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Branch Banking: Convenience is King

By Bill Handel, Vice President of Research and Product Development, Raddon Financial Group

While the number of insured financial institutions continues to decline, the number of bank branches continues to rise. In 2005, the banking industry added 2,255 net branch offices, a 3% annual growth rate. Over the same period deposits increased by 8% (Source: FDIC). Ironically, the branch growth rate is similar to the growth rate of online banking users. The online channel, once thought to make the branch obsolete, is now firmly entrenched as a complementary channel to the branch within a traditional bank’s delivery strategy.

The correlation between the growth in branches and the growth of deposits is real – branch convenience drives deposit growth. But, at what level?

The industry has always known that convenience is an important factor when a consumer opens a new checking account – the most important factor according to Raddon Financial Group’s (RFG) semi-annual national consumer research. Intuitively, this makes sense; a consumer’s primary checking account is transaction-intensive. Some consumers can rely heavily on automation (direct deposit, bill pay, AVRU), other consumers still require the physical presence of a branch lobby or at least a drive-up ATM to make transactions, but the majority of consumers prefer a combination of both automation and face-to-face service. One may also consider a consumer will forego a free toaster, or the latest iPod rather, for additional convenience another bank may offer. The question, however, remains: how can we quantify the importance of branch convenience to product sales and balance growth? In addition, is it possible to determine the financial lift banks gain from being more convenient to their customers?

RFG has quantified the value of branch convenience for several hundred financial institutions through a database research and profitability analysis program called the CEO Strategies Group. RFG’s research defines the lift generated by branch convenience in meaningful terms like balances, cross-sales, Return on Assets (ROA), and net income.

First, to understand the impact of this research, the concept of branch convenience must be defined. RFG developed a model based on the location of a customer’s home address relative to the institution’s branch network. For the model, RFG weights two factors: the distance the customer lives from their bank’s closest branch, and the total number of their bank’s branches within a five-mile radius. Given these factors, RFG computes a Convenience Score for each customer household, then RFG segments the households by five levels of convenience:

  1. Multiple Branch Access (approx 45% of retail customers and 50% of commercial customers)

  2. Very Convenient (approx 20% of retail and commercial customers)

  3. Convenient (approx 15% of retail customers and 10% of commercial customers)

  4. Inconvenient (approx 10% of retail and commercial customers)

  5. No Branch Access (approx 10% of retail customers and 10% of commercial customers)

Interesting product usage patterns appear when the segments are analyzed side-by-side. The following table outlines the lift convenience provides in checking penetration, total deposits, core deposits and service per household.

Customer Segment Checking
% of
Per HH
Per HH
Multiple Branch Access 69% 58% $11,335 2.00 26%
Very Convenient 64% 17% $9,104 1.93 32%
Convenient 59% 10% $7,556 1.85 36%
Inconvenient 51% 7% $6,133 1.70 38%
No Branch Access 41% 8% $5,488 1.41 28%

Every deposit category has a linear relationship with convenience: with higher convenience comes higher deposit balances and higher deposit usage. It’s unmistakable that deposit generation and checking sales depend heavily on branch convenience. But, notice that loan penetration has an inverse relationship to convenience. One may ask why convenience doesn’t drive loans as it does deposits. An RFG client recently offered this explanation: “Our customers like to be close to their money, but as far from their debt as possible.” The observation has merit, but the data could also mean consumers are more willing to travel to get the best rate on a loan, or the industry does not focus enough on cross-selling loans in the branch.

An institution’s level of convenience has a significant impact on the bottom line as well. RFG ranked each institution in the study based on their level of convenience, represented by: High Convenience, Average Convenience and Low Convenience. The following table shows how the three groups compared based on key metrics.

Bank Segment ROA Cross-Sales Fee Income
Per HH
Cost of
High Convenience + 10 basis points 15.70% $219 1.85%
Average Convenience Baseline ROA 12.60% $155 1.98%
Low Convenience -3 basis point 9.70% $98 2.00%

Banks with high convenience are able to generate $121 more in fee income, pay 15 basis points less on deposits, and achieve a higher ROA than banks with low convenience.  In addition, banks with high convenience have better cross-sales to their customers.

The data clearly shows the value of branch convenience, but does not suggest that banks should always focus their capital on branch expansion.  Each market is different and each bank has unique considerations to evaluate before deciding where and how many branches to add. 

RFG suggests analyzing current branches based on how well they are leveraging their convenience to generate greater deposit balances, higher checking penetration and overall share of wallet.  In addition, a market area analysis of current branches and prospective branch sites should take into consideration these factors:

  1. Should the bank add branches to grow new customers, serve existing customers, or both?
  2. Which existing branches are performing well, and which are underperforming?
  3. What’s the sales potential by product from existing customers and prospects for each existing branch and proposed branch area?
  4. Is the market heavily penetrated by competitors?
  5. What’s the institution’s branch growth strategy: core deposits, loan sales, new customers/accounts?
  6. What are the market demographics and the projected growth rate for the market?

Ongoing, the performance of existing branches should be evaluated at regular intervals (annually or semi-annually) relative to one another with industry benchmarks to highlight areas of competitive advantage or weakness.

About the Author
Bill Handel is the Vice President of Product Development with RFG. Bill graduated from Kenyon College in 1980 with a degree in Economics. He has worked in the financial services industry since that time, primarily as a consultant in the area of product development and management. Since joining RFG in 1990, he has developed several unique programs to assist financial institutions in the management of their product lines. To contact Bill, call 800.827.3500 ext. 364 or email

About RFG
RFG has been providing research-based solutions exclusively to the financial industry since 1983. RFG understands the industry and knows how consumers interact with financial institutions. By using best practices in research, analysis and trends to create member intelligence, RFG plays a key role in helping credit unions manage their member relationships and their organizations.


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