Episode 4: Keep, Close or Transform? A 3 Step Methodology for Making Branch Investment Decisions

Greetings everybody. This is Eric Cook with WSI Internet Consulting. And I would like to welcome everyone to the July 2015 episode of Banker Education Series webinars. For those of you that maybe stumbled upon WSI and the Banker Education Series through a link through social media or some other method, WSI is a digital marketing agency, and I consider myself a recovering banker of 15 years, and I've been doing digital marketing since 2007. And we work with businesses and organizations around the country, particularly in the financial services arena, on digital marketing, web development, social media, and also have the good fortune of speaking at banking conferences and conventions across the country, which is one of the reasons Why, I am very excited to welcome our guest for today's show, Mr. Joe Sullivan from Market Insights, because as a banker, I've had the pleasure of listening to Joe present at conferences, and as a speaker, I've had the almost equal, if not better, pleasure of sharing the stage at conferences and both being speakers at similar events. So I kind of know Joe both ways, which is pretty exciting. So before we officially get started, just want to provide everybody with a couple of items of housekeeping. If you do have a question during today's presentation, we'd certainly love to hear from you and encourage you to use the chat functionality in your control panel. You can go ahead and type your question or comment, and I'll be monitoring for those during today's presentation. I don't think we're going to have any challenges of being conversational because I already have some questions for Joe as well based off of the topic today, but if you've got things that you would like to ask, by all means use the chat function and we'll make sure to go ahead and ask those when there's a break in the action. Joe will provide some information at the end of how you can contact him if you'd like to get a copy of his slides from today's presentation. And then lastly, before we get started, just want to remind everyone that we do record all of these webinars and they will be made available at the Banker Education Series page, which you have before you. So just as a recap, we, we did a session last month on cybersecurity. We've talked about Apple Pay and why bankers should care and how that's changing the way that we're actually making payments. And then much probably close to all of our hearts, if you're a banker, which you probably are, the .bank in the top-level domain. And now that you probably all have your domains registered but wondering what to do. Um, might not be a bad idea for me to get a hold of Doug over at the ABA and see if he'd like to do a round 2 to figure out what to do next. So, but that is for a future show. On today's show, we have episode 4 entitled Keep, Close, or Transform: A 3-Step Methodology for Making Branch Investment Decisions. So while I work the magic of, uh, the GoToWebinar system, I am going to send the presentation. over to Joe and have him share his screen. I see—

let's see here.

Joe, you should be getting a request to share your screen out.

I just clicked that and don't see anything here yet.

So we can see your desktop. The ocean's— oh, the ocean wave. Got it. Here we go. All right. There we go.

Can you see all that now?

Yes. So, so formally, Mr. Sullivan, I would like to welcome you to my Banker Education Series webinar show, and thank you very much for being our guest and sharing your Keep, Close, or Transform concept. I know we've done a little bit of chitchat about this before the show, and with the, the way digital is changing, I know a lot of the bankers that we work with are certainly looking at their branches a little differently, and do they need them? If they need them, What do they do? So I think this topic is really, really timely, and I'm excited to let you jump in. So with that, I will turn the presentation over to you, and let's get through some slides.

