Executive Summary: FIC’s last newsletter discussed the importance of banks focusing on cost reduction if they are to generate strong earnings in 2012. This newsletter, written with the input of my colleague Ric Carey, former head of Retail Banking at Umpqua Bank, offers some specific ideas for banks to implement in their retail and small business units.
In light of reduced revenue opportunities and the continually changing role of the branch, banks need to decrease their operating expenses. The following ideas are practical and, in many cases, can be implemented quickly. Some provide revenue growth opportunities as well.
* Increase centralization of operational and compliance activities. Taking as much of these activities as possible out of the branch, not only reduces the need for branch staff but typically increases productivity and quality.
* Increase span of control for branch managers. At many branches, transaction volume is down. In addition, more activities have been moved out of the branches to regional or centralized offices. In part due to these changes, not every branch needs a dedicated branch manager. Based upon geography, current and likely volumes, and personnel capabilities, many managers can handle two or three branches rather than one. The potential cost savings are substantial with some of those savings used to hire experienced sales persons, rather than trying (and usually failing) to retrain customer service oriented bankers.
* Establish a remote centralized Relationship Management (RM) team for small businesses. The target clients for a remote RM include companies that prefer to speak to someone that knows their company, but do not have the time to meet or the economic potential to merit meeting with an RM. In this case, discussions and transactions are conducted by email or phone, yet the customer is speaking to the same person (or team member) when they need help. This segment represents about 25% of small businesses and tends to involve smaller, privately owned operations, for example, a retail shop. The hours of remote RM availability should extend until the early evening and Saturday. A team of four remote RM’s can handle over 2,000 clients in this manner while providing personalized attention to this customer segment. Today, most banks are largely ignoring this customer set.
* Lever existing technology. Many banks now use a hub and spoke system, whereby, a product specialist handles multiple branches. This is true for product areas such as consumer and small business lending, mortgages, wealth management, among others. Some banks are refining that model to have the specialist meet with targets by video conferencing. In some cases, branch staff meeting with a customer will use their computers to link in the product expert, or conferences will occur within the branch. This approach saves time, increases productivity, and should result in experts focusing on opportunities with a higher likelihood of closing.
* Expand branch employee empowerment to make waiver and refund decisions. Employee empowerment will lead to quicker decisions for the customer and, with proper training, can actually reduce waivers as branch personnel become the decision maker and take responsibility for reducing exceptions.
* Rank personnel/replace the bottom five-ten percent. As noted in our last newsletter, poor performers are productivity killers. In many cases, the worst performers should be dismissed as soon as possible, in order to capture some near-term savings rather than waiting for a replacement to step into the position. (Our experience is that most will not be missed.)
* Streamline the regional management team. Changes such as those above result in the need for fewer senior regional managers. Increased regional management territory results in significant cost savings and can be implemented relatively quickly with minimal downside risk.
* Introduce Universal Associates (UA) versus the traditional teller and platform staffing model. The UA is trained in all branch functions. Any UA can conduct teller duties, open new accounts, complete loan applications, and perform similar duties. While this approach may increase near-term training costs, it can also permanently reduce the total staffing within a branch.
* Change branch design. Neighborhood branches with 2,000 sq. ft., no drive in, and open extended weekday and Saturday hours located in appropriate urban settings can reduce construction costs by 75%, yet achieve outsized deposit growth. Included in new branch design should be paperless video product information as well as opportunities for community involvement. Banks also need to renegotiate existing leases to reduce space and related cost.
* Centralize all retail and small business lending activities. Centralizing credit can reduce origination costs, speed up loan approvals, and often increase portfolio quality. Credit scoring models should be used for a first pass approval with underwriting conducting a “quick” personal review for final approval.
* Reduce marketing costs. Significant cost savings can be achieved by implementing Predictive Modeling for next product purchase propensity. Banks should replace mass marketing with targeted promotions to the right customer with the right product message. Increased segmentation both reduces costs and improves results.
* Introduce a Consolidated Product Package. Develop and implement a combined consumer and small business product package to better address the total banking needs of the vast number of very small businesses, such as SOHO’s and part time business clients. This approach can reduce the cost of individual product sales.
Concluding comment.
In response to the need for banks to reduce costs, FIC has developed a cost reduction workshop. This one-week program identifies priority areas for cost reduction and provides a road map for management to achieve potential cost takeouts. Regional and community banks, in particular, should immediate place a strong spotlight on cost reduction.