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Despite the growth of electronic channels for banking transactions, members still consider branch convenience paramount, with the branch remaining the predominant venue for new account sales. Thus, credit unions seeking to grow must also find profitable branch expansion opportunities.
Every new branch decision is predicated on a forecast; a presumption that the revenues generated at the new branch will yield an acceptable return on the branch's expenses. But forecasts represent only our best guess, based on the information available at the time, so revenue can lag due to economic downturns, the relocation of a major employer, or unanticipated competitor behavior.
Whether an unanticipated adverse event renders a presumed-viable project unprofitable depends upon the margin of error built into the cost side. A branch model with low operating expenses carries greater ability to withstand a revenue shortfall, giving an institution wider latitude in deploying branches. Further, a low-cost operating model may prove the only viable strategy for entering smaller infill markets between major destination points or remote rural markets.
Two components drive the expense equation: the capital cost of deploying a new branch, and the annual expense costs of operating the branch. Institutions that minimize both will be able to afford broader branch networks and profitably enter a greater number of markets. These institutions will also enjoy greater insurance against unforeseen events. Two options, in-line and in-store branching, prove especially adept for infill markets or other limited-scope market areas.
1. The in-line, or storefront, branch is one of the most effective means of entering a market while minimizing risk:
If deployed with technology such as teller cash recyclers (TCRs), the small footprint of in-line branches abets more effective branch operations.
Leveraging the benefits of a small, efficient design requires training:
2.The in-store branch also offers greatly reduced capital costs and low staffing requirements similar to in-line locations:
Both in-line and in-store branches share the benefits of low entry cost and low operating costs. And, while the traditional 3,500 square foot freestanding location maintains a role in the distribution network, these branches should be reserved for only the largest, most dense markets. In smaller markets, whether urban infill or isolated rural, slimmer, more flexible operating models will leave the institution with a much lower break-even deposit level. A $500,000 branch that operates with four FTEs (full-time equivalents) affords greater freedom to enter small markets. Even in large markets, it affords greater margin for error if balances fall short of typical levels.
An institution can typically operate three in-line branches for the cost of two traditional branches. Yet, on average, in-line branches capture 35% less in deposits than freestanding branches. So in aggregate, the deposit and operating disparities offset. But the capital cost for the three in-lines is only 30% that of the two freestanding branches, so in-line remains viable in many more market areas. These economic factors, combined with consumers’ demonstrated preference for large branch networks, indicate that credit unions should consider a much greater mix of small format branches in their future branch plans.
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June 29, 2009
7/8/2013 01:41 PM
The storefront branch strategy you describe is consistent with the way many banks are responding to the changing marketplace. Beyond size and cost, banks should consider which business building initiatives are in line with opening a new branch. For example, customers overwhelmingly prefer branch banking when applying for a loan and least prefer the branch when opening a credit card (Source: PwC Rebooting the Branch - http://www.pwc.com/us/en/financial-services/publications/viewpoints/reinventing-branch-banking-network.jhtml
7/26/2012 04:09 PM
Very Interesting thoughts. Seems like common sense! We have similar posts on our blog.
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