Bank Branches: A New Model

This design or that design. Digital, pods, low square footage. All the talk around the branch of the future is about design, staff levels, square footage, and technology. 

Yet the people that carry balances, the boomers and older, can't figure out where to go when they come in for a teller transaction. And the younger generation want help managing their budget, using the improved technology tools, and applying for loans.

Sorry youngster. But look at our cool design! 

The slimming of our branch networks, both in number, square footage, and number of staff was used to increase our technology spend, compliance costs, or dropped to the bottom line.

Well I propose something different.

A Different Branch Model

I have a habit of asking almost every head of branches I encounter if they experienced, at any time in their career, a support center person transferring to a branch. In all of the years I've been asking, only one said yes. Because of a toxic boss in the support center. Otherwise, crickets. 

Why? Why doesn't anyone transfer to branches? Why is the branch so important to the execution of strategy, yet nobody wants to be there?

The reasons I hear most are: hours, pay, accountability. They want to transfer to the back office for greater pay, regular hours, and little accountability.

And I have personal insights because I was once a branch manager. Granted in the mid 90's. But still. Then as now, it was a stepping stone for me. No intention of remaining in the branch. The pay wasn't enough. And it was organizationally a thankless position. No thank you. 

Has it changed?

But I propose it should. Because what I hear in community bank strategy sessions, the branch is an important if not critical portion to an enduring future. Why? That one-on-one relationship can't easily be replicated by technology, a bot, or a phone call (when not accompanied by an in-person relationship). 

Survey after survey continues to show that a local branch is important for customers or would-be customers, no matter the age. 

Yet we're blowing it. 

We continue to make the branch a waypoint for our most promising employees. So here is what I propose:

1. Increase the pay- At least two branch employees should earn household breadwinning pay. Right now, the way we pay branch managers, either they are supplementing family income or are young without the outsized financial responsibilities of supporting a home and family. We think increasing teller pay, in the face of rising wages led by larger banks, is enough. It's not. It's branch leadership that needs to earn breadwinning pay. This may increase compensation expense in branches. According to my firm's profitability database where we measure hundreds of community bank branches, each branch generated 2.19% in total revenue as a percent of deposits (spread plus fees). And the median branch deposit size was $61 million. To cover the extra costs, that $61 million branch would have to be $65 million. Would greater talent with the ability to deliver on what people want a branch for in today's environment get you there? I think so. And then some.

2. Rethink the hours- Nothing that customers say they want branches for requires 44 lobby hours and an additional eight drive-thru hours. How about 7-3 M-T, and 11-7 Wed-Thurs and 9-5 on Friday? That allows time for early morning people to bank and after-work people to bank and see your bankers for their more sophisticated problems. Put an inter-active teller machine (ITM) in your man trap or drive up for doing transactions during other hours. This would allow branches to have four FTEs, assuming one is absent at all times for training, customer visits, PTO. You can make up some of the costs of paying people more by having fewer people. Floaters can cover crunches.

3. Design should match emerging needs for branches- Taj mahals are not necessary unless you are using a hub and spoke where the hub is in larger towns, and spokes in lower footprint branches such as the 1,000 square footer. But pay attention to design to make sure you convey the look and feel consistent with customer needs and what you want them to think about you. Check out Associated Bank's design (a couple pictures from their annual report). They took part of the savings from reducing their number of branches by investing in the look and feel of the remaining branches. Check out my post from nearly four years ago on branch décor for more on this. And oh yeah, don't spend money on making your branch a destination. Because people don't want to hang out in bank branches. 

4. Automate support functions- Want to save money? Look at HQ. The promise of AI looms large.

If we believe in strategic alignment, that our day-to-day actions should be consistent with our strategy, then we need to re-think how we feel about branch staff. Because I don't know many banks that want their branches to be staffed with our lowest compensated, highest turnover employees. 

Yet here we are.

Thoughts?

~ Jeff

The bank branch is dead. Long live the branch.
https://www.forbes.com/sites/forbesfinancecouncil/2019/04/10/the-bank-branch-is-dead-long-live-the-bank-branch/#6d595a2f32d0

Regions New Branches
https://www.youtube.com/watch?v=wycNfFk6Dic

Chase Branch Design
https://www.youtube.com/watch?time_continue=45&v=yCe9yPKyd9Y

Bankers: If We're Serious About Helping Clients, What About These Two Products?

