Strategy for Success: Doing De Novo Right
t’s the big day. You’re in a prime location. Streamers and balloons are everywhere. The Grand Opening sign is up. And the tellers and loan specialists are ready to service the hoards of new bank customers about to come stampeding through that door. Nothing can go wrong.
Or can it? Look around. Have you done everything possible to make sure this day is a success? Have you established a new organization dedicated to launching and building the de novo branch? Do you have the right team in place? Have you primed the pump with pre-opening buzz and activity? Have you clearly defined—and incentivized—“success”? If you are like many managers of a de novo retail banking branch, there is a good chance that the answer to one or more of these questions is no. And that could spell disaster for your budding new outpost. Unfortunately, if you build it, they will not necessarily come. You need a dedicated de novo strategy built upon four core elements—a distinct organization, specialized training and recruitment, tailored marketing and promotions, and a targeted incentive plan—to drive new business into the branch and keep it there.
THE NEED FOR GROWTH
There is no denying that de novo success is critically important to banks. In the first quarter of this year, the six largest U.S. banks suffered the largest percentage drop in quarterly revenue in three years. Collectively, revenue fell 13.3% from the first quarter of 2010, with a 40.2% slide in pretax pre-provision profits in the same period. In this environment, constrained by recent regulation limiting or eliminating formerly reliable sources of income, banks are increasingly dependent on the ability to obtain core deposits through branches.
In 2010, for the first time in 15 years, more bank branches closed than opened in the U.S. by about 1000, making the new branches an even bigger proportion of the channel’s success. Despite a 30% drop in overall new openings in 2009 and again in 2010 in response to economic difficulties, 2010 still saw a very respectable 1,300 new branch openings.
The top 10 institutions alone were responsible for more than 400 of those openings, representing a large investment on the part of large banks (and a decline in new openings of only about 5%). Clearly, despite the hardships of the financial crisis and economic downturn, big banks are still pushing forward on de novo strategy. This makes the success of each de novo branch of critical importance.
Typically, a successful new branch should break even within two years and have $60 million in deposits by year five. But new branches do not always perform as well as they should. In 2009, 1,907 branches were opened and one year later, the average deposit base among those branches was still well under $13 million. Of the nearly 1,000 branches opened in the first half of 2009, more than half had not reached the $15 million mark a year later.
LOOKING BEYOND LOCATION
For sure, location is fundamentally important, but normally not the culprit behind poor de novo performance. Banks have been picking spots pretty well for the past decade. Retail pros routinely use multiple sources of data and analysis on demographics to go where the opportunities lie. Specifically, site selection must (1) tie back to your strategy (go where your target customer is, e.g., if your strategy is small business, go where small business is thriving), (2) target areas with strong economic outlook (to fuel growth), and (3) satisfy the mundane but critical conditions for visibility and easy customer ingress/egress (customers follow the path of least resistance). Banks have cracked the formula on where to put pieces on the board and continue to recognize location’s importance especially in the face of increasingly more complex decisions around specialized branch design, i.e., rolling out different kinds of branches for different targets.
So where does de novo go wrong? In a word: execution. Most often, the fundamental reason de novo branches fail to thrive is that banks often treat de novo branches as business as usual – paying cursory attention to their unique status and circumstance as de novo. De novo branches have different needs than a mature branch; they need to be managed outside the existing network to give them the highest chance of delivering optimized results. A successful de novo strategy is based on four core elements:
- A distinct organization
- Specialized training and recruitment
- Uniquely tailored marketing and promotions, and
- A targeted incentive plan.
A DEDICATED ORGANIZATION
The hierarchical reporting structure for de novo branches should be distinct from business-as usual for the first 24 months. De novo reporting structure has a smaller span of control than that of mature branches (allowing for more attention from management), and governance and monitoring would be finely tuned for de novo issues and geared towards reaching specific build-up targets. Similarly, the organizational structure should be established separately from the larger, existing network. Many large institutions lack a dedicated management team to manage the program, plan strategy and provide the right support needed by de novo branches; the solution is to create a small, core staff team focused on servicing the unique needs of de novo without creating a costly, separate support system. Then, as these branches mature, they are moved to the business-as-usual line.
