You aren’t alone if you’re confused about how to proceed with your bank or credit union’s branch location strategy.
For the past 25 years, there have been two very different schools of thought: one arguing that branches are dead and encouraging institutions to embrace ideas like Pop-up branches and heavy investments in digital. The other side argues that branches are still critical to reaching new markets.
Data paints an equally confusing picture about the relevance of branches in today’s consumer purchase path. Branches are closing at a rapid rate but we see that a majority (60%) of customers still prefer to take that last step of opening an account in branch.
So, which side is right?
Financial Services Lessons From Restaurants
A new restaurant only has a 41% chance of surviving its first three years.
Big chains and franchises have been gobbling up market share from local restaurants.
Growing overhead costs and the need to adjust to population shifts have caused restaurants to rethink brick-and-mortar locations, giving birth to a food truck movement.
Restaurants that have beaten the odds have found a strategy in a real estate mantra: Location, location, location.
It turns out people don’t want to travel very far for everyday needs. On average, consumers will travel a maximum of 8 minutes and 40 seconds for fast food.
Knowing this, it’s not a leap to say that your location can have a dramatic impact on the success or failure of your business. Find a dense hotspot and you give your business the best odds for success.
Importance Of Location In Banking
Numerous studies have shown that consumers exhibit this same preference for convenience when it comes to banking. The average distance a consumer is willing to travel for depository services remained constant from 1992–2004 at 3 miles. For loans, which require less ongoing interaction, consumers would travel slightly further, ranging between 7 and 22 miles.
A study by AOL found that location was the top factor when it came to choosing a financial institution.
We also know that branches are important for a part of the relationship.
No, consumers don’t begin their research in-branch. Nor do they manage a majority of their relationship with branches, but the branch is the preferred place to open the account or start a loan. People come into a branch for those high-trust moments.
A study by Market Force found that only 3% of consumers are digital-only when it comes to managing their banking relationship. So, it is safe to say that branches will always be a critical component of your service.
Questions To Answer For Branch Location Strategy
When evaluating a location, you will want to know:
- What is the population within a 5-mile radius?
- Is the population growing or declining?
- What is the average income in the area?
- Is population growth being fueled by Millennials and Gen Z?
The strategy is simple: Grow into areas where the answers to the above questions indicate fresh community growth. Consolidate your branch network where the answers suggest stagnation or, worse, population decline.
Let’s look at a sample report for real cities in Michigan.
This graph can be populated to show data on every city where you have a branch or where you are thinking to expand. This sample shows that our anonymous city has a disproportionately high concentration of citizens aged 20 to 34 years. Not only does this mean more consumers you can reach today, but more long-term wealth and a boost in future generations as these Millennials start families of their own. In fact, we can see the start of that with the spike in citizens aged 0 to 4.
Our report also breaks the communities down into Kasasa’s 12 proprietary segments, which we can use not only for marketing messaging purposes but also to determine which consumers are most likely to engage with our products. For example, we know that Satellite City Mainstream Families are 2.65x more likely to be a customer or member.
In this example, we see that City 1 has the highest concentration of this demographic, reinforcing the suggestion that this would be a good location for a new branch. By contrast, City 2, with a high concentration of “Country Comfortable Couples” and “Gentrified Families” tell us that this community is well-established and aging. The number of households is comparable, but the opportunity for growth is much better in City 1.
There are several factors that will make a branch more efficient:
- Location: High-density locations with population growth stemming from younger generations mean that your branch will have lasting power. Younger generations will typically purchase more products from you, equating to an increased lifetime value and ROI.
- Adopting technology to reduce in-branch traffic: By moving some services to digital (which makes customers happy) and bringing efficiency tools in-branch, you can decrease the effort to service each customer.
- Increasing Service Radius: By reducing the effort to serve customers (thanks to technology) you can increase the radius you serve. Even a 2-mile increase in the radius to serve can translate to dramatically fewer branches, particularly for small banks competing in urban areas. For example, a branch with a 3-mile radius to serve covers 28.26 square miles. Increasing that to a 5-mile radius to serve increases the coverage to 78.5 miles.
Consider the exponential efficiency gains these combined factors grant.
For the foreseeable future, you will need branches, though the most successful institutions will find ways to maximize the number of consumers they serve with least number of branches. Ways to accomplish that is to examine the radius and population served by each branch. For many institutions, this will require a ground-up re-evaluation of your current branches and strategy.
If you’re interested in seeing where the high growth markets in your area are (and where you might want to consolidate) then check out the free Market Insights Report. We customize it specifically for your institution and you’ll learn which communities are growing, demographic breakdowns, income levels, as well as a wealth of marketing and proprietary segmentation data.