Eric, thank you for that, and thank you everyone. And so if you're in the Eastern time zone, I hope you're enjoying your afternoon coffee. If you're on the West Coast, I hope you're enjoying your lunch, and hopefully we'll give you a few things you can think about here. Eric, as you and I, we've obviously had quite a bit of conversation around this, but keep, close, or transform, and what do you do with this bricks-and-mortar? There is so much opinion out there. There is so much data that says the branches are obviously in rapid decline, that they're being used for different purposes, that you should rip out all of your tellervines and replace them with tellerpods. So the reason this was created is to put some framework around this for things that you can look at to evaluate your business situation. I'm gonna warn you right now, I am steeped in metaphors. I talk a lot in metaphors about the way that I do things here, and there's a lot of slides, and I'm gonna hit some highlights. I might skip through a few of them, but at the end of this call today, you will have a framework to evaluate your business situation and start having the internal discussions around keep, close, or transform. Twitter handles and hashtag for this particular session today and how you can reach me on Twitter if you care to. But what's our agenda? I'm gonna paint the framework of the industry dynamics. We're gonna talk about what do you research, what are the most important things that you can take a look at, because to quote someone from Charles Schwab that I heard years ago who said, we are drowning in information but thirsty for knowledge. So what are the appropriate data points, what are the appropriate metrics and triggers that say this is definitely a branch that we should keep, this is definitely one that we should close or consolidate or transform, and I'm going to share my thinking about what rethinking the branch actually looks like. So a little bit about me, we are Chicago-based. I started this company in 1993. I'm a frequent writer for The Financial Brand. As a matter of fact, an article by the very same name as this conference I published with them on July 7th, I think it was. So you can see it there as well. I'm a speaker, a psychotherapist, a consultant running this Chicago-based firm, and I also work out of Seattle, so really all over the country, and actually Michigan-born and raised. I noticed that there's a number of you from Michigan on the call today, so I'm originally from Grand Rapids area. But that's a little bit about me and the things that we do. I'm a marathon runner, a yogi, a coffee drinker, and so forth, so you can see who's this, this guy on the other end speaking with you today. A little bit about Market Insights on slide number 5 here. Our work is about delivery optimization and helping banks and credit unions take a look at the market area and assess what needs to be done and how do we deliver services given the target customer or member. We do M&A work. We do customer segmentation work, branding and positioning, and strategic planning, but everything is geared toward helping you understand the marketplace, and what choices do you need to make going forward to keep your bank or credit union relevant? I think Bill Gates said this better than I can. He said, banking is necessary, but banks are not. You might think that he said that last year, but ladies and gentlemen, he said this in 1995, as you can probably tell from the photo. I think that it's a good analogy because banking is something we do, not necessarily someplace we go. Banking is a verb, but not necessarily a noun. So I want you to keep that in mind, because this is not about randomly spending $700,000 to remodel a branch. This is not about randomly closing branches because you think that your mobile banking product is up and running, and of course it is. But it's to think about, we as consumers are omnichannel. We as consumers bank in multiple channels. And what is the right combination of things that you do today to position your bank and credit union for success going forward. Transformation is really what this is about. Really, transformation is a noun. It's the thorough or dramatic change in form or appearance. That's really what's going on in this industry right now. We're just going to call it financial services, so I don't need to talk bank versus credit union, because the reality is none of that matters. The question you need to know is, what do we need to do differently going forward given that technology and consumer behavior and demographics are changing, and what does that mean for our business model, so that we don't randomly or haphazardly make choices or spend money that may not be aligned with your customer. So transformation takes a lot of different environments. We have demographics, as I mentioned here on slide 8. We have mobile. We have the changing role of the teller. We have the changing workforce and demographically what it looks like. And we have, in addition to Chase, we have what I call Silicon Valley-inspired competitors who are calling all of us to get better at our job, that are calling all of us to redefine what competition looks like and say, how do we move forward? Now, disruption is the name of the game, ladies and gentlemen, as Eric has obviously talked about quite a bit as well. You know, there are so many different types of competitors out there that I am frankly least concerned about the bank or the credit union that's within a 3-mile trade area of your bank branch or your credit union branch, but to say, who is it that's actually going after our customers? Now, the disruptors are many, from Lending Club to Square to GoBank to Apple Pay and so forth, but what I'm going to mention here in this case are 2 things. Number one, the disruption really started in 2007 when 2 things happened at the same time. The advent of the first Apple phone— excuse me, iPhone was introduced, and the recession started. That fundamentally changed everything in terms of we as consumers and how we shop and how we evaluate companies that we want to do business with. Take Walgreens as an example. I think they're a great example that probably most of you have a Walgreens in your own neighborhood. Again, with Walgreens, whether it was their purchase of drugstore.com, whether it was their invention of Balance Financial, which again brought debit cards— excuse me, prepaid cards into the hands of consumers and their foray into the banking business, or their more recent advent, which is 500 pilot stores around the country, one in my neighborhood in Chicago, for example, that went into a vacant Borders bookstore. And at that Walgreens store, I can not only get a prescription filled or fill in the— pick up the prescription that I filled online. I can go to the juice bar. You can get a manicure and a pedicure. You can have coffee with your neighbor at the espresso bar. You can of course talk to your pharmacist. All of that says Walgreens knew that if they did not reinvent their store experience or rethink that store experience, they would not be relevant for the changing demographics. On top of which, what was driving it was of course aging baby boomers and the Affordable Care Act. So all of this is to say that we do not live in a bucket or a bubble, I should say. We must constantly keep an eye on the trends out there inside and outside financial services. We must understand constantly how the demographics and the changing consumer behavior is shifting our business model. Now, I'm going to spend— I'm going to go through these very quickly, but we know that the branches are in decline. What I mean by that is the number of them is obviously changing. On average over the last 5 years, we are reducing by a net number 1,000 branches per year in the country. Obviously, there are still a lot of branches out there. My stake in the ground to tell you is that I think there is an important role for the branch to play, and it's changing. That's what I want to fuel you up to help solve. We know that bankers are buying and they're selling, and just today there was yet another thing in one of the news medias about Dodd-Frank. We know that regulatory costs and things, if you are a smaller institution, that this is an ongoing burden and challenge that you have. We also know that there are more people having discussions when you look at 2013 in black versus 2014 in red. We know that there are more buyers and more sellers. Going into discussion, and that is only going to continue. So regardless of whether that's going on in your market, regardless of whether that is you, what we're going to lay out here fuels you to be able to compete. Now you see some sheep on here on slide twelve, and this is a reminder to all of us not to go into autopilot. Seth Godin, the great author and blogger, said sheepwalking was his term to define as mindless employee behavior, and we all do it. I know I do it. You probably are thinking you do it. And all it means is when you go into autopilot, when you pick up and do the same solution to a problem the same way you solved it 5 years ago, when maybe it requires something different, this is the time to stop and rethink and say, are we doing the right course of action? Are we thinking through the potential implications here based on today, not based on 2008 or 1998 or whatever? So where do you begin? Ask these questions. Begin with a dialogue at your entire organization around these questions. How should the branch evolve in light of market conditions? Are our branches focused on the right activities? How do we serve retail and commercial or small business customers cost-effectively without the huge expense of a branch network? And here's the big one from my perspective. What do people visit a branch for? Ask yourself that question. Get one branch in your system, whether you have 1 or 2 or 100. Pick one, and as I'm going through the slides here today, ask yourself the question: what is it that people visit this branch for? And how does this branch, or the branches that we have, align with the call center and the other digital channels that we have? Now, a way to think about this— I put in a slide here called Delivery System Methodology, and I wanted to have kind of a picture for kind of how to look at this. And we're going to go in a counterclockwise direction starting with the market, and the things that you're going to want to look at are— and whether you do this at a branch trade area or at the county that surrounds all of your locations— what is the demographic trajectory of my markets? What does market density look like? Is it growing or declining? And what does market quality look like? Creditworthiness, age