Why Are All The Branches Back?
Should you and how could you get back into branching?

By: Joseph Sullivan, President, Market Insights, Inc., Chicago, Illinois.

Changing customer values, especially since 9/11, have driven people back to the branch in droves. What was once thought to be an outdated mode of financial interaction is becoming a significant part of the overall delivery strategy again. Branches are popping up in many communities across the country similar to the way gas stations did in the 1960s. Many banks have adopted the "Me Too" theory that branching is back and they should join the bandwagon, but is it right for you? The result has been increased competition, rate wars, and escalating land costs. Banks must learn how the branch of tomorrow needs to be researched, located, designed and positioned to compete and thrive. The purpose of this article is to outline a framework for evaluating the viability of a market and branching possibilities.

Step 1: Understanding Your Culture

The key question is: Who are you and can you do what you're good at in a particular market and at a particular site? You must begin by assessing the current position of your bank in terms of sales philosophy, niche focus, deposit and loan footings and product offerings. Conduct a series of interviews to assess your bank's culture, strengths and weaknesses and to identify your unique value position. This will allow you to evaluate market (and site) opportunities based on whether you can successfully execute on your mission in that market or at that location.

Step 2: The Physical and Demographic Characteristics of a Site

There are numerous factors you should consider when evaluating a branch site. Some key factors include: whether the site is a storefront or for a freestanding branch with drive through capability, proximity to a retail or commercial draw (i.e. shopping center, Business Park, etc.), visibility, accessibility and vehicular traffic flow. You must also determine the size of your trade area after visiting the site. Trade area is impacted by proximity to retail or commercial draw such as a department store, grocery anchor or discount chain (as mentioned above). Trade area is also impacted by the type of branch built. Freestanding locations tend to have larger trade areas than storefronts since they generally have more comprehensive product offerings and better visibility, access and parking.

Step 2: The Physical and Demographic Characteristics of a Site

Currently there is a trend toward storefront locations, partially due to lack of availability of good shopping center pad sites, but also due to cost and a shorter development lead time. A storefront could be considered for a retail or commercial LPO (Loan Production Office) as an entree into a new market, an Investment Boutique or a mortgage center. Many banks begin with LPOs and then migrate to full service branches if and when the market warrants the investment.

Step 3: Competitive Intelligence

Much attention is paid to what the FDIC databases report about branch deposits in a trade area. If you are judging your bank's market share and success on these numbers alone, you only have one third of the entire picture. What you must focus on is the propensity to purchase financial products and assessing the strategic focus of your competitors to determine whether they pose a threat to you in the execution of your mission. Statistically, $0.30 of every dollar is held in the "banking" industry and the remaining $0.70 goes to non-traditional providers. Propensity, which is the ability for any adult above the age of 18 to purchase a checking account, mutual fund, mortgage, etc. based on their demographic profile is a better gauge of branch potential.

Step 4: Market Potential

One simplified way to view your market is to picture it as if it were a pie. Each slice of the pie represents a share of households or businesses obtained by a competitor. Each share of the pie (household share) is impacted by the number of branches in the market, household density and the age/income characteristics of the market. The key question is: how big of a slice can you grab and can you retain it. Through hundreds of client engagements Market Insights, Inc. has been able to establish a knowledge base of performance standards (a branch scorecard). Through mathematical modeling we can predict household penetration (share of the pie) and the share of wallet for any existing or potential market. In conclusion, I have attempted to summarize the key variables necessary to evaluate branch market potential. While more detailed analysis is necessary, this framework should provide you with a strong starting point.

Joseph Sullivan is a founder and President of Market Insights, Inc. a market research and consulting firm with offices in Chicago and New York.

Market Insights, Inc. offers branch network planning, demographic studies, site selection, competitive intelligence, strategic planning and marketing. Joe can be reached at jsullivan@formarketinsights.com or 800-348-0220.