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  • Writer's pictureRoy Urrico

Branches Help Create Loyal Relationships, but Merger Efficiencies Not Assured

Updated: Jun 17

By Roy Urrico

Founder and president Steven Reider, and founding principal and director of marketing research, Kimberly Clay of the Birmingham, Ala.-based Bancography recently sat down with Finopotamus to discuss some of the key industry insights and research about branch banking as presented in Bancography’s Bancology Summer 2024 Newsletter.

In the first of a two-part article, Finopotamus focused on trends and benchmarks. In this last part, we shine the light on loyalty and efficiency.

Loyalty by Age – Branch Versus Digital Transactors


For its customer experience research tracking program, Bancography conducts thousands of telephone interviews. Data from those interviews yields insights into brand loyalty. More than 90% of survey participants conveyed that they have visited a branch in the past three months.

Kimberly Clay, founding principal and director of marketing research, Bancography.

“We go into the market blind and ask top-of-mind-awareness primary market share questions,” explained Clay. In marketing, "top-of-mind awareness" refers to a brand or product first in customers' minds when thinking of a particular industry. 


Said Clay: “We get a sample of (financial institution) customers and we take them through the survey. (Accountholders) have to maintain at least a deposit account. We are trying to get a customer who has a relationship. We do not want single service (customers) because the institution has not done a good job in cross-selling them anyway.”

The survey asked respondents who they consider their primary financial institution (PFI). As the branch transactor client ages, they are less likely to consider the institution (where they have at least one account) as their PFI. When asked their likelihood to recommend the institution to friends only 64% of these transactors between 18-24 years old were willing to recommend their PFI, versus 75% for those older than 65.

Clay observed that during presentations before financial institution executives they sometimes assume everyone on their (survey) list who has at least two accounts considers the institution as PFI, which is the case only about 60% of the time. “You just see their faces go white because no, that is not the case.”

Like the branch transactors, those who utilize digital channels only were less likely to consider the sponsoring institution as their PFI as they age. On average, branch transactors are four percentage points more likely to recommend the institution than their digital counterparts.

“Everyone is more interested in the younger generation because we understand ourselves and we are not so concerned. As far as knowing the lifecycle and the products the young people need, that has never changed. It is all simple. I need a checking account, eventually I will have my first car, eventually a home. None of it was really surprising,” Clay told Finopotamus.

What has changed, suggested Clay, is for younger generations convenience is often defined in terms of clicks. “That's why they like PayPal and Venmo (where it is so easy to move money). It is easier than when you get on your banking app. To them that makes those things more convenient.” That is where their loyalty always waffles somewhat when analyzing the survey data and reading the room, Clay emphasized. “I may not recommend you, but yet I’m still going to stay with you.”

She suggested bankers at the PFI may not always catch the subtle drift among younger accountholders because the financial institution still holds their accounts. “You are still making money; the loyalty is a little less, but (they) are still on your books and when they have the next need, you will be considered. So, it is still a win.”


Branch Relationships Make a Difference

Steven Reider, founder and president, Bancography.

“We have seen this 35% decline in branch transaction average activity over the past few years, even though we are still seeing similar new account volumes in the branches. Folks are opening accounts at the branches, but they are not necessarily coming in,” Reider told Finopotamus.

“Those who use the branch and especially those who open the accounts in the branch, are statistically much more loyal to their PFI than those who are digital only. And it just goes back to human contact,” said Clay.

When it comes to errors or problems, that loyalty matters as well, noted Clay. “If they have experienced a problem, let us say it is an encoding error, they do not blame the branch. They blame the brand who they cannot see because ‘they didn't do a good job training Susie, the teller;’ or, ‘they did not give Susie a good computer to manage my transaction.’ So, we are very loyal to the human.”

Reider said, “It is often why we say the single most important person in the success of a branch is not the CEO. And it is not the head of retail banking. And it is not the marketing director. It is your director of human resources. It is a place where credit unions really have an advantage because smaller institutions tend to have the ability to facilitate more effective one-on-one training with their MSRs (member service representatives). And there tends to be a little bit less turnover in the front office on the credit union side of the industry.”

The Efficiency Ratio and Mergers

Source: Bancography.

Bancography determined there are many measures that summarize banking performance, but in terms of the immediate effectiveness of a financial institution, one of the most insightful measures is the efficiency ratio. The financial services consulting firm said efficiency ratio is calculated as noninterest expense divided by the sum of net interest margin plus noninterest revenue. Simply put, how many cents in expense does it take us to generate a dollar in revenue?


In its Bancology Summer 2024 Newsletter, Bancography said, “Whereas measures such as return on equity remain dependent on the bank’s capital structure at the time, and return on assets gives no insight into the scale of expenditures required to generate those returns, the efficiency ratio neatly captures both sides of the income equation.”


There are only two primary ways to increase earnings in the banking industry: sell more or spend less. The efficiency ratio captures success at both tactics.

Bancography also focused on how bankers have often justified mergers in the name of efficiency. Reider said, “If you go on an earnings call after two banks announce a merger, the first thing you are going to hear is the CFO tell you, ‘We expect tremendous efficiencies out of this merger.’”

Reider offered his perspective: “The reality that so many mergers are predicated on gaining efficiencies empirically. We do not see great evidence of that. What we see particularly is that when you merge to increase size, there is not a continuous gain in efficiency. But rather there seemed to be some step function tiers out there.”

The Bancography newsletter maintained when two $1 billion banks merge, the resulting entity does not need two marketing directors, or two chief financial officers, or two core systems, so even maintaining revenues as is should yield an improved efficiency ratio, as the noninterest expenses to create those revenues would decline.

The reality, however, diverges, and at best efficiency appears a step function rather than a function of continuous improvement. That is, there are bands of asset size where banks and credit unions operate at a certain efficiency level, but notable improvements occur only with seismic leaps to a different asset tier.

“If you are predicating mergers on scale improving financial performance, you have got to do it with an eye toward this is not a onetime thing,” Reider told Finopotamus. “At some point there is a tradeoff between cost over cost savings (and) the piece just becomes too complex to manage.”

Credit unions are not immune from the merger promise. Bancography revealed credit unions show the same step function pattern, with minimal difference in efficiency ratios between institutions with less than $250 million in assets versus those with $250 million to $500 million or $500 million to $1 billion in assets. Credit unions see modest gains by growing into the $1 billion to $5 billion asset tier.

Nevertheless, credit union and bank mergers continue to grow. The NCUA reported from 2011 to Sept. 30, 2023, it had approved 64 purchases of banks by credit unions. S&P Global reported 12 such deals so far this year, putting 2024 on pace to exceed the 16 acquisitions that occurred in 2022. The total target assets of banks selling to credit unions has reached $7.21 billion in 2024, well above the 2022 record of $5.15 billion.


“Credit union CEOs like the bank acquisition targets because it is clean, right? There is no vote of a membership, there is no issue about diluting board seats. And in fact, community bank execs tend to like it that credit unions give a more community bank feel to their customers than merging with a large national bank would have done. So, for them, it is a nice home for their customers to become credit union members,” said Reider.


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