and income and education and business profile. All those things, and I'll show you a sample of that, but those are the kinds of things you want to look at relative to the market. Relative to your customers, who are the segments that we actually serve? Are they young and upwardly mobile? Are they small business? Are they older and mature with very few credit needs? You have to go back to the data, and if you walk away with nothing else from this presentation here today, it all starts with the data. You cannot make informed decisions about keeping or closing or transforming if you're not looking at the data. So your data is a gold mine of information that you can mine and assess and look at. Ask yourself this question: What is the role that you play in your customers' lives? It's not to cash their checks. It's not to make them loans. Well, yes it is, but I'm inviting you to look underneath that and say, what's the true role that we play? Then you look at market potential. Do you have branches that have the ability to grow, and do you have branches that don't? You need to understand which ones are which. So we do some financial point scoring and help you to prioritize. If you've got 5 locations that are in question, you start with one. You pick the one with the greatest growth potential and call it a pilot. Call it a way to introduce a new way of thinking. Look at your competition. I am less concerned as to which banks and credit unions you're competing against, and I really want you to know the type of competitor that you're actually up against. This is where the GoBanks of the world and the Lending Clubs of the world— these are where you are probably seeing a big bit of your competition that is eroding away at your market share. We're going to talk about propensity, but it's more important to know the total propensity for people in your market area to purchase financial products than it is what the FDIC reports as branch deposits. And finally, I'm going to give you the metaphor of place, processes, and people, and to say— and we'll go into this— but what do we need to know about place, processes, and people, and what do we need to change relative to our place, our processes, and our people? So I promised you metaphors: research, review, and rethink. Number 1, research what matters. First of all, it starts with your data. Many of our clients will tell us they're very reluctant to use the data because they're concerned about privacy concerns and all that. Here are a few things to get you started in terms of your data and what you should be looking at. Number 1, first of all, how do we assign households or businesses to a branch? This is one of these age-old questions of data. Are your customer households assigned to the branch based on where John or Mary Smith opened their small business account in 2001, but yet they moved 15 miles away and don't even bank there? We recognize that that can be a Pandora's box, but one of the things that you're going to want to look at is how are you assigning branches. Then you get into internal organizational politics and what makes a branch grow and so forth. Etc. But start with branch assignment. Look at the transactions that you're actually doing: teller arrivals, personal banking sessions, mobile, the app and all the different things, and mobile and ATM and all the different things and the different ways in which people transact for you. And if you are not gathering that data, then it's time to start setting up fields in your MCIF to start capturing it. What are the customer segments that you actually attract? And are assigned at the branch level? Again, I'll talk about this in just a few minutes, but what are the unique segments? And how do your branches relate to each other? Do you have branches that feed off each other? One is more commercial and one is more retail. So again, beginning with data is a great place to start. Now, I want to show this map of the United States because one of the things that we all have to do is to put this into context. And I picked this as a US map to show something. Everything basically in the green and blue are areas where between 2010 and 2014 there was a net gain in population. Everything in yellow or tan or brown is a loss. And what this does, it also factors in people's mobility based on if they've moved or relocated for a job. And as you can see, not every part of the country or every part of your state looks the same. For example, if you look at the state of Michigan, we know that the south and the west is far more in a growth mode than the north and the east. So it's important to understand what is happening demographically within your own footprint, neighborhood, trade area, and so forth. So I want to lay out the things that you can look at. I'm going to speed ahead for just a second to the map on page 20. I hypothetically picked— I believe this is the state of Kansas if I'm not mistaken. I hypothetically picked a market with a bank with 3 branches. Market A which has a 3-mile radius kind of near the center of town there. Market B with a 2-mile radius right below it and overlapping it a bit. And Market C several miles to the north which is 5 miles in nature and a little bit bigger. We understand that we are in a digital world, but we understand also that you have this bricks and mortar that you need to take a look at and say, what do we do? This is where I'm going to share with you what I think are the most important things that you should look at. Number 1, within your own branch trade area, and if you have 1 branch or 5 or 10 or 100 or whatever it is, that's fine. First of all, identify the environment, and by that I mean, is this in the ground floor of a hospital? Is this at a workplace or a factory or branch? Is this in a neighborhood near a major shopping center or on the pad of a supermarket? Is this in some kind of limited access environment, such as a military base or so forth? All of these dictate different travel patterns, different density patterns, and so forth. Second, ask what the trajectory— not ask, but look at it— what's the trajectory of your market area over the next 5 years going forward? Is this market or branch trade area in decline, or is it in growth mode? Next, who are your customers assigned to this location? What is it that they buy or have the financial propensity for, and how do they want to access it? And as I mentioned previously, what is the role that you play in your customers' lives, and what is the desired customer experience that you want to create? These are the things, ladies and gentlemen, that suggest how the filters for how you should be looking at your branch trade areas. So hypothetically, again, you know, kind of some of the data that matters on slide 21. I took those same 3 trade areas, and the thing that I want to point out here is that Market C, although it's the biggest trade area, it has the lowest density. It is the one that is in market decline, both in population and households, from the current year, CY, to 5 years, FY, going forward, and also from 2010 to now. It has the lowest average household income, the lowest home value, the lowest number of businesses. And so what this bank hypothetically is looking at is maybe it's not Branches A and B that we need to be concerned about. Maybe it is Branch C, but it all begins with data. And as I've sometimes said at other speeches or with clients, the road to growth, the path to growth and profitability lies in data. Now, I want to talk about your customer segments because when I asked you, who are they? What is it that they buy from you and how they want it delivered to you, or how do they want it delivered? This is to say here in this example that we have, you know, Market A in blue, Market B in red, and Market C in green, and that not all of them are the same. So what it is, is getting a handle— ask not how your markets are the same, but how they're different. The customer distribution and types of customers may vary by location. And so if you have markets that perhaps skew younger and more tech-savvy, It might mean that you're going to do different things inside that brick-and-mortar location than you might do at a different one. Maybe more succinctly put, I profiled one of these segments, the Y1 upwardly mobile segment, and I picked it because I think it shows an interesting profile of the data. And I've got to move something on my screen here to get this out of the way. I'm not sure if you guys can see this or not, but this segment which comprises roughly— I forgot how much here, but a large chunk of some of these trade areas. What this woman profiled in this picture is, she has a high percent propensity for first mortgage usage, student loans, using her American Express card, trading online, opening her account online, and direct deposited payroll. But not very prevalent in here do you see the need for a checking account and so forth. The indexing from 100 to 200 means that 100 being the same as the national average, that these trade areas with the Y1 customer distribution has 2.2 times as likely to have large mortgages, student loans, and American Express cards. The reason I point this out again is that it helps you to make choices as to product suite, delivery choices, and what to do with the branch. Bear with me here just a second. Now, just as importantly with that is when you're looking at your branch, it's also what kind of potential do you have? We in the banking world, there is kind of an ongoing belief that the way that success at a branch should be judged is Teller traffic, transactions, and deposit levels. So in this example that is a bank in the Midwest, we profiled and we found out that their top growth product categories were number 1, commercial loans at $124 million, investments at $106 million, mortgages $72 million, checking at $25 million, and savings at— let me move this— $16 million. And what this bank was doing was building the idea around that we should evaluate where we can gather checking products. And what this bank found out is that the real gold and the growth potential had nothing to do with the deposit side of the bank. It had to do with the loan side of the bank, and that meant that they needed to change the staffing model over, and they needed to change what was going on inside the square footage. So to keep, to close, or transform, you understand— you must understand the kind of potential that is there. All right, bear with me here just a second. There we go. Now, from a competitive standpoint, one of the things that I want you to consider is we know that there's a lot of data out there about— from the FDIC and CUNA and so forth, as far as deposits and market share. Yes, Eric?

