Finding the Intersection of Market Opportunity and Branch Performance
In the swirling cloud of discussion among the “pro-branch” and “anti-branch” loyalists, something still seems to get lost.
Will the market even support the branch location? In the absence of this data, making informed decisions on whether to renovate, make technology upgrades, relocate, or close a branch becomes extremely challenging. As legacy retail branch networks have aged, many communities across the country have seen dramatic shifts in demographic, economic, and competitive factors around branch locations. What may have been a highly desirable location eight to ten years ago could very well be a marginal market today.
Conversely, in some areas of the country, communities are seeing explosive growth, and financial institutions are racing to secure prime real estate and construct branches that will position them to capitalize on that growth. Regardless of the scenario, credit unions are striving to balance branch appropriate performance expectations and the realities of the market opportunity in which their branches compete. This is no small task, and it is one that requires access to data, a methodology for interpretation, and a framework for making decisions.
Determining the appropriate balance requires credit unions to look both internally and externally at the performance of their branch networks in an honest and objective light.
The following should be considered:
- Direct Measurement. The evaluation should focus more on direct measures of branch contribution, such as the number and dollar volume of new accounts opened, number of sales referrals to specialists, and other performance metrics that more accurately reflect the current value the branch adds to the credit union’s growth efforts.
- Competitive Intensity. When evaluating a market, it is critical to utilize competitive density and saturation metrics, such as households per branch, market share and share of wallet. While helpful on a stand-alone basis, many of these metrics can be significantly more insightful when combined into ratios. Households per branch is a useful measure for credit unions as it provides a way to compare the competitive opportunity of small markets against larger, and better their position relative to other financial institutions.
- Branch Payback. Another key element is understanding the performance requirements for a branch to generate returns on the investments made in it, and, ideally, use these metrics to help prioritize the allocation of investments. Establishing measurable performance objectives and assessing return on investment (ROI) are critical steps in successful planning efforts, and especially important when considering the current banking environment and the level of investment required for building or refitting a branch. We typically encourage credit unions to take their measurements one step further by converting financial goals into everyday performance measures that can evaluate the viability of reaching certain ROI hurdles.
- Market Opportunity. As an overlay to the performance measures outlined above, credit unions should apply local market knowledge along with qualitative data to shape a more complete picture of the market opportunity. There are several firms, including Momentum, who can provide your credit union with a full range of market analysis solutions that can offer objective, data-driven insights.
Once a credit union has performed an extensive level of internal and external research, the management team must then apply that information in the most strategic and cost-effective ways possible. The matrix below illustrates a very simplistic approach to determining the appropriate strategy for branch networks.
By developing a scoring model, branches can be assigned scores (1 through 10) for performance (sales, transaction activity, etc.). These scores, shown on the horizontal axis, are then compared to the market potential of the branch’s trade area (commonly measured using household growth, demographic trends, median income, competitive intensity, etc.).
By combining a branch’s two scores, it places it into one of four quadrants:
1) Branches in the upper right quadrant are high performers in markets with high opportunity, and are therefore candidates for a maintenance strategy.
2) Branches in the upper left quadrant are lower performers in markets with high opportunity, and should be candidates for additional investment.
3) Branches in the lower left quadrant are low performers in markets with low market opportunity and should be considered for closure or relocation.
4) Branches in the lower right quadrant are higher performers in low opportunity markets and should be targets for cost control measures such as gaining efficiencies through better processes, reducing unnecessary expenses, or reducing communications expenses
By evaluating the data and assigning your branches a score, you will be able to make an informed decision on whether to renovate, make technology upgrades, relocate, or close a branch. Without question, these are not easy decisions for credit unions to make and often require the assistance of outside firms to provide quality market data and a methodology to measuring market opportunity.
But first and foremost, you need to answer the question; will the market even support the branch location, now and into the future?