With all of the automation of financial products, one would think managing finances would be simple. Much more so than when our grandparents saved for the coal delivery in an envelope in the night stand.

My focus today is on consumer banking. Which is becoming more challenging for the community financial institution due to heavy competition from money center and super-regional banks, credit unions, and fintech firms. Do we cede the field? Hand Wells Fargo our sword, as it were?

I don't think community financial institutions can fund themselves solely from their commercial customers. They struggle serving deposit-only or loan-lite small businesses because commercial lenders have no interest and branch skills have not been elevated to create the confidence needed to have business banking conversations. If a commercial lender has 20% in compensating balances in his/ her portfolio, that would be a win.

But what about the funding for the other 80%?

No, I think community financial institutions should develop a solid strategy for retail banking. As my industry colleague Ron Shevlin aptly pointed out in his 2015 book, Smarter Bank, money management will be more important than money movement. Actually, since it was written four years ago, I might be as bold to say that it IS more important. 

This reminds me of a scene from Date Night with Steve Carell and Tina Fey. Steve played an accountant, and informed a couple that they would be receiving a nice tax refund. To which he suggested opening a Roth IRA. Not interested. They were going on vacation. The world needs more boring advisors like Steve in Date Night. Should your institution be the bore? To help your customers make better financial decisions?

If you believe yes, how is your financial institution equipped to handle such a business model? Not just in employee capabilities, but in products?

A 2018 Harvard Business Review article emphasized a growing financial problem among our retail customers: they are not prepared for retirement. HBR proposed what to do about it. But I ask my readers, what do you intend to do about it?

As HBR puts it:

"Ultimately, the shift from defined benefit pension plans to employee-directed defined contribution 401(k)s is the major driver of the impending retirement crisis. Beginning in the 1980s, this move helped companies reduce their retirement liabilities and better meet their quarterly financial targets, but put an unmanageable burden on employees."

Helping our customers manage this burden requires a change in strategy, from one of "more products per customer", to "promoting our customers' financial well being." If your financial institution is embarking on delivering the latter strategy to your customers, I think there are product gaps. Two come to mind.

Much Maligned Products

The below products are much maligned due to high reputation risk, outsized fees, and are difficult to deliver due to high maintenance costs or regulatory/licensing requirements. But to help our retail customers navigate retirement, they are legitimate options that need a trusted person to deliver, be that an advisor or banker. 

Annuities

Many financial institutions "sell" annuities. But many advisors say this product is not worth it. Sales loads and ongoing fees are too costly compared to alternatives. And I agree. Vanguard was known as the low-fee producer, and they are transitioning account administration of their annuity products to Trans America. And I must admit, finding a legitimate website for objective comparison is difficult because annuity providers clog searches with pitches. And they sponsor websites that might appear objective.

Which screams for somebody to be on the side of the customer.

An annuity, properly constructed, can help your retail customers reduce the risk of running out of money in retirement. Much like a defined benefit plan does. A deferred annuity, or an immediate annuity, can be structured to provide fixed payments as long as the buyer lives. And to protect the buyer from pre-mature death and losing their savings, an insurance rider can be applied to reduce that risk.

It doesn't seem like this should be something that has a 2% annual expense ratio and a 6% sales load. Especially since your customers can pay no sales load and a 25 basis points fee for a robo advisor or an index fund. The costs are too great to overcome. 

This is an opportunity for a consortium of financial institutions, perhaps through their national trade associations, to develop products such as an annuity that protects community financial institution retail customers from running out of money in retirement. Without hyper-feeing the customer in the interim. 

The offloading of retirement risk from employers to employees scream for it. Why would banks sit on the sideline of such an important financial goal?

Reverse Mortgages

Or as the federal Department of Housing and Urban Development calls them, Home Equity Conversion Mortgages (HECM). There's an acronym for everything. Here's another product that requires some savvy web surfing to look up legitimate sources of information that is outside the product pushers purview. Imagine being a retired utility worker that is concerned about running out of money? No wonder they turn to Magnum P.I. and The Fonz for financial advice.

