How Many Branches Do You Need To Serve A Market?
One of the most frequently asked questions we get from executives at banks and credit unions is “How many branches do I need?”
It’s a simple question, but as you can guess, it needs a nuanced answer. The right answer is it depends on your overall strategy, expectations, and market conditions.
From a strategic perspective, if your customer or member base is already heavily digital channel reliant you can operate with fewer branches, especially if you’ve solved the problem of opening new accounts through those digital channels. You likely just need 1-2 branches in a city as a back-up or security blanket for your customers.
However, if you are like most more traditional banks and credit unions with a branch-dependent base, who may do some routine transactions through online and mobile channels, you likely need more branches (and likely remote ATM sites) to create a convenient access network for your customers.
The “expectations” aspect deals with how hard you want to work to maximize revenue and profitability of your branch network. It reaching profitability is your goal then a small network can suffice, but if you want to fully leverage your investments in branches and ATMs then you need a larger network, but perhaps not as large as you might think.
Let’s talk facts, starting with what I call the “6% rule”. In studying metro areas across the United States (MSAs), we’ve found that if you have at least a 6% branch share in a metro area, you have a 63% probability of getting more than your fair share of deposits from that market. “Fair share” is a simple concept. If you have X% branch share you should achieve X% deposit share at maturity. If you hold less than 6% branch share you only have a 29% probability of exceeding your fair share. Scale matters as it equates with convenience.
The difference between those banks gaining more than their fair share and those banks that don’t works out to be $25 million difference in deposit levels. At current spreads that’s about $670,000 in annual revenues per branch. Multiply that difference by multiple branches and you’re talking about dramatic gains.
Should you have the resources to build a strong local network, target at least a 6% branch share.
The second way you can look to answer the question “how many branches do I need?” is by looking to branch density metrics. If you want to mostly cover a market, meaning serve the bulk of the population, you will need about 1 branch for every 15,000 households. If you are in a growth market and building your business you want to be a little denser, closer to 12,000. If you have already deeply penetrated a market you can optimize back to about one branch per 18,000 households. A well-planned branch network at those levels should reach about 80%+ of the opportunity locally. These density levels nicely align with the 6% rules.