“Everyone is entitled to their own opinions, but not their own facts.” —Daniel Patrick Moynihan
Branches are essential. Branches are useless. Which is it?
Not a week goes by that we don’t hear another message about how branches are all closing tomorrow or they are indispensable forever. First, it’s the irreplaceable warm and fuzzy in-person branch experience. Then, it’s how banks are dinosaurs that need to rid themselves of branches so fintech omni-nirvana can be reached.
It’s like the (nerd alert) History Channel show Life After People, where viewers are taken on a journey of what Earth would be like if people went away, but instead it’s Life After Branches.
The Future Value of Branches
One way to gauge what’s coming for branches is to check out industry valuations. Where are investors making bets? First up, let’s look at some of the platforms used to engage digitally largely outside the branch. Private equity firm Vista Equity Partners recently acquired digital marketing platform Marketo for 6X revenue and outreach events platform Cvent for 9X revenue. Microsoft (valued at 5X revenue) recently acquired LinkedIn for 8X revenue. And industry darling Salesforce is valued at 6X revenue.
Compare that to branch mainstays NCR and Diebold, which are both currently valued under 1X revenue. While the big core providers driving many of the branch systems are valued in the 2-5X revenue range, a look behind the scenes finds payments growth and overall earnings — not branch related systems — driving that value. To be fair to Diebold and NCR, if the core providers spun off branch-only groups, those might carry valuations under 1X revenue, too.
So, there is clearly value in branches, but we need to be realistic about how much.
Why Branches?
Taking a step back, let’s remember that branches were originally created to be conveniently accessible so customers could originate new accounts. Financial models were designed under the assumption that revenue generated from those new accounts justifies branch expenses. Since most transactions were in-person, the branch did have a servicing aspect. The model worked. But then delivery shifted and branches became the alternative secondary servicing channel. It’s not uncommon now for a branch closure to result in the retention of 80% or more of the related customers. Which begs the question: why would a branch get credit for revenue generated today from accounts opened there 15 years ago? Or, why would a branch get credit for a customer’s revenue because the customer cashed one check there last month? If origination is the main goal, why isn’t that the main measure? Do we need to rethink value credits?
Half Gone Soon
Three facts about branches:
- Declining Interactions: Many bankers are already hearing crickets chirp in some of their branches. It shows up in the data too. According to the Cornerstone Performance Report for Mid-Size Banks [2], median branch transactions are already dropping at such a rate that, in only five years, half of today’s incidental branch cross-selling opportunities could be gone. That’s a dramatic pipeline impact, right? Some bankers may not be seeing major traffic declines because of high customer growth (not a bad problem) or because they’ve forced the branch into fulfillment interactions not really required. Wet signatures vs. e-signatures is the common example. Prediction: remaining barriers to e-signature adoption get solved once customers start rejecting the 30-minute loss of life to “just drop by.” If that doesn’t fix it, cost scrutiny will – when smart CFOs see the pinch of risk-elimination-compliance overspending sucking away precious resources from competitive survival initiatives.
- Footprint Reductions: Every quarter, another handful of mid-size banks announces 8%-10% reductions in branch networks. This is just the beginning. Yes, some growing banks and especially credit unions are modestly expanding their branch networks, and many are rightly reshaping existing branches. But the net is clearly headed downward and tough resource tradeoffs will pick up the pace.
- Digital Engagement: Online has risen to be a decent chunk of originations. Most are still done in branches but probably not for long. Bankers have to avoid autopilot spending, which will typically under-resource digital and over-resource branches.
New Models Needed
Many branches clearly have sales and branding value, but more will have to be done to drive value than web appointment-setting apps, kiosk justifications, or employees trained as Pokemon Go trollers. Banks will want proactive branch closure justification models and return on channel models using some new measures around revenue, efficiency, retention and experience. Revenue credits will need to be rethought around value creation. As much as branch build or transform models, return on channel and branch closure models will help bankers facilitate the tough conversations needed to survive.
What do you think?
-Sam
Much appreciation to Ron Shevlin, Scott Hodgins and Jim Burson for their input to this article.
Continue the discussion with Life After Branches II: What’s the Conversation? [4]
Introducing GonzoCast:
Under 15 minutes. Straight to the point.
Fearless.
This week we’re talking about trends in channel utilization.
Do we need branch closure models?