It looks like we are froze on the researching slide. You might have accidentally clicked the pause button for your control panel.

All right, just a second. All right, can you see competition now?

Competition is there, thank you very much.

All right, sorry about that. I was moving around that. That control panel takes up such a big portion of my screen that I keep having to move it.

I think there's an option to go ahead and shrink and minimize that. There should be maybe an orange arrow. We'll let everybody experience our chitchat back and forth. So you should be able to minimize that and hide it. There you go. That's the joy of doing a live show, right?

Exactly. I'll go back to the one thing here, you guys, I know there's a lot here, pick the 2 or 3 tidbits that are most important. So what I'm going to just say about competition, it is far more important to really ask the question, who truly is our competitor in this market? And most of the time we find with our bank and credit union clients, it's not The branches that physically exist within the 1-mile radius or whatever around the trade area. Who are you really competing against? Because this is the question that has to happen. Now, I'm gonna talk to you again, and we should be on slide 26 now, Markets A, B, and C, and I'm gonna just show a really quick example of Market C. Deposit propensity of $961 million, deposits held in banks and credit unions of $241 million, and deposits held elsewhere, or the money to still grab, is $720 million. Compared to Market A with $4.79 billion and Market B with $2.147 billion, the question to be asking is this: is there— propensity is basically the demand for the products based on the demographic profile of people who live and work there. And the question to be evaluating is not how many deposits are held in the banks and credit unions in your trade area. It does not matter. What matters is the amount of money held elsewhere, because that is the growth potential that you can sell into. So all I'm going to say here without getting too much into the weeds here is, again, there's a lot of data out there, but who are your true competitors? And the things that you want to evaluate are propensity, and households per branch is a good figure as well, and what share of propensity is held outside banks and credit unions, because that's the amount of money that you have the ability to grow into. I realize that's a mouthful.

Yes. Yeah, back on that slide, I guess when you're identifying that $4.7 or the $2.1 billion, which is the deposits held elsewhere, what are some of the sources that you rely on that might be available to bankers through public sources just to give them some ideas? Because obviously we can go to the FDIC registry and get all the competitive data to see what banks and credit unions are doing, but how are we sourcing that held elsewhere to really reveal the true opportunity?

