Branch Banking: Optimization and Acquisition as Opportunity

With consumers seeking relationships, community banks and credit unions look at branching opportunities as a way through the COVID crisis

In our last feature What’s Next, we explored the ways banking is coping with near-term challenges and provided best practices to implement across both brands and branches. One of the five key principles we identified was optimizing the branch network. While it may seem counter-intuitive to focus on the branch while foot traffic is lower due to COVID, consumers are reporting that what they want most from their financial institutions now is a focus on relationship banking. The local branch continues to be a vital place to support and nurture those deeper bonds between bankers and their customers or members.

Optimize What You Have

According to reinvesting resources, banks and credit unions should consider ways to enhance local presence with their existing branches. That could mean rightsizing your current network by shifting format size and scope and deploying hub-and-spoke cluster models in the markets you serve. Or it could mean utilizing channels you already have better, like optimizing the drive-up window and installing ITMs as a bridge between the digital and physical and as a solution for social distancing protocols.  What’s not in question, however, is the power of local influence in financial services. Once a bank optimizes, what’s next?

Identifying Opportunities

At the end of 2019, PwC was predicting a robust merger and acquisition market in banking after an active year that was up 1.8% over 2018. Banks seeking to scale their organizations sought opportunities and often found them by merging or acquiring other banks in markets they sought to serve and growth markets they expected to flourish in the future. In fact, American Banker found that “Despite growing concerns about an economic slowdown, banks announced 257 deals in 2019, making it one of the busiest years for M&A since the financial crisis. The new year also showed promise, with 17 merger agreements reached in January.” Then COVID hit.

Since the outbreak of Coronavirus, M&A in the financial services sector all but stopped as banks shifted their focus to branch operations and day-to-day maintenance, with complications like lobby closures, appointment banking, and shifting transactions to other channels. The mergers that were in progress were either slowed down or terminated outright, with acquirers choosing to conserve cash over expanding their reach. But with operations now settling into a new COVID normal and community banks and credit unions seeing success by meeting consumers at the point of need, they’re beginning to look beyond the crisis at ways to extend and enhance their reach.

Growing Influence

While COVID will continue to impact local branch operations, those financial institutions with the resources to acquire will surely find better deals – with average premiums falling by 9% for the first half of 2020. But making sense of local data and ROI will be more complicated as the local banking landscape shifts along with virus hotspots. That’s why it’s critical to apply up-to-date data insights when developing a branch network strategy. While COVID may have shifted operational priorities for financial services in the short and medium-term, leveraging physical locations still represents the greatest source of consumer trust and new business opportunity for financial brands in the post-COVID landscape.

With the branch network, a bank’s primary objective is to achieve critical mass in any given market area, so that their market share exceeds their branch share. This is where market opportunity meets efficiency. When evaluating potential merger/acquisitions, look for those that bring you the most concentration in the areas of highest market opportunity – ideally without overlap but contiguous to your current footprint. Investing in the existing and future branch network positions banks and credit unions to scale, but determining which formats work best and what markets to deploy in continues to be a complicated picture, especially because of COVID.

Priming Potential

However, just because it’s complicated doesn’t mean banks can afford to overlook their branch network. Nor does it mean you can just close a certain percentage of your branches in the hopes of an optimized network when you come out on the other side of COVID. As a new report finds, “While banks have been closing branches for years, a Novantas analysis of recent closures found that at least 20% of branches were the ‘wrong’ branches.” It goes on to call for optimization, saying, “As the industry moves from a world where branch proximity and convenience was key … to a world where branch access is key… banks will increasingly need to re-envision the network to determine which locations make the most sense.”

Novantas data finds that retail store traffic in Work Centers is down by as much as 80% in large markets – while people work from home – while visitation in Hybrid (with a mix of workers and residential) and Feeder (very few businesses) still remains reduced but significantly less so, varying by market size.

New Markets, New Potential

Considering new markets it no easy task, but for financial institutions that will successfully navigate the COVID crisis, assessing new market penetration is critical – and things are beginning to look up. While there was a contraction in the first half of the year, Motley Fool is reporting that banking mergers are picking up pace: “[A]fter only one announced M&A deal in May, things started to get back on track. The Department of Justice dropped its investigation of Charles Schwab’s planned $26 billion acquisition of TD Ameritrade, and Schwab shareholders approved the deal on June 4. There were also six other M&A deals announced in June, and the targets seemed to get bigger as the month pressed on.”

We’re also witnessing a shift as consumers relocate due to COVID. The Pew Research Center is reporting that 22% of U.S. adults have moved due to COVID-19 or know someone who has. That’s millions of Americans relocating to different communities. Since moving is one of the biggest triggers for considering a new banking relationship and consumers are seeking new connections to purpose-driven brands, this migration presents an opportunity for banks whose primary focus is relationship banking. That is, of course, if they’re in the right markets at the right time – an opportunity that can only be unlocked by looking ahead at your branching strategy.

Here are some key questions to begin evaluating opportunity:

  • How do you categorize your markets?
  • What are your growth objectives?
  • Who is your primary target?
  • What is your value proposition?
  • What are key financial and non-financial considerations?
  • What are performance boundary expectations?

In upcoming Believe in Banking news and feature articles, we will continue to keep our finger on the pulse of the M&A environment and provide best practices for financial institutions in this challenging, but opportunity-rich environment. To develop strategies for your brand and branches in the face of COVID, contact Adrenaline’s experts at or (678) 412-6903. For more information on bank branch reopening in the post-COVID landscape, download the Roadmap to Reopening. If you need support for staffing, see the Frontline Staff Engagement Training series.Believe in Banking Logo