In the “Believe in Banking Podcast: The Growth Edition,” Sean and Gina discuss ways that banks and credit unions are meeting the industry’s the imperative to grow. They discuss how financial institutions determine the right formats and the right markets, including hub-and-spoke clusters with flagship locations in high opportunity areas and smaller community branches, ATMs and ITMs dotting the network for support. They address needed investments from the brand to the branch to maximize opportunities and discuss the critical role of a financial institution’s brand as a differentiator, priming banks and credit unions for change as they expand their influence.
Text Transcript
Intro: This is Believe in Banking, a podcast series for decision-makers, influencers and leaders featuring experts taking on the financial industry’s most pressing issues with insight and empathy. The podcast features information and conversations designed to enlighten and empower. Here are your Believe in Banking hosts, Sean Keathley and Gina Bleedorn.
Gina Bleedorn: Welcome to our Believe in Banking podcast. I’m Gina Bleedorn, Chief Experience Officer at Adrenaline. For our February podcast, we’re doing a special episode we’re calling the Growth Edition where we’re looking at ways financial institutions are implementing varying strategies for growth.
So whether banks are building their brands, transforming their branches, moving into new markets, or expanding through M&A, there is no doubt that growth really has been and remains an imperative for all financial services providers, especially post COVID.
In this special podcast, we will provide best practices, examples of banks and credit unions that are driving growth by reinvesting in their organizations with an eye on maximizing opportunities for today and tomorrow. We will pay special attention to ways to deliver better banking experiences and capitalize on the power of your physical presence. We hope this episode’s focus on growth provides you with some inspirational ideas and actionable approaches for your bank or credit union.
Sean Keathley: No matter the size of your organization, more and more organizations are going to be merging and acquiring and growing to kind of fortify. And with that said, Gina, maybe you should talk a little bit about what has to change with the network because again, this is a dual front.
You’re facing the digital aspect and the physical aspect, and it is impossible to do so with the kind of legacy thinking of branches in terms of density, location, and size. So how are people going to balance physical network that matters with this increased focus on digital?
Gina Bleedorn: Well, one stat that I am happy to see is that 11% are closing branches, but they’re doing so to reinvest in new formats. And those new formats certainly many of them are going to be smaller with less operational cost in staffing and square footage. But 30% of institutions are focusing on growing new accounts. So there is as much, if not more of a focus on growth as there is in reduction of cost in the network.
And that’s wonderful. Our fear was everything was going to just going to cut, cut, cut. And the fear with cut, cut, cut is that you lose; you’re cutting off limbs and you’re losing your opportunity to grow. So that focus on growth is still there, but there’s just simply a massive, massive right-sizing of the network. And you don’t need as many large locations in areas of lesser opportunity.
And when you start to look at hub-and-spoke clustering, because you can’t make decisions about any single location in isolation, when you look at that and you start to say, well, in this cluster of geographic area and market similarity, I can maybe downsize two of these branches. One could go to a micro location, one could turn to just an ITM or drive through format only, and suddenly I have great operational savings.
I’m still getting most of the presence that a larger branch would be providing, and thus the Halo Effect of what we have often talked about in the network effect of perceived presence. But I’m doing so at much less of a cost. And something notable in the Network Effect is that the general threshold of critical mass seems to have reduced. And I’ll explain what that means.
Gina Bleedorn: So as a reminder, the idea of the network effect is that you want your market share percentage to outweigh or outrank your outlet share or your branch share. So if you have 5% of branches in the market, you want more than 5% market share in the market. What has typically been the case over the last many decades is that there is this critical mass that previously had hovered around 8 to 10 percent of the branch share that was required for the S-curve to turn positive for you.
In other words, you need about 8 to 10 percent or so of branch share in your market to have your market share exceed. It seems that percentage has reduced to about 6% in markets of many different sizes. So that’s good. It means you need less actual locations, and it is a combination of less actual locations and that perception. And that’s the big change in the Network Effect, is that you can achieve perceived presence through smaller formats if they are clustered in a hub-and-spoke fashion in a way that strategically makes sense, again based on market opportunity.
Sean Keathley: And it’s that balance we’re looking for, Gina. You don’t, to your point you’re making, have to branch to the extent you did previously. Finding that balance for people is going to be the key. And as you talk about using analytics, using the right formats is going to be part of the solution.
Gina Bleedorn: Now there’s best practices from retail and other industries that support this. Some people call it kind of a flag-shipping model where you over-invest in hubs essentially and under-invest in spokes. But as an essential service, banking sits in a pretty good position.
And to think of like a Carvana, they’re building towers of real cars that are theoretically virtual in markets to just signify their presence, even though their model is that you’ll never ever go there. And they’ll give you a loan virtually and you’ll get your car virtually. And they’re doing that to do exactly what you said, Sean, to just be present in as big a way as possible.
Sean Keathley: We have highlighted some of the larger mergers and acquisitions that really make the headlines. They impact more branch locations, more communities. We are involved in the Truist project; the brand reveals happening now. So you’re seeing Truist brand is coming to live. And really one of the biggest deals that’s ever been done. The next closest was Wachovia-Wells Fargo.