There's 2 things. We mathematically model it here at Market Insight, but what we do is we use Nielsen data, and the Nielsen data basically gives us the household data, and we do some mathematical calculations of the household data and the average product and usage balance. Say, for example, that Household X keeps an average deposit balance of $28,500. How many of them are there in the marketplace, and what percentage of people actually carry a deposit account? So what we do is mathematically calculating it using the Nielsen data and the mathematical lean of the demographic data to come up with that. And then we compare that with the deposits that FDIC, for example, would report at, say, $1.343 billion for Market A. So a lot of it we come through— there's a series of processes we take it through. We use Nielsen data. We'll use S&L data sometimes where that's appropriate as well, which is also Nielsen data, by the way. And, and do some mathematical modeling of that to show the client what is the total universe of, say, deposits that are available. Did that answer that for you?

Yep, I think that's perfect. Thank you for clarifying that.

Okay. All right, I'm gonna, I'm gonna kinda move ahead just to keep things on here, but I think that composition and expectations— when we look at a trade area, when there are more big banks in a trade area, there are some things that we definitely know to be true. Number one, The digital experience is going to be better. There's going to be better online marketing. There's going to be a higher percentage of customers banking online, and so forth. It is going to influence the expectations of your customers. You might say, how does all of this relate to helping me decide what we're going to do with the branch? Again, it's understanding the dynamics in your own market area. These are kind of some of the things that we look at. Now, slide 28 is a bank branch that I was in recently. Eric, since you're online near, where are we?

I think we're in any community financial institution with 4 teller lines and a little counter where you fill out your deposit slip and a new account desk on the left-hand side.

