Branch Performance by the New Numbers

By Robert E. Grasing 
President

The key performance numbers that retail bank management rely on to run their franchise effectively are shifting along with wholesale changes in technology, delivery channel choices, sales strategy, segmentation, and management practices.

Managing branch effectiveness has been an elusive target for many banks due to changing objectives, shifting resources, and varying tools that individual bank managers use to react to the marketplace. The traditional measures of performance that branch management has relied upon in the past are becoming invalid since they are indicators of an obsolete environment. In cases where solid management information is not available, banks manage primarily by experience, based on previous practices and existing rules. At a recent retail bank conference I attended, a regional manager in an open session asked, “What are you using for the average number of transactions per hour that a teller should be expected to handle successfully?” Attendees offered a variety of target numbers. They concluded that 30 was a reasonable number. I was a bit surprised that a question like this was relevant to retail managers since each bank has its own policies, work processes, technology, sales referral objectives, customer base differences, and service expectations. The important issues taken from this discussion are that retail management is searching for some solid ground in making management decisions, and that they do not necessarily trust their own numbers.

In recent years, shifts such as the development of alternative delivery channels, customer segmentation and the resulting targeted marketing campaigns, a younger more electronic-minded customer base, and the adoption of end-to-end processing in new business to simplify sales transactions have influenced retail management. Projections showed that these factors would lessen the reliance on the traditional branch system to support and deliver retail performance. The thought was that by deflecting high-value customers to private bankers and low-value service customers to contact centers, banks would gain control of the most profitable customers. Interestingly enough, a recent Gallup Poll (April 14 to 16, 2003) finds that 83 percent of Americans still visited their branch bank at least once a month on average over the past year. Bank changes to products, service offerings, and their approach to customer segments in general, have yet to significantly impact (deflect) customer behaviors. The primary responsibility of retail bank managers is to meet the service expectations of customers. 

While each bank’s key management numbers are unique to its conditions, an examination of what is changing in the industry to gain competitive perspective is valuable. The Robert E. Nolan Company conducts an annual Efficiency Ratio Benchmarking Study. The results provide an excellent starting point in establishing directional shifts. The study examines differences between high-performing banks and average banks by each line of business. The 2003 study includes data from 36 banks, thrifts and credit unions with assets between $1 and $5 billion.

 The retail branch Efficiency Ratio is currently 27.1 percent for the top-tier performers and 47.5 percent for the average of all 36 participants.  The efficiency ratio is a common banking ratio which measures the cost to generate a dollar of revenue.  It is important to understand the essential factors that make a difference and try to put them into perspective. The differential is significant between the top performers and the average banks, but we must comment that a high efficiency ratio by itself for any given bank should not be viewed as an indictment of the retail management of that bank. It is often, simply, a function of the work processes, systems, policies, incentives, and marketing programs that the bank has chosen to employ. We will examine the drivers beneath the key numbers to shed some light on what the new numbers mean. 

Technology

Banks are taking a variety of approaches in implementing technology to make improvements in retail delivery. The methods differ, depending on the bank management’s mindset toward the purpose of the software and its valued place in the new business or service delivery processes.

Some banks are convinced that the software developers have had to consider the effectiveness issues in their design, and see little value in starting with process redesign. In those cases, the technology decision starts with a traditional approach to define business requirements leading to software selection and then implementation. Technology vendors prefer to install their software in the easiest and most operationally effective way possible. Vendors have become very effective in making this case. Banks have opted to design the technology implementation process around meeting the customers’ requirements and limiting the work effort required. The challenge has been to accomplish straight-through processing in order to eliminate potential errors and work duplication.

Most banks do not have an integrated technology solution. Often in isolation, the “owners” of an element of the process make the system choices for the pieces of technology they require. For example, the loan accounting system is often in the hands of loan operations and the credit division usually makes the credit system decisions. Branch administration may decide on the document preparation system. Human Resources will drive the incentive system, but sales and marketing management develop it. The contact management system and the CRM are often the purview of marketing. Individual system owners most often do not want to complicate the decision to acquire and install “their system” by including total integration of all data requirements in the process resulting in largely disconnected technological environments.