But that’s not really the full story because in terms of numbers, there are much higher number of acquisitions happening in institutions that don’t have that kind of scale. We’re thinking about the regional banks, the community banks, and even the credit unions. And as we know, there’s a far bigger number of those institutions. So the likelihood of those being acquisition-driven make it higher just in that sheer fact.
Sean Keathley: But you could also argue that maybe it’s even more important; — the need to scale. The smaller your organization, the more difficult it is to survive and thrive. And many still have the spirit of community bank and absolutely want to be community-focused, neighborhood-focused.
But that can be done in more than one community and often that provides many benefits. So Gina, with a trend this prolific and this many organizations, large banks, community banks, regional banks, credit unions, dig into the why a little bit. Why are so many people thinking of this as a way to expand and grow?
Gina Bleedorn: Yeah, the top reason is not shocking. It is expanding the geographic footprint. And that supports everything we’ve been talking about, about the power of physical presence. Even if there’s less people going in, it’s expensive and the branches that you have may not be optimally designed and bigger than you need, the geographic presence is the number one reason why M&As are happening now.
That is followed by looking for new business lines, new revenue sources, often more niche revenue sources. So there is certainly a move towards becoming specialized in a few different ways, but those are the two main reasons why it’s happening. Further we mentioned this before, along those lines, that is why even non-banks are coming into the mix, and there is this bringing together of players that weren’t used to playing with each other before.
Gina Bleedorn: That also includes, and this is quite a polarizing topic, but credit unions buying banks. That is absolutely happening and that presents a whole new level of convergence both in the credit union communities, in the bank communities, and in the minds of consumers, that ultimately what often happens in the M&A world as deals are being looked at and considered and getting done, the downstream ramifications of the experience for the customers and for the communities and for your own staff become a secondary and sometimes even in some ways overlooked.
And so what we want to help our clients and the financial community think about is what are those implications of how this deal is going to affect our customers, our staff, and our potential customers in the markets that we may be expanding into. And we may need to change certain things about ourselves, about our brands, about our branches as we expand.
Sean Keathley: We continue to see this as a major trend. There’s an M&A announced every day, almost. You’ve been talking to some of the people that are involved in these mergers, and I’d love for you to talk to our listeners about what they discovered and how they think about some of the things they’re not doing as they consider these mergers and acquisitions.
Gina Bleedorn: Yeah. Understandably, in the deal-making process, there are so many uncertainties that all types of potential implications cannot be vetted in initial stages. But I think for many certain types of considerations, specifically around the brand and around the branch network, are not being considered as carefully as they could or should be.
As much for planning, the actual integration as for decisioning to make the merger or acquisition happen. Making more concerted efforts to think about what a brand implication would be, or a name implication would be. Do I have a name right now that is going to be limiting to these new audiences I’ve just acquired into, to new markets or new segs I’ve just acquired into? How will my name play in the short- and long-term?
Gina Bleedorn: And what happens that we are oftentimes helping clients reconcile years, in some cases, maybe decades, but many years later that could have been more adeptly and efficiently planned in advance is the result of the conglomeration of maybe names, of maybe brands or maybe just irreconciled differences between organizations that need to be reconciled for future growth. So those are some of the big eye-opening things we are seeing, because oftentimes when we work with clients, it’s right after these deals have occurred.
Sean Keathley: Well, Gina, we know that one of the things that is driving this activity is share prices are increasing. That’s a key item for people to consider, but it’s also creating some competition for these banks. We know of several situations where there’s multiple bidders.
And if you think about just the overall idea of due diligence and what a bank and its executives and board is doing as they’re thinking about merging or doing acquisitions, when should they be thinking about the things you mentioned?
Gina Bleedorn: Yeah. Really in the last one-third of the due diligence process. So depending on how long that is for your organization, it could be the last couple of months. That means this is getting serious, we’re finalizing, we have not entered into a definitive merger agreement publicly yet, but we are close. At that time, that is the moment you must consider what downstream brand and even branch network implications might be.
And for the brand that could be reconciling the position of the brand or the name or both. For the branch network, it’s about how to really leverage formats and think about how to get more efficient and ideally downsize while looking like you’re up-sizing. So more locations that are smaller and ultimately saving you operational cost, thinking about that sooner.
Gina Bleedorn: It’s not about closing, it’s about redesigning and optimizing. That ideally begins at the end of due diligence, before entering definitive merger agreement. And then that’s when you are really planning. And so also of note is alignment with the strategic planning process of your organization.
We find so many times, especially with anything related to the brand, that there are redundancies and overlaps in the conversations that are happening in strategic planning and in that process that really could and should be aligned with what’s happening with the brand and in some cases with the branch network too. So in general, it is much further upstream thinking.
Outro: You’ve been listening to Believe in Banking, a podcast series created to empower decision-makers, influencers, and industry leaders in financial services. Be sure to also join us on our flagship site, BelieveInBanking.com.