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Top 5 Questions to Ask Before Changing Your Branch Structure

Cheryl Wondrasch
Jul 17, 2013

Author: Cheryl Wondrasch,

Very early in my career, my professional mentor and manager frequently made the comment “banks make money in spite of themselves”.  I was in my mid 20’s, a financial analyst, and just learning about banking.  To me, it seemed the opposite, we used complex concepts like funds transfer pricing, and credit allocations.  How could smart people, that understood these topics, lose money?

Twenty years later, I’m beginning to see the wisdom of his comment.  Hopefully, I have not upset my fellow finance managers in the industry.   I have built my career around financial reporting and analysis.  I have had the opportunity to be a financial manager in large and small institutions.   The last eight years have been spent consulting on and installing customer, organizational, and product profitability systems.

So, what made me realize the wisdom of the comment?  A great example is the recent trend in the financial services industry to evaluate the branch channel.  Per a recent survey by Celent 55% of financial institutions were going to significantly change their branch structure.  Here are the most important questions you need to ask yourself before changing your branch structure:

  1. Impact on loan and deposit balances and margin:  What is the potential impact of losing customers?  Which customers will we lose – single product, low revenue, or large profitable customers?
  2. Impact on non-interest income:  Will the restructure of branches impact our ability to generate over the counter fees? Are they significant?
  3. Most important, will the expense reductions be offset by the increased technology costs?
  4. Have you evaluated different scenarios?  These are assumptions; we recommend minimally a worst, most likely, and best case financial scenario.
  5. How about the impact of Reg II?  If you think because you’re a small FI, this won’t impact you, think again.  We all know the revenue to be lost by the larger FI’s will be made up somewhere.  Do you know how this will impact your deposit profitability? 

Branch Profitability_branch structure   Branch Channel_branch profitability analysis

Do you have the resources or tools to model this type of change to your branch or fee structure?

There are many FI’s that are asking these questions, purchasing these systems, and trying to develop the resources to answer these questions, but again, fail to successfully install or make use of the information provided.  Typical pitfalls for installing a profitability measurement system are:

  1. Due diligence was not done prior to purchasing a system.  What is your organizations priority?  Branch, product, or customer profitability?  Two comments that stick with me are from early customer profitability installations:

    “so how does this increase our margin?” – bank CEO

    “how is this information more valuable than all the other reports I receive?” – Chief Lender

    Both great questions, but shouldn’t they have been decided long before the application was purchased, installed, and training complete?  Why would you purchase a tool without knowing how it is going to help?
  2. Dedication of ongoing staff to support the use of information.  Once a system is installed, the work is not done; the ROI or value of the system comes from using the information.
  3. No executive oversight of how the information will be used.  Inherently, people do not like to be measured; management needs to clearly communicate how information will be used.

Don’t get me wrong, I’m not implying that all institutions fall in this category.  I’ve worked and consulted with several very good institutions that “get it”.  What does “get it” mean?  They have a clear plan of what they want to achieve, they know what they are going to do with the results, they have clearly communicated how they are going to use the results, and most important, they follow through!

Our industry is going to continue to change and you need the tools and resources to understand how these changes will impact your institution.  Can you ensure your FI doesn’t “make money in spite of itself”?

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