Exactly, thank you. That was my only point in showing it. I want the listeners here today to pick one branch in your system. Pick one that just confuses the daylights out of you. You're like, we don't know what to do here. I want you— I'm going to ask you a series of things we're going to talk about over the next few slides, and I want you to keep that branch in mind as you go forward. Now, one of the things that I've already referenced this, but channel usage, I've mentioned that you should be looking at branch assignment and transaction mix and product mix. Product mix is a good one, and I want to bring you back to fundamental here. Banking 101 with this one. If I have a bank branch that the transaction— not the transaction, but the product mix that we have booked at that location is not really demand deposits, but it's primarily CD and time deposits, then why are we still staffing the branch the same way? What I'm starting to lead you toward is that the data starts to influence what are the trigger decisions that have to be made, and because most of the bank branches that we go in today, or credit unions, are staffed the same way. They have a few tellers, maybe a personal banker or 2. They have a manager and an assistant manager, and everyone is telling me how busy they are and they don't have time to go outside and make sales calls in the community. All I'm doing is saying that the data is beginning to challenge, as I showed with you before, the bank that had $126 million in commercial loan potential and $100 million in investment potential. We have to start looking at that to say, Does this mean an indication of a change in staffing model? And I'm going to quickly go through this, that we all bank many, many times, 20 to 30 times mobile, 7 to 10 times per month on our desktop, etc., etc., etc. And this continues to change and move and tilt more toward mobile. It does not, however, mean that there is not a place for the branch. We also know And you've got a social media guy who's hosting this today. We know that social media is influencing this. And how do we look at this when we are looking at the branch? We want to know what the conversations are about, and we want to know how is this bank presenting themselves in the social media realm. And are they using social media as a way to stop by our branch for coffee today and things like that? And what is the true conversation that's going on as opposed to some of that more or less extraneous useless stuff that gets out there in social media world? Now, place, processes, and people. That's my last metaphor for the day, you guys. And I want you to think again, what do I need to know about place? What do I need to know about processes? And what do I need to know about people? So far in our journey here today, I've, I've talked to you about demographics of the market and some of the things that are important to know about your trade area. We talked about competition and some of the things that are important there and so forth. Now we're going to take this a little bit further, and we're going to talk about the review of what actually do we look at when we start to make these choices. So we're back to that Market A and Market B again, and I just zeroed in on that same map that I showed you a few minutes ago. And there's some overlap between Markets A and Market B, and that may not be significant. Sometimes there's 100% overlap. The more important question to ask is this: Do they functionally overlap? And by that I mean, if Market A, for example, or Branch A is primarily focused on commercial, and Branch B is a feeder that primarily serves retail and transactional traffic, then it doesn't matter necessarily that they overlap. So what you need to be asking yourself is, what are the activities that go on in Branch A and Branch B? Do they work together at all? Does Market A send things to B, and Market B send customers to A? In other words, do they complement each other? Does one serve— perhaps Market A is the hub and B is a spoke. So just because they geographically overlap does not necessarily mean that is a bad idea. It can be, because if they're doing the same things, that's where you start to look at, we might need to consider consolidating B into A. And then you get into, you know, which has a better location and things like that. But here's what I want you to go back to. I asked you a few minutes ago when I showed you that branch lobby that could be Anytown, USA, I asked you to keep in mind one of your locations. And here is what I want you to look at. Now hypothetically, we'll put a little table here together of locations 1, 2, 3, 4, and 5 across the top. But here's what I want you to think about. I'm going to start at the bottom. And the environment I alluded to earlier, are we in a small town? Are we on a pad of a regional shopping center? Are we in a workplace environment? Are we on-site at a hospital and so forth? So the environment, number one. What is the drawing power of that location, meaning high-end retail, lots of transactional traffic and so forth? We have clients right now in Los Angeles where I have yet to this day see bank branches as busy as these are with migrant workers and city workers that live and work near there. that are transacting like crazy, and they need more tellers and not less. So it all depends on your market and the location that it's in. Maybe you're in the right market, but the location's in the wrong place, and, and location is very important today when we decide to commit to the bricks-and-mortar game. But here's what I want to ask you internally. When you walk through the front door of your location that I— that you have in mind, ask yourself if there are what I call zones of access. Number 1, do we have an empowerment and education zone? Do we have a place where customers can go in to be inspired, to think big, to think about that new house, to think about ways that they can plan to get their children through college and so forth? Do we have an area where banker and customer can engage together? Do we have an area for specialized sales if we need it, such as an investment services boutique, Or a mortgage lending area and so forth? And do we have an area for self-service, which is a growing part of it? We know that people come today to a branch for very specific things. It is for problem resolution. It is for the more complex transactions and so forth. And I'm guessing that the branch that I asked you to look at looks kind of traditional. So this is a way to organize your thinking as a place to start. What do we do with these branches? Are we organizing the inside of that space with the right kinds of activities that matches up to the kind of potential that we have? So what are some of the triggers to keep, to close or consolidate, or to rethink or repurpose? Now, I want to caveat this right now before I start laying this out to say every market is different. Every business situation is different. These are not the absolute Bible according to we must keep or we must close when these things happen, but it's again a way to organize your thinking, a way to organize the discussions at your particular institution. So here we go. Now, keep. We generally define these more in the safe category for this has got to keep, be maintained. If the branch serves a very defined niche, if it has a high-volume transaction level even today, even in light of your mobile product and your ATMs and perhaps your video ATMs and so forth, if there's a profit contribution that is positive, and if this is a highly visible branch or what I call a physical landing page for your brand. Those are generally some of the ways in the safe column. So what I'm inviting you to do is to triage and kind of categorize your locations if you can to say which ones do we need to take a closer look at, which are the ones that are pretty safe and don't need management attention at this point as much. The second category, when you have branches or markets where there's no growth, where there is a geographic and a functional overlap, when you look at the age breakdown and it might be perhaps inconsistent with the market, When the deposit mix, for example, is highly toward time deposits and not transaction deposits, and when your household per branch number, again depending on the environment, falls in 500 or below. Now I know that some of you on this call today, because I know most of the areas where you are all located, is that again, if you're in an upper peninsula of Michigan, for example, or you're in a southern state, We know that these numbers are not— 500 may not be the magic number. But what I'm inviting you to do is to look at that as a metric to say, this is a starting point, so you can rank your branches relative to each other. And the third, where are the triggers for kind of a rethink and repurpose? When we know that Branch A is a good feeder branch for, say, Branch B, or the other way around. I didn't mean to confuse that from earlier. When there is a synergy that happens between locations, When we can define a hub or spoke concept, when we have a branch where we need to completely rethink and turn this into an investment services boutique and wealth management as opposed to teller deposits. In other words, people again visit branches, and what we see for the foreseeable future is they're going to go there for the more high-end, sophisticated— not high-end, not necessarily in dollar ticket, but more complex business situations that your clients are into. This is a way again to start ranking and sorting and triaging your locations based on these