Further, technology is not often applied to simple processes that could reduce errors, cost and time. Retail banks sell 65 to 80 percent of their new products to existing customers. Keeping this in full view, the new business process should allow the existing core systems to populate the appropriate customer data whenever a customer opens a new product or service.

The trend in technology is straight-through processing or electronic integration of all the required data elements and support systems. Independent surveys conducted by the Robert E. Nolan Company reveal that many banks have this objective; but, to date, very few have accomplished the connectivity in an efficient or effective manner. The few banks that are integrated have lower time to close, lower cost, and better quality of data elements. This advantage will certainly impact the amount of work that a CSR (Customer Service Representative) is able to complete on a comparative basis. An interesting discovery from the most recent Nolan Efficiency Ratio Benchmarking Study (analysis completed July 2003) reveals that there is no correlation between a particular software system and higher retail performance. The study examined top-tier performers by line of business, asset size, and type of organization, without noting any significance related to performance and system use. The conclusion is that performance is more highly correlated to the process design and integration of data systems.

Teller Effectiveness

Industry data is best used as directional information, not as a true measure of what individual banks need to achieve to realize high performance. Teller effectiveness is an area where banks have gone through cycles over the past 20 years. In the 1980s, the operational focus was on security factors, including balancing. Many banks fired tellers for being out of balance. Those banks designed their transactions to include redundant steps to help measure and track the balancing process, including triple counting the cash back to customers, and a practice called “backing” deposit slips and/or withdrawal slips. Backing referred to writing the exact currencies transferred on the back of the slip to potentially simplify the balancing process later in the day (for example, ten 20s, five 10s, two 5s and five 1s = $265. 00).  In these banks, the importance was on transaction accuracy. The audit department often imposed security into the processing steps without regard to timeliness and the service impact on customers.

Top-tier performing banks examine the value of each element of transaction processing and found that the work expended in triple counting and backing added 20 percent or more to the transaction time. They conclude that this work is not cost beneficial.

High-performing banks handle 13 percent more transactions per month than average banks. The relative cost per transaction is 35 percent higher in the average banks than the high-performing banks. Although banks need these statistics to look at teller performance, a directional view is required. Each bank places differing process and security time burdens on the teller position. Transaction effectiveness is a significant factor, but other conditions can directly influence transaction performance.

Teller performance variables can include: the impact on training; the teller turnover rate; the actual teller performance; the opportunity to perform at a high rate related to staffing and scheduling; the use of part-time tellers and teller pools that can support multiple branches due to illnesses and vacations; the customer base being serviced; communications; and, the sales referral policies and requirements.

Wide variances exist in the time and effort banks put into teller training. Some banks provide no formal training but have tellers work with a “teller trainer” in the branch to learn the policies, procedures and systems. In these cases, the trainer will influence the procedure with their individual biases and not necessarily the bank’s standard practices. Some banks institute a three-week formal training process where tellers learn about the bank’s commitment to customers and how it supports the bank’s strategy. They train individual transactions in a uniform and controlled way and then, in week four, assign them a branch teller monitor to assist in getting started. The cost of effective training appears high on the surface; but, when management considers that more tellers interact with customers daily than any other position in the bank, it follows that service and transaction training is essential to high performance. Effective training can cut errors and help to ensure that the speed of processing is elevated through a confident and competent staff. 

The annualized teller turnover rate is typically one of the highest areas in a bank, ranging from the mid teens in some banks to over 100 percent in others. The national average is 33 to 35 percent. The teller turnover rate is generally lower in a down economy. Banks that seem to have lower rates of turnover often have practices in place to reward high performance. Recruiting appropriate personnel from the branch location often helps in keeping tellers with the bank longer. 

