Banking Performance Insights

The Role of the Branch in a Digital World

Aug. 29, 2016

By Timothy J. Reimink

With declining branch traffic and changing customer expectations, banks, credit unions, and other financial services companies are being forced to re-evaluate the strategic role their branches play and reassess the cost-effectiveness of the branch channel in general. As they respond to this changing environment, where new competitors and new technology-based services are emerging with increasing frequency, these companies need to develop a new understanding of the role of the branch and more effective ways of measuring and managing branch performance.


Changing Times, Changing Strategies

There is little question that the branch channel in the financial services industry is facing severe challenges. Declining traffic is only a symptom of more fundamental changes in the industry – and society at large – as a new generation of customers chooses to conduct its banking business in different ways.

We live in a multichannel world, where the growing popularity of remote and mobile access, combined with competitive pressures from online providers and competitors with few or no branches, are forcing banks and other organizations to re-evaluate the strategic role of the branch as a customer channel. To be effective, such a re-evaluation must begin with a clear understanding of the different ways in which channels address three basic functions for customer relationships:

  1. Sales: developing an understanding of customer needs, connecting them to the appropriate providers, motivating their purchases, and fulfilling the delivery of the desired services
  2. Service: performing basic account transactions, providing account information, facilitating account changes, and helping to resolve problems
  3. Retention: influencing a customer’s choice to continue the relationship with the organization by creating a personal connection, demonstrating responsiveness, developing relationship-based decisions, and reinforcing the convenience and availability of the organization

The various channels – branch, ATM, telephone, mobile, online, and others – perform these three functions in different ways with varying degrees of effectiveness. For example, an ATM’s primary value is its ability to expedite basic service functions, while the primary value of relationship or account managers is heavily weighted toward sales and customer retention. Exhibit 1 illustrates one way to envision the relative value provided by various channels.

Exhibit 1: Sources of Value Vary by Channel

Source: Crowe Horwath LLP analysis

As the exhibit demonstrates, these three broad roles are complementary and overlap significantly. No channel is focused exclusively on a single objective. This is especially true of branch operations, whose value to the overall customer relationship is among the most balanced of all existing channels.

Defining the Branch Operating Model

Branch operating models build on the basic understanding of relative channel strengths and functions in order to express specific ways in which products, people, processes, platforms, and management practices are combined to deliver value to customers. Some organizations’ operating models are based on the traditional role of the community bank, while others more closely resemble a franchise or retail operation. Some models place a greater emphasis on technology and convenience, while others function more like a financial advisory office.

There is no single “branch of the future” operating model that works for every bank or credit union. Each organization must make strategic choices to develop operating models that are appropriate for its situation. What’s more, it might make sense to deploy more than one branch operating model within the same organization, taking into consideration the market situation of each particular branch.

Key elements to consider in developing the most appropriate model include crossover of customers between branches (referred to as “network effects”), the level of local empowerment, the relative focus on relationships or transactional sales, technology deployment, real estate location, facility design, and revenue sources. At an even higher strategic level, this analysis also can involve a reconsideration of which customer segments should be targeted.

Current industry experience suggests many organizations are struggling with developing their operating models. For example, in a recent online survey during a webinar sponsored by Crowe, a little more than a quarter of the participants (26 percent) said they had a clearly defined and well-executed operating model for their branches, as shown in Exhibit 2.

Exhibit 2: How Well-Defined Is Your Operating Model?


Note: numbers might not add to 100 due to rounding.

Source: Online survey of Crowe banking industry webinar participants, June 2016

The Changing Role of the Branch

There are three fundamental factors that must be addressed when developing an effective branch operating model. The first factor is a clear understanding of why customers choose to visit the branch instead of using some other channel such as an ATM, online banking, or a mobile application. This understanding can guide management as it addresses the other two factors, identifying the facility features and staffing models that can best meet customers’ expectations.

  • Reasons to visit. The most common reasons why customers choose to visit a branch include to:
    • Process transactions that are not easily handled through digital channels
    • Resolve problems more expeditiously
    • Discuss needs that are complex or out of the ordinary
  • Another obvious reason is to access location-dependent services such as safe deposit boxes or cashier’s checks.
    One often overlooked reason is the social interaction associated with a branch visit and in-person service by branch staff. This interaction is one example of the important customer retention function that the branch channel fulfills.
  • Facility features. As branch usage patterns trend increasingly toward resolving problems or handling more complex transactions, a number of organizations are rethinking branch design to establish a more engaging environment, with more flexible interaction space and no teller lines. One interesting response to this trend has been the creation of coffee shop-style environments that facilitate more comfortable and conversational settings for in-person interactions.