triggers. Let's talk a little bit about rethinking the branch. There is a lot of experimentation going on. There is a lot being written about this. There's a lot of discussion and a lot of— we went into a client, I'm just gonna say the Upper Midwest at this point, in a market that is very economically challenged, that is demographically challenged, where they have a brain drain of talent and young people moving away. And what this particular client did is they spent $700,000 remodeling a main office and putting in telepods and so forth, and it was the wrong place to spend the money. And that's what I want you to avoid. So what I'm going to do is share, hopefully with steps A and B here so far, 1 and 2, You're starting to get an idea that this requires information to make more informed decisions. Now we're back to our place, processes, and people metaphor again. And the one thing in place here on slide 40 I want you to think about— I've mentioned most of these areas, the zones of engagement, self-service, and complex transactions and so forth. But we know for a fact right now that we're going to have fewer branches in this country almost regardless of state and regardless of geography. They're going to be smaller in square footage, and they're going to be more finely tuned with people that are highly trained. Call them universal specialists, call them universal bankers, and so forth, but they're going to be trained to handle more complex things. The depository functions and things like that, these are being handled through technology. Location, location, location. You probably heard that metaphor when your real estate broker was showing you houses to buy. The same thing goes here. What I mean by that is this. That when you make a commitment or a decision to keep bricks-and-mortar, they had better be rockstar locations with highly visible draws in good markets. There is no more room for suboptimal locations. There is a decreasing amount of, I think, patience in the industry for banks or credit unions to keep locations that are suboptimal at best. You can't afford to keep those. You have regulatory costs to pay for. So what I'm inviting you to consider, where are your rock stars? Where are your weak links? And what do we do with the weak links? Now, another way to organize that. When we work with a client, we tend to break them up into generally 4 categories: ATM only, a self-service banking center, 250 to 300 square feet, a hybrid banking center of about 1,000 square feet, maybe 800, and a full-service traditional, and you'll notice that it's 2,500 square feet. So what we try to do is again, you've heard me say the words, organize the thinking, break it up into specifications, square footage. Again, you already know the kind of market potential that you have. You already know the kinds of customers that you're serving. You already know whether this branch has the ability to offer investment services and so forth, and fewer depository services. You know that. So then you can start to make decisions such as, would installing a cash recycler in this particular location make us more efficient, free up staff to do other things? And do we need a traditional type of ATM in here, or do we need a more interactive video-enabled ATM? Then we get at that environment that I mentioned earlier that I talked about that I won't say again, but urban— I think I forgot to mention urban, but that of course is one. And suburban, small town, and workplace, and so forth. And ask yourself, what is the typical situation that we have here? We might be needing to downsize square footage. We might be needing to consolidate 2 into 1. We might be needing to turn 1 branch into a satellite of another location, or it's a downright branch closure. And then we look at staffing, whether we need a universal teller of sorts, or banker I should say, not teller. Whether we need specialized investments or mortgage or small business people, and whether we should phase out the tellers. So this is what we call delivery stratification. It starts with the market and your customers and the kind of potential and whether the branch can grow and what kind of outlet that you need and the things that should be happening inside that outlet once you know that. So let's just look at a few visual examples that I pulled from the headlines here. And I think in all of these, what I'm gonna say is this: there's a lot of experimentation going on. There is no one-size-fits-all that's the perfect thing for every situation. That you see a lot of interaction where a customer can walk up to a touchscreen and talk with his or her banker, or explore at what's called the visual planning table. But what all of these spaces were designed to do is to draw you as the customer into the space They are highly branded. They are highly, you know, high use of technology and touchscreens and the ability to talk to a banker who may not physically be located in that space and so forth. So I think these are just a few examples. The other thing I want to say on slide 43 is that I see a correlation between telemedicine and video banking. You know, telemedicine, which is what again In the healthcare world, we're looking at where we can basically log in and talk to our doctor without having to get out of bed if we have a fever of 101, where we can talk to him or her about the symptoms. Technology is already putting the access to medical professionals in our hands, and I'm saying that the video ATM is that very same metaphor. It's the same analogy. I personally think that the video ATMs The real gold and the real value in this is the ability to talk to my investment person, my mortgage gal, my commercial lender, and to do it there within the comfort of my desk without having to have him or her come to me or vice versa. So there's a lot of cross-pollination of how technology is allowing people to deliver services to their customers. It's not just unique to banking, and that's the thing that I think we need to remember. Now, I'm just going to check my time here because I know we've had a pretty action-packed slide presentation here in terms of content. I want you to think a little bit about, again, Steve Jobs. And he said, simple can be harder than complex. Now I've got to kind of move my screen a bit here so I can see all the quotes. Simple can be harder than complex. You have to work hard to get your thinking clean to make it simple. But it's worth it because in the end, once you get there, you can move mountains. And by this I'm saying that we have to again get inside the heads and the hearts of customers and what is most important to them. So USAA, I'm just going to hit this high level on this, but what they have done is basically do what's called activity-based marketing. They have said to their customers, hey, if I want to buy a car, I don't need to go to the dealer, I don't need to shop for all these different things online, I can go right to USAA, I can pick out the kind of car I want with the features and the color and all the different things, tell them where I live, and they will help me facilitate the purchase of this car and get my insurance and get my auto loan and all of that and help me sell my old car. This, ladies and gentlemen, is what is happening. While this is not happening inside a branch, USAA, by the way, has also made announcements that they're going to put in 12 locations across the country. It is about finding the balance between the technology and allowing our customers to do as many things as they can on their own and being available in the physical world when they need us to be. Now, I just want to reference quickly an article that was in the Financial Brand last month, and just that in North America, for example, most of the expenditures in the branch are in what's called the upper quartile in black, in workforce optimization, product origination, advisory services, and customer service technology. So again, I think it just puts it in perspective along with other areas of the world. And finally, I want to make one other point here— almost finally, I should say— that LinkTo, or if I'm saying that right, but I came across this service. Basically, what you're seeing on the iPad and the iPhone here is basically what I call banker on demand. It's the same video banking technology, and it's just on your iPhone and your iPad. So this is again where we're moving to The customer, you know, requiring our services when and where and how they want us to. I'm just going to take 2 seconds on the workforce realities and the shifting demographics to say that as you also look at staffing, you need to also recognize that you have as many as 5 generations working at your bank or credit union right now, and they all have different career goals and rewards and views of retirement and job change and training. And all I'm doing here is to say it's important to keep that in mind, because the workforce is changing, and as you are being called to look at how to staff, that's going to only increase the demand that you understand what's going on there. So training to the desired customer experience, which is kind of where we started some of this, is always the thing to keep in mind. So when you're training and when you're deciding what has to happen at the branch, The first thing you must start with is what's the desired customer experience that we want to create here. Now, I've gone through here very quickly to allow any time for Q&A in case we have it, and so maybe that's a good time to do that right now, Eric, to see if anybody has any questions that they've brought to you.