This one is close to home because I described it to my mom to alleviate her concerns about outliving her money. She owns her home outright. As many seniors or near-retirees do. A reverse mortgage is a legitimate product almost totally avoided by financial institutions due to reputation risk. Imagine the scenario, mom takes reverse mortgage but fails to tell her children. She passes and nobody keeps up with the payments. The bank forecloses. Geraldo is called in. Adult children on TV in tears. Holding grandchildren that thought the house was going to pay for school and give them a leg up on life. Sad.

This is not an unsolvable risk. It may, and likely does, require financial institutions to look beyond the mandatory disclosures. Because as I hear it, heirs not knowing about the loans are a big problem. Couldn't we solve for this and other risks and maintain our position as our retail customers' advocate?

A reverse mortgage requires little organizational effort in today's technology world. The loan origination resources wouldn't be materially different than a home equity loan. Loan maintenance would be even less. We already track that borrowers pay their real estate taxes on regular mortgages. The biggest difference will be at the end of the loan, where the full balance is due when the owner sells the house or passes away. And that effort and risk can be priced into the loan, without gouging.

But if we do have a retirement crisis, a reverse mortgage can be part of the solution.

Product Promoter or Retail Customer Advocate

Helping retail customers prepare for and navigate retirement can be a strategic objective of your institution. It is particularly important as so many Baby Boomers are taking their gold watch every day. Many if not most are ill-prepared for what is next. Becoming their advocate can be the best advertisement for attracting younger retail customers to your bank.

Because there are a lot of hucksters out there. Pushing Product.

~ Jeff

Can and should banks help the children?

It's for our children. I love it when politicians give some variant of this argument. I suppose if they really cared about our children, they would stop running up the national credit card on them. But doing so would not allow us to "protect our children". Protect them while saddling them with our bills. Real good parenting.

Politics aside, I received a school of hard knocks lesson in how poorly our young adults are prepared for personal financial management. Prior to sending our daughter off into the hard, cruel world, I sat her down and went over budgeting and the importance of saving. We developed a spreadsheet together to go over her expenses, and her after tax income from her paycheck. We allocated a certain amount to auto-deduct into a savings account. We used Excel, but there are plenty of nifty apps such as Koku (pictured) so they can use their indispensable phone.

Then she left. And ignored everything we discussed. We could have let her work her way out of her money mistakes. I'm a firm believer in letting kids touch the stove. But no. Most of her financial misdeeds fell to me and my wife to clean up. I often ask other parents about their situation. Most either continue to provide financial support to their young adult children or let them struggle. Problem: when digging yourself a hole, the first order of business is to stop digging. These kids, I suspect, keep plugging away at it.

Not to play up my generation. But when I left the house, there were no checks coming my way from Mom. No paying auto insurance, cell phone bill, etc. It was.... good luck son! Today, there is a greater sense of dependency and entitlement, as if reducing our retirement to support our adult children's lifestyles is something to aspire to.

Isn't this an area begging for help from financial intermediaries such as banks and credit unions? Parents don't want to support their kids ad infinitum. I doubt brokers or insurance agents want to fill the role, because they still get compensated on production. And there will be no big dollars in the near term for becoming the kids' money mentor.

But kids and parents need help here. There is an emotional aspect regarding dealing with money issues between them. Having an intermediary makes sense. Compensation can be in the form of a fee, or for "premium" customers, no fee (minimum balances). FI customers are extremely sticky, so not only will you win the loyalty of the parents, but have a great chance of banking the kid for life as they move from broke, to borrower, to saver. I think, with training, the emerging "universal associate", assistant manager, or in some cases, branch manager will be able to fill the role. Imagine once per month, ten minute Skype sessions with the college student checking in on their money management practices. It could set them on sound footings for life.

There may also be profitable opportunities for college financing, as this is an area that begs for conservatism. Money has been seemingly so free to kids in college, they burn through it faster than a pro athlete at a strip club. They go overseas for study or vacation, take spring breaks, stay in college for six years, all because that first payment isn't due yet. But when it comes, they'll either have to default or live with the parents because the monthly nut is so huge they can't make it on their own.

Can't we create a financial package and service and price it so we grow revenues, leverage our infrastructure and expertise, and win the loyalty of parents and their young adult children? I think we can.

What are your thoughts on the subject or do you know of FIs that are doing it?

~ Jeff