Cutting branches to cut costs - does it work?
The number of bank branches in the US hit an all-time high in 2009. Since then, that number has dropped more than 25 percent as banks close branches in an attempt to control costs.
But are these banks trading revenue for short-term savings? Is cutting branches the best way to cut costs?
Why banks close branches
Banks invest millions, $2-4 million on average, to open a new branch. Then they spend $200,000-400,000 per year to operate it, especially in expensive urban areas. It might take years for a branch to reach its profit potential.
So, if a branch isn't profitable, it makes sense to close it. Doesn't it? If profitability were the only gauge, banks would keep closing branches to consolidate branch traffic and streamline operating budgets.
But these numbers don't tell the whole story. Because, despite these costs, bank executives understand the importance of the branch as a critical customer touch point.
In this article, even though the number of FDIC-insured banks has fallen by more than 25% since 2009, bank executives argue “…branches remain crucial for acquiring new customers and doing more business with existing ones. Closures, they say, would hurt revenue more than help reduce costs.”
It's true that customers visit the branch less frequently, but they still expect to have a branch nearby when they need it. In fact, convenience of branch locations is a key deciding factor in selecting a bank. According to John Elmore, vice chairman of community banking and branch delivery at U.S. Bancorp, "Proximity… is a very, very important factor to bank selection and their continuing relationship with a bank."
So far, online and mobile banking haven't replaced the branch for every transaction, they merely complement the entire customer experience. These digital banking channels haven't unseated the branch as the prime opportunity for revenue-generating activities like selling additional products and services and building customer loyalty.
There's no arguing that both transaction volumes and branch visits are down. An obvious solution is to consolidate; operate fewer branches to concentrate volume and traffic. But the fact remains that customers expect branches to be nearby when they need them.
Closing branches makes sense in some cases but only after careful evaluation, not as a go-to solution. Branch locations are carefully researched and ultimately selected for compelling reasons. Once you've made the initial investment to get one up and running, you won't recover that expense. There are other ways to cut costs and capitalize on the locations in your branch network. You can start by improving operating efficiencies and making branches more profitable.
Cut costs not branches
Cash transactions are a significant driver of branch traffic. Customers still have to go to a branch to deposit cash. And banks have to process and manage that cash. But many operating expenses are embedded in time and labor costs of manual cash processing.
Branches plan and staff based on average transaction volumes so when there are fewer transactions, it drives up the cost of each one. And cash transactions don't add value — they simply consume resources. In other words, cash handling is low value work.
Mundane activities like sorting, counting and recounting bills, balancing drawers and managing cash inventory keeps tellers focused on cash. Dual control processes pull your most expensive staff, like managers and head tellers, into this low value work and often requires extra staffing. When your staff is focused on cash, they're not focused on customers. It's an expensive arrangement that just doesn't make sense.
Cross selling other products and services is increasingly important in this competitive market. Even if customers have two or more accounts with a bank, they may still have relationships with several other institutions. Nearly 70 percent of bank customers use more than one institution for their financial needs.
Tellers are, quite literally, your front line. They interact with customers on a daily basis. Creating a good customer experience at this interaction could prompt clients to move money or purchase more products from an institution. This type of cross selling is key to increasing revenue.
But to deliver this level of customer service tellers can't be distracted by cash handling processes and pressures. During a standard retail cash transaction, they spend at least two minutes counting, sorting or handling bills. This is time spent looking down and focusing on something other than the customer. And it's time better spent interacting with customers to understand their financial needs and how your bank can meet them
You can do both
Devices, like cash recyclers, can do the cash handling ‘dirty' work. Cash automation machines automatically sort, validate, count, and balance cash faster and more accurately than tellers can. That's not to say that machines are better than tellers.
But it does suggest that the least valuable and most time consuming part of a teller's job can be left to a machine so tellers can focus on the important work of providing meaningful customer experiences and building relationships.
Cash recyclers can free tellers, supervisors and managers for revenue-generating activities while reducing costs associated with the entire supply chain of cash within the branch network. The next time a branch is on the chopping block take another look at it. Are you sacrificing revenue opportunities for short-term savings?