Okay, yeah, that's head-spinning, really good stuff there, and when you showed the video Banker on Demand, I, I got to thinking of the Kindle device where Amazon on Kindle, you can go ahead and it gives you the ability to pull up somebody to walk you through how to use your Kindle device.

Yeah, like the Mayday button, I think it was called.

Yeah, yeah, that's what it was, the Mayday button. Yeah, um, as much as the advertisements on TV, I think, creeped people out a little bit, uh, Big Brother's watching.

The reality is they don't care.

Yeah, so, but yeah, it's definitely there. And certainly the other element that you talked about with regards to social media growth, it was interesting. Everybody always thinks about Facebook being the monster. YouTube was the largest number on that, and that speaks to video and wanting to see who it is that you're going to be interacting with.

Right.

And it all boils down to personality, and in the community banking world, Having that personal connection, I think, is so important. We've done it so well for so many years. Now we need to figure out a way to embrace technology to do that, and it's either improving the branch experience or figuring out a way you can digitize that.

Right.

So, just some, just some big observations on my part. As a reminder, if you're listening live, feel free to type in any questions or comments into your chat box. I'll keep an eye on those. One question that jumps into my head is, you know, what if you have got an office and you've determined, wow, that's just way too big, but you can't sell it and you don't need as much space? I know I talk to a lot of bankers and they've got 5 teller lines and they only really need 2 of them.

Right.

What do you suggest a banker does with all that extra space? Education pods? Self-standing kiosks?

Well, there's some things—

Remodel and build a community room? What do you think needs to be done there?

I think again, it depends on the market and what the needs are, and I'm going to share a few examples that we've had clients do. We had one client that had a whole location that due to an acquisition that they had to close because it was 100% overlap, and what they did is they donated it to the community and turned it into a community center. Now, but more in terms of the square footage to get at what you just mentioned, I think, you know, you obviously look at whether you lease and own it, if it's off the books and all that. I think number one, bring in a complementary line of business. We have a client on the West Coast that brought in a coffee shop, which is not uncommon, and they take over the whole first floor lobby of this 3-story building that they have, and it's wildly successful, and it's a local chain, it's not one of the nationals. The other thing to look at is, again, you know, whether you can lease or sublease a portion of it to, again, complementary line of business, a real estate company, an insurance company, and so forth. So I think that that is again, what's the highest and best use for the real estate? We have a business out here, a friend in a business where— now this is not banking, but what they've done is they have brought together a coffee chain and a postal services like a UPS Store kind of thing and created their own hybrid. And now bankers are very interested in that model. And when I was in New York about a month ago, I saw that a bank in New York had leased out some extra space for a postal service so that the small business people that they bank could come in and get their packages ready to ship, get a cup of coffee, do that same kind of thing. This is where we've got to think outside the box and say, what are the needs of the customers that we serve? If you did an informal survey of your small business customers, they might tell you things like, we need shipping and packing services. We need a notary or whatever it is. So complementary lines of business that you could sublease space to, chop it off and sell a portion of it if you could, donate a piece of it for other purposes, and then of course again the community room and educational center and things like that are all I think fair options on the table.

One other question that I get asked often, and I'm curious on your thoughts, As a lot of banks start moving more actively into social media, some of them are looking at online chat capability.

Right.

And you know as well as any, social media never sleeps, and they're struggling with how often they need somebody available to answer questions. And while that might be initially thought of as if somebody posts to their Facebook page, does somebody need to respond over the weekend? But when you think about it from a branch delivery perspective, Are you seeing that consumer expectation requires greater than 9 to 5 hours from a community bank to get support through things like online channels and video chat and those sorts of things?

Absolutely. I think that the 9 to 5 world is gone, as you and I both as entrepreneurs can speak to personally. But absolutely, what I see happening is the call center that banks have that has primarily been either just problem resolution or sometimes outbound, needs to be reconfigured or reimagined with video capabilities that is staffed at least from like say 7 AM to midnight and might even be 24 hours depending on where you are, but I think that's what has to happen.

Okay, yeah, I know, and the nice part about that depending on the systems and the technology that you're using, some of that can be done remotely. But that opens up a whole other can of worms from both the technology and an HR perspective, and you've got people manning support lines.

Well, but I think that that is where we're moving to, and if the bank wants to, or the credit union wants to position themselves as kind of like always available, it is going to say we need to rethink this staffing model. And I think it goes back to that comment you said earlier about You know, people wanting to see a face-to-face connection with the people that they are working with. We are redefining the concept of place is what we're doing.

Yeah.

And part of the questions that you've had is all about creating place, and all we're inviting everyone here today to think about is that we know that bricks and mortar, there's still a place for it, no pun intended, but we also know that you've got to balance out the things being done differently in that bricks-and-mortar in light of all the other things that we've been talking about in the last 5 minutes?

Yeah, well, it's certainly one that consumer expectation is being set outside of the industry, and while we don't necessarily maybe feel that the community bank needs to be there right now, I think more and more consumers, especially the younger ones, that pressing the bundle— a button and having a Kindle person right there on video When they get to the point where they apply for a mortgage loan, why wouldn't a bank offer that? If Amazon's giving me that, why doesn't my bank?

Right.

And so thinking about it, you can't start thinking too soon. So all very, very good things to think about. And I've got, uh, I'm sure we could be on the phone bantering back and forth for at least another 30, 40, maybe 60 minutes, but I just looked at the clock myself and we are at the top of the hour, my friend, and have run out of time.

So let me just say this. There is obviously a lot. Let me say thank you to you, Eric, for inviting me on today and for everyone listening in today. And if you want a copy of the slides, contact me. I'm going to get to that right now on the screen there, my email, jsullivan@foremarketinsights.com. And you can also reach me @mi_sullivan on Twitter. And I would be glad to send you these slides. Fascinating topic, Eric. Thank you, and thanks to everyone here today.

Yeah, my pleasure, my pleasure. And I know, you know, everybody— I can, I can see attentiveness. You may not realize that, but I can see attentiveness in my GoToWebinar console, and I can tell you that everybody was glued to the slides and paying very much attention, as was I. So great topic, great information. I encourage everybody to reach out with Joe and to get the slides and to chat with him more. It's certainly been a pleasure to have become a good friend of yours, and we often will throw Twitter banter back and forth, and that's been fun, and I'm looking forward to seeing you at some upcoming events.