnelled’ them into call centers staffed by idiots and intocentral branches.

  4. DBasri

    The largest cost component of branch networks by far is staff. Yet the majority of banks still do not formally address this. There are several good solutions out there and most of them are affordable. I can only speak to our experience with StaffPro, but users have trimmed 5% to 10% and in some cases well into double digits. Saving one FTE will fully fund 20 branches. Yet it is difficult to convince many retail executives to even try it (which is free).

    All of the larger institutions have used staffing and scheduling software for years, while mid to smaller ones have shied away. That is ironic as branch staffing expense as a percentage of operating expense tends to be higher at smaller institutions.

    Thomas is correct. Branch networks will be here and even expanding for the forseeable future. Branches are where the customer’s relationship with the institution starts, even if branches are not the transaction generators that they once were.

    David Basri

  5. Doug

    David Fostere is right about depowered branch personel. Several months ago I visited a local BofA branch to dispute a fee. Both the assistant manager and branch manager agreed it was charged in error, but could not waive it without calling the same customer service line I would call. They entered my info to the automated attendendant (account number, etc) and then when a rep came on the line I had to give them permission to speak with the Branch manager. I closed my account a week later.

  6. Sean C. Payant

    Rather than focusing on adding or subtracting branches from their current branch networks, most community bankers would be best served at maximizing their existing branch network. Even with reduced fees, the solution is still customers. Customers still overwhelmingly prefer to bank at the branch. The electronic access points are essential, but new relationships for the vast majority of community banks primarily begin at and are sustained at the branch.

    Most importantly, more customers allow for the spreading of fixed costs and the creation of additional revenues. The cost of the distribution channel is already in place. It doesn’t substantially change with more customers if you look at it marginally. The reality, however, is that smart-growth customer acquisition is hard work. It requires well-trained, empowered staff, a compelling offer to get customers in the door, a focus on keeping existing customers, a desire to cross-sell additional product and service solutions, and most importantly, accountability. There is no magic pill, no easy solution. The existing distribution channels can be maximized, but it must be done strategically.

    How many branches are too many or just right? If you have a single-branch bank with 5,000 retail and business customers in portfolio (the current number is approximately 1,000 for community banks), then maybe one is the ideal number. In most cases, I think the ideal number of branches depends on how hard a bank wants to work. If there are going to be winners, then their must also be losers.

    I would agree that the distribution channels are overbanked in many communities, but this does not necessarily have to apply to each individual bank that really understands strategic customer growth and is willing to work to achieve it. More customers = more profits: the equation has not changed.

  7. BS

    Vernon Hill was on to more than a little (a whole lot); well located locations; open and airy designs but using tranditional materials on the exterior like rolled brick and stone in the parking areas with a lot of glass in the front facade. (The fortress designs are the past.). Combined with more flexible hours.

  8. sgr

    Go read The Innovator’s Dilemma again. Technology has changed how business gets done in banking. But the legacy folks are going to be far more determined to try to justify how they’ve always done things than in accepting and adapting to the new reality. Talk to Barnes and Noble or Blockbuster about the competitive advantages of their huge “branch” networks.

  9. JRB

    Start by asking your customer what they want–set up some discussion groups with a small group of representative customers and find out what they want and need–then craft your plan

  10. PJ

    thomas – your article is verbose at best – you haven’t suggested anything new that banks or customers don’t already know! What’s your point? BTW, ING does indeed have branches in many countries where it does business – what has changed is how these branches are organized. In ING Canada, the branch tends to be more like a cafe where you get wi-fi and actually have someone show you how to do your banking on an iPad while having a coffee!
    Do a bit more research and actually talk to some innovative banks next time…

  11. Jaime

    What i always love about this debate is no one bothers to separate the conversation for the normal retail consumer vs the small business. How you view the import, the staffing, and the cost of branches depends on your target customers. Have a big and profitable SMB clientele? Branches make a ton more eceonomic sense than a SMB light business model.

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