The ability to grow an institution’s customer base, balance sheet, and earnings presents a significant challenge in today’s banking environment. Despite the pandemic accelerating the push to digital services, the branch network continues to play a significant role in overcoming growth challenges and supporting the institution’s success.
It follows that effectively and efficiently evaluating branch performance in today’s challenging environment is critical. The first blog in this blog series, Digging Deeper into Bank Profitability Analysis, discusses the importance of measuring and evaluating branch profitability — including a deeper analysis of profitability drivers — to support better, more informed business decisions.
However, profitability is only one component of branch performance. As consumer preferences change and branch strategies evolve, it becomes abundantly clear that concentrating solely on a branch's profitability provides an incomplete, and even misleading, view for decision-makers. It’s time to move beyond profitability and use other metrics to evaluate branch performance.
A Holistic View of Branch Performance
As with any other channel, the goals for a branch should include providing excellent, efficient, and effective customer service; growing wallet and mind share; increasing profitability; and ensuring that the branch is providing value to the institution. With these goals in mind, consider the following analyses to enable a more holistic view of branch performance.
One of the primary goals of the branch network is to provide and support growth, including the overall growth of the institution, its customers/members, balances, and ultimately earnings. As such, financial institutions should assess various growth metrics related to their branches as part of the branch performance evaluation, tracking both loan and deposit growth; increases in the number of customers/members; and referrals, cross sales, and new accounts opened.
Branch activity is an important indicator of branch performance and strategy. Tracking metrics such as foot traffic, transaction counts (by type), and number of transactions per employee provides insight into the amount and types of services that customers rely on within an individual branch, and within the overall branch network. These metrics also help leaders assess the best services to provide in the branches, analyze optimal staffing levels, and develop targeted marketing campaigns. Activity/usage should also be a consideration in branch closure decisions.
Gauging customer satisfaction for any channel is important; capturing, storing, and analyzing customer satisfaction data for branches is critical. Branches provide one of the only opportunities to interact directly with customers and to develop and enhance these relationships. The costs related to this interaction are high, so it is paramount to meet the needs of customers/members. Gathering and analyzing satisfaction information is a key component in assessing whether the institution (or more importantly, its customers) are getting value from the branch network.
Additional Performance Metrics
In determining the full value of a branch, the following performance-based metrics can and should be measured and evaluated:
- Fee revenue, waived fees, and the amount of high-value transactions: An assessment of these factors provides insight into the importance of fee-based products and services within a branch and whether the branch could better optimize revenue from fees.
- Efficiency ratio, expense ratio and revenues, expenses, and assets per employee: An assessment of these items can help determine whether branches are staffed at appropriate levels and whether additional efficiencies in branch processing should be pursued.
- Accounts, loans, and deposits per customer/member: Assessment of these data can reveal growth opportunities related to wallet and mind share of the branch customer base.
Many of these metrics are most likely already calculated at the institution level. By analyzing them at the branch level, they can support specific branch, product, marketing, and pricing strategies for the organization.
In assessing the performance and viability of your branches, it is imperative to understand the markets in which they operate. Consider whether performance expectations should be the same for a branch located in a busy, highly populated urban location compared to a branch located in a sparsely populated, rural location.
Beyond population density metrics, it is important to capture and analyze information specific to the branch location that pertains to average household income, ratio of homeowners to renters, age demographics, and the number and types of businesses. These data help set performance expectations, but also should reveal growth opportunities, influence product strategies and the types of services offered, and even impact branch design considerations. In addition, capturing information about competitor branches, products, and rate offerings provides insights into growth and pricing expectations and strategies.
Whether technology and digital channels continue to lead to branch closures or branches continue to be the primary channel for developing customer relationships and loyalty, measuring and understanding branch performance remains critical to the success of most financial institutions. Given the continued usage and significant expense of the branch network, the ability to fully evaluate branch performance to support strategic and tactical decisions is vital.
So where can institution leaders access the data needed to perform these types of analysis and calculate these metrics? In addition to market information and customer satisfaction surveys available externally, the obvious place is your institution’s financial performance management (FPM) system. FPM systems should support budgeting, planning and forecasting processes, profitability analysis across all segments of the organization, and detailed financial and management reporting processes. These systems already should contain the majority of data needed for a more in-depth analysis of branch profitability and a broader view of key performance metrics.
A centralized FPM system contains source data, such as current period and historical general ledger data, transactions, fixed assets, customer and account data, employee counts and salary data, production data, and more. Leaders should leverage these data to develop a more comprehensive view of profitability and an expanded view of branch performance, optimizing that performance and supporting critical decisions for the organization.