The skills and personnel profile required to make a de novo branch successful are different than those required for an existing mature branch. Or, more precisely, the skills and people may be the same but different skills must be emphasized. In traditional branches, a significant percentage of sales (as high as 70% or more) comes from selling more to existing customers. Obviously, this is not the case in new branches. De novo personnel must focus on relationship building (versus relationship management) and customer acquisition (versus selling into an existing account holder base). Training should be similarly distinct. The curriculum should emphasize the start-up nature of a new branch in order to set the appropriate mindset. Finally, a fast-start training program should also serve the purpose of building the energy and momentum of the team. The value of a properly motivated team can never be underestimated, especially for the fast-paced, goal-driven environment of a de novo branch.
UNIQUELY TAILORED PROMOTION
De novo marketing and promotions should be structured deliberately around the opening day and consist of three separate phases with their own pace and tactics.
Phase 1: Pre-Opening
Banks should be running a full sprint by Day 1, not just starting the race. To build critically important awareness and momentum, promotion must begin long before the branch doors open. The pre-opening phase includes events and outreach to engage the community. The goal is to generate pre-opening consumer and small-business accounts (generally around 100 and 25, respectively) and to develop relationships that translate into post-opening business. The branch needs to establish a presence through attention-grabbing tactics such as a mobile branch or bank-in-a-bus to sign up new depositors or free pre-opening financial planning consults.
Phase 2: Day One
The second phase is Day One itself, and the grand opening should indeed be grand. The goal of Grand Opening Day is to drive enough prospect traffic to the branch to generate new relationships with at least 100 new customers and $1MM+ in deposits. That’s going to take more than a banner over the door. New branch openings should include attractions and entertainment for prospective customers but should also involve local groups and businesses. This sets the stage for the branch to get involved in and provide value to the community on a deeper level that promotes creating and maintaining relationships with potential customers.
Phase 3: Post-Opening
Finally, the post-opening phase is all about continuing to drive and acquire new consumer and small business customers, ensuring retention of promotional rate deposits, and cross-selling current account holders. The need to maintain discipline around momentum and retention of early wins cannot be overstated. Promotional-rate customers have a nasty habit of hitting the road once the juicy early rate deal expires; successful promotion necessitates engaging these promotional customers specifically with a program that makes them “sticky” through follow-up service, attention and retention offers.
De novo branches cannot rely on sales from existing customer walk-in traffic. Therefore, the action plan and targets will be fundamentally different than those of a mature branch. Furthermore, getting new customers is more difficult than selling into an existing branch. For this reason, incentive plans for the de novo team must meet three requirements.
One, they must be pure and focus exclusively on the one thing that matters most: acquisition. In other words, the tracking and rewards system must not be diluted by operational elements relevant to an existing branch. This purity focuses the team’s energy and clarifies the meaning of success.
Two, the reward should be proportionate to the energy and skill required and to the value delivered. A new customer’s first dollar is worth more than an incremental dollar from an existing customer. Hence, de novo incentives should be richer than business-as-usual.
Third, comparisons should always be apples-to-apples, so performance should be tracked against other de novo branches, and not against the overall network or existing, similar branches. Otherwise, the deck is stacked in favor of the teams at existing branches who can rely on established base and presence. While exact formulas and actual levels are more complicated, these three basic requirements lay the groundwork for a highly effective incentives program.
A STRATEGY FOR SUCCESS
Finally, it should be noted that these four core elements should be underpinned by a detailed action plan that is uniquely tailored to the de novo circumstance. The target is new business and the timing is yesterday. The plan should emphasize short-term goals, speed, specificity of targets, and discipline. This plan can help keep the entire team on track and provide an early warning system for problems. This plan serves as the rallying point for the distinct support structure, uniquely-tuned team, momentum building marketing tools, and highly motivating incentives needed to drive success.
Successfully building a new branch requires a specific set of tools and activity. A strategy that treats de novo as distinct from the rest of the bank enables the new branch to grow into maturity—and can bolster the performance of the entire retail network.