    At the same time, though, facility designers cannot ignore the still important goals of creating higher visibility in the market, being convenient, and providing easy access to information. These objectives will influence location choices, consolidation or relocation decisions, and the design and placement of interior merchandising displays.
  • Staffing strategies. Changing customer expectations also drive the staffing models being employed by banks today. Increased importance must be placed on branch staff members being capable of handling multiple types of issues and transactions, particularly more complex and nonroutine transactions. Strong relationship skills, technology skills, and adaptability become more important. Depending on branch location and customer demographics, they often also must be comfortable interacting with diverse customer segments, including mass market consumers, business clients, and the affluent.

    To find and retain more highly skilled and experienced personnel who possess these capabilities, many organizations are adjusting their approaches to recruiting and benefits, as well as deploying universal banker positions, flexible scheduling, and enhanced incentive programs.

Developing a Branch Value Metric

As the role of the branch changes, measuring branch performance becomes more challenging. Traditional branch profitability metrics do not adequately reflect the customer retention and service functions that are an increasingly important part of the branch’s value to the organization.

As performance metrics are reworked, it’s important to guard against the natural tendency to focus on those attributes that are easiest to measure, even though they often do not provide the most valuable information. For example, total branch deposits is an easy number to track, but it is woefully inadequate as a measure of overall branch performance.

Many traditional branch profitability metrics also fail to reflect the fact that the branch does not “own the balance sheet” – that is, the branch channel generally has no control over many major drivers of profitability. In addition, the branch often does not “own the customer.” In other words, the customer may use multiple branches and channels. Traditional metrics might be skewed by irrelevant cost allocations and inadequate recognition of the value of servicing and customer retention activities.

A more accurate and useful alternative to traditional branch profitability metrics can be achieved by developing a broad-based value metric. Such a value metric is an aggregate measure of value across multiple components of performance, such as sales, service, and retention. Using such a value metric in goal setting can allow for trade-offs between sources of value and can provide flexibility for different markets to achieve the value goal.

The development of a branch value metric begins by assigning values to the various sales, service, and retention activities performed by the branch. The value of these functions can be quantified by using models that are comparable to other fees, commissions, and retainers that banks already use. For example:

  • Sales value can be calculated in the same way that traditional sales commissions are calculated: as a percentage of new revenues.
  • Servicing value can be calculated using techniques similar to those used to collect foreign ATM fees and other fees, with an agreed value established for each type of service that is performed in the branch.
  • Retention value can be determined in much the same way that insurance companies calculate retainers for their agents, as an ongoing percentage of the account or loan balance with the percentage varying according to the type of product, account longevity, and other factors.

The net value of the branch then is determined by subtracting direct branch expenses from the total value generated. Exhibit 3 shows how this might look, and how such a branch value metric might be reported for a typical branch.

Exhibit 3: Example of a Branch Value Model

  Number Average Balance Balance
Current Value

Value Assumption

Sales Activities

New Accounts Sold for Bank



















New Accounts Sold for Others



















Total Value From Sales

Servicing Activities

Transactions Processed

For Own Accounts


For Other Branch Accounts



Branch Service Fee Income

Total Value From Servicing

Retention Activities




250 40,000 $10,000,000 $15,000 0.15%

100 1,000 $100,000 $10,000 10.00%

Total Value From Retention

Total Value Generated

Direct Expenses

Net Branch Value


Source: Crowe analysis

Each financial services company should develop and fine-tune its own branch value metrics so that the metrics accurately reflect the bank’s unique circumstances, including its strategic objectives and competitive position. Eventually, employee and team performance incentives could be tied directly to these same metrics.

Planning Ahead

The changing role of the branch will continue to cause considerable uncertainty in many banks, credit unions, and other financial services companies for the foreseeable future. The companies can begin to address this uncertainty by first evaluating the specific roles that branches play in their operating strategies, then defining the most effective and appropriate operating models to perform those roles, and finally developing and implementing accurate and effective branch performance metrics that measure what actually matters.

Regardless of shifting business trends and challenges, attracting and retaining talent is always one of the top priorities for any bank. Having a well-understood branch operating model and relevant performance metrics will support effective strategies for recruiting, compensating, and retaining talent.



Tim Reimink

Managing Director