Focusing on Branch Profitability, Solely, Misses the Mark: 4 Things to Consider
January 11, 2017
As consumers’ preferences continue to evolve, it is becoming painfully clear that focusing solely on branch profitability will provide an incomplete or even misleading picture for decision-makers.
Think of it this way. Traditional branch profitability analyses often reward branches for living off the past.
Consider a branch that has a large loan portfolio, creating a lot of revenue, ultimately leading to today’s high ROA for that branch. However after taking a closer look, it may turn out that this branch hasn’t produced many loans over the past year. In fact, they are one of the lower ranked branches in terms of loan production. However, the high ROA shown in a traditional branch profitability analysis is the result of living off loan production from years ago.
Evaluation in terms of current ROA alone may result in missed opportunities to realign resources today in order to have intentional focus on strategic objectives and evolving trends.
The following outlines 4 things to consider that is guaranteed to enhance business intelligence with respect to delivery channel effectiveness.
1. Expand the evaluation to all delivery channels. Credit unions are investing heavily in self-service options for members. Effective adoption of these options is key to remaining relevant for many credit unions. A focus during on-boarding has proven to help with adoption and engagement of new self-service options
2. Align measures of success for each delivery channel with the credit union’s strategy. This requires decision-makers to be intentional about the purpose of each branch, the contact center, and digital delivery channels
3. Take a holistic approach to metrics. Rank them to align with the credit union’s strategy. For example:
- Membership Growth
- Not all growth is created equal. This can be evaluated by segments if there is a strategic emphasis on the type of membership growth
- Assigning indirect autos to the closest branch can significantly skew results. Consider evaluating and managing the indirect channel as a stand-alone delivery channel
- The same holds true for membership acquired digitally. If a branch is credited, decision-makers will not have clarity with respect to the effectiveness of their digital delivery strategy or the physical branch
- Value-Add vs. Routine Transactions
- Work with your team to distinguish value-add from routine transactions, then rank delivery channels accordingly. For example, many are revamping branches to remove routine transactions so that value-add and complex transactions can be effectively and efficiently handled. In this case, the metric would evolve around reducing routine in-branch transactions and increasing value-add transactions
- Member Engagement & Feedback
- Comprehensive delivery channel evaluations should incorporate what the members are saying about their experiences with the different touch-points. Credit unions are investing heavily in digital delivery. It is not uncommon to hear that member satisfaction with digital delivery is lower than that provided in branches. If this is true for your credit union, ask yourself how this can impact member engagement and how the gap in member satisfaction can be narrowed
- If the credit union has strategic emphasis on particular demographic segments, consider establishing metrics that align with this focus
- Loan Growth
- Rank current balance, short-term, intermediate-term, and long-term performance independently. This addresses a common flaw of profitability studies that can focus too heavily on older loans
- Rank major segments of lending by balance and recent production. This provides an early warning if production is falling off
- Share Growth
- Consider category evaluations. Delivery channels that rank high for regular shares or checking may benefit the credit union differently than those with a heavy reliance on money markets or CDs
4. Weighting Is Key
- Each of the above can be important to monitor, but not all of them will contribute equally to the credit union’s performance or strategy. Consider the credit union’s strategic objectives and then use these objectives to help weight the importance of each category. This intentional view of production and member experience, connected to strategy, creates better business intelligence for decision-makers than a traditional branch profitability analysis
Having a broader understanding of delivery channels in terms of contribution to strategic objectives and the trends exhibited is the first step. This can then be combined with profitability estimates if desired.
As the financial services industry becomes more complex, it is important for decision-makers to have the right type of business intelligence so they can take action and make necessary course corrections, timely.