Are Your Branch Analyses Misleading?
One of the standard metrics analyzed when evaluating branch performance is the size of the customer base (or in a credit union’s case member base). This measure is used as a gauge of the branch’s performance or health. The problem is that too many firms still rely on an old-fashioned account domiciling approach that assigns accounts (and households) to the branch where the account was originally opened… regardless of how many years ago that occurred.
Managing Your Branches
One key to managing a FI branch and ATM network is gaining insights about how that network is being used by its customers or members. It is important to understand not only historical performance, but current performance and trends. A good approach tries to answer these two questions:
What value does the branch site provide to the network overall?
How has the branch contributed to growth?
The challenge is one of tradition and inaction. My experience indicates most banks and credit unions still employ the classic “account domiciling” approach that has been in use from the beginning of the financial services industry when firms had only one location, their headquarters. As branch networks were created and expanded, rules need to be put in place where to “house” new accounts from an accounting perspective.
According to Law Insider, a legal information site, Domicile Branch means the branch in which the Customer(s) opens and maintains his/her Account(s). The original rationale for taking this approach was tied to signature cards. Remember those artifacts of banking? The logic was that your account should be domiciled where you opened it and your signature card was kept, probably in some filing cabinet or desk drawer. Makes sense in that moment. You come into that branch to cash a check they could compare your signature on the check to that on the signature card.
The Inevitable Problems and their Solutions
The problem is time. Over time, people move. They change jobs. They change apartments. They get married. They buy a new house. They retire. Every one of these life events provides the potential to change the location they conduct the banking transactions.
Additionally, mergers and acquisitions happen. I worked for many years at Bank of America, which was built through the acquisition or merger of 200+ banks over 200+ years. Complicating it even further, I closed over 2000 branches, thus combining accounts into “receiver” branches.
The problem that is created over time is that your customer is increasingly less likely to continue transacting at the branch where the account was opened, raising the question “should the opening branch continue to get credit for the account when they may never service that customer?” and the corollary question “should the servicing branch get credit for the account?”
If your firm is still conducting branch analyses without taking this historic rule into account, you are likely getting mis-leading results. That can be costly.
The cure for this analytic flaw is the process of redomiciling accounts on a periodic basis. This process of redomiciling relies on evaluating current customer behaviors to reassign their predominant branch. Basically, you are adapting based on current customer behaviors and not historical behaviors. Customers, their accounts, and their channel usage patterns are analyzed to determine which channel, branch(s), they use most often. The most recent branch(s) where they opened accounts are also evaluated.
The goal is to realign customers to the branch sites that have the most meaning for each customer when you consider the totally of their interactions with your firm. Let’s look at some examples.
John and Mary
John Smith has been a client of ABC Bank for 20 years. He maintains a checking, money market, and credit card account at ABC. All his accounts were opened in Boston, Massachusetts where John went to school. John has had a successful career with a few job changes and promotions, and now resides in Washington DC. Fortunately for John, ABC Bank has branches from New England all the way down the Atlantic seaboard to North Carolina.
ABC Bank does not redomicile its accounts, so even though John resides 440 miles away from where he opened his accounts, and he hasn’t transacted at the original branch in over ten years, the Boston branch still gets credit for his ever-growing balances. ABC has many customers like John.
The most common reason today why people change banks is still “I moved, and their branches were no longer convenient to where I live and work.” What’s changed over the last several decades is that there are many more banks and credit unions, with larger branch networks, covering much larger geographies, just like ABC. Customers like John didn’t have to change “banks” when he relocated to DC,just branches.
John works in downtown DC and lives across the Potomac in Reston, Virginia. He typically uses the branch near his office for ATM transactions, and when he has questions about an account, because it’s open when he is at work. He also uses the ATM at the branch near his home in Reston for cash and the occasional check deposit. Redomiciling realigns John’s accounts to the branches most often used.
Here is another example. Mary Jones has been a customer of Community Credit Union for over ten years in Phoenix, Arizona. Community CU has been growing rapidly and added several new branches during that time. Originally, Mary opened her first accounts with Community in Glendale where she worked. Due to Covid19 restrictions Mary has been working remotely from her apartment in Tempe on the other side of the valley. She switched to using the new Community branch opened near her apartment. In fact, Mary recently purchased a new car and took out an auto loan at the branch.
These are just two examples of the thousands of real-life situations your customers experience.
Adaptive Redomiciling Through a Customer Lens
What is Adaptive Redomiciling?
A dynamic approach for assigning business and consumer customers and prospects to a branch. The approach uses a customer’s purchase history and banking habits to determine their preferred branch. This approach affects the branch balance sheet, as well as marketing support provided to branches.
Through adaptive (i.e., adjusting to new conditions) redomiciling, you can reassign customer accounts to the branches that make the most sense from your customer’s perspective. Here is an example:
This adaptive redomiciling approach serves as an important first step in many analytic processes, such as creating trade areas and allocating revenue to individual branches for the revenue maximization process.
Any strategy must be built on the foundation of accurate data. Current branch performance should be analyzed from multiple angles, including a more historical view, such as total deposits, and a more current view, such as sales and transaction volumes.
An updated domiciled deposit base is a first step. Additional steps include: transactional performance and trends for both teller, ATM and platform. These steps help address how well branch is doing in servicing current customer base.
Key Takeaways…
A classic domicile view of branch trade or service area is mis-leading as it’s built on faulty underlying faulty data.
Building trade areas without re-domiciling customers is like a car dealer servicing a car and not counting it in their books because the car was purchased in another state.
Using the adaptive redomiciling process up front before proceeding to evaluate trade areas or branch performance brings branch performance up to date.