Not many banks are equipped to measure the actual teller performance or even relative performance within a branch or from branch to branch. One of the reasons is that teller opportunities to perform are not equal. A drive-up teller will usually handle more transactions per hour due to handling two customers at a time and a limit on transaction types. Within the branch, the teller at the head of the queue will service every customer in slow periods, where a teller at either end of the teller line will not have as many opportunities. To analyze real teller performance, the bank would need sophisticated modeling to calculate customer arrivals during the tellers’ working hours along with customers in line to determine teller opportunity. The teller position is a “customer demand” work environment and while management sometimes uses fill-in work to help the utilization, it typically comes down to effective staffing and scheduling. 

Hundreds of teller staffing and scheduling models are available in the marketplace, but currently there are three that have the features necessary to model both teller and CSR positions effectively. All three have the modeling capabilities and report generation necessary to be effective with a diverse set of branch locations. GMT, Demos, and Exometrics all have the required queuing models and the flexibility to place staffing and scheduling in the hands of retail management.

Banks must factor in tailored work standards and develop scenarios that reflect the conditions of each branch location as close as possible to reality. The flexibility of the model used is only one element in staffing and scheduling success. The standards and the work measured must accurately reflect the branch conditions as believed by branch management and then used to develop schedules. Some banks tailor standards to location-type such as urban, rural, shopping mall, university, etc. Differences in work are attributable to a varying mix of transaction types due to customer base, possibly differing cashing limits for tellers due to experience or branch characteristics, physical location of bank checks and encoding equipment, and potential use of cash dispensers in some locations. Banks must account for all of these differences, as well as differences due to the actual performance of standard work. High turnover branches will have lower real performance due to more tellers who are in a learning curve. The learning curve for tellers is typically three months; and with a bank turnover rate of 35 percent, that can lead to lower performance in selected branches. Banks can adjust the staffing model for effective service in locations with high turnover until the time that problem is resolved.  Staff modeling is a dynamic process and the tools used should be dynamic as well. 

True performance is difficult to measure without a tool to properly balance the customer demand to the service staff hours. In low-volume locations, it is very difficult to evaluate the performance of tellers since management must staff to volume and allow for breaks and coverage. Often a branch requires the equivalent of between 1.5 and 2.5 tellers per hour in remote locations. Management may decide to utilize three full-time tellers to allow for coverage during peaks and deliver service properly. This decision places the teller in a position where they cannot perform on the same level as a teller in a branch where customer demand is high and relatively constant. The incentive system should not penalize them or it will force even higher turnover. 

In the past six years, retail banking has experienced a significant shift to transform practices to primarily a sales orientation. Teller incentives are largely weighted on paying for closed referrals over and above any measure for service and productivity. This shift in many institutions has contributed to difficulty in making any comparisons. Many banks have trained their teller staff in how and what to refer with an expected volume of two closed referrals per day. Incentive systems can direct tellers to concentrate on referrals, which may also slow down the transaction processing and resultant service levels. 

The reported results from the recent Nolan Efficiency Ratio Benchmarking Study show that top-performing banks’ branch personnel are processing 13 percent more transactions per month than the average banks and are supporting 39 percent more deposit accounts. The factors that prevent banks from performing at the higher level relate to process efficiency, policy, deployment of staff through scheduling and staffing, and the connectivity of software. Line of business performance is determined by how people, process and technology are deployed, not the software.

CSR Effectiveness

There are a variety of issues that impact the performance of Customer Service Representatives (CSRs) in the current environment. Banks have wide differences in deployment. Some will restrict the activities of the “platform staff” to strictly new business and support service. Other banks will view the CSRs as part of the retail branch sales and service team, and will deploy their time to sales and service first with a component of teller support in their mix of responsibilities. Some banks will establish an objective for outside sales asking CSRs to have involvement in community functions in the sales effort, while other banks see marketing as having a primary role in driving potential customers into the branch. In any event, the key is to establish the branch objectives in line with the bank's strategic direction. The primary activities we see CSRs handling are sales/new business, service, branch support, and administration.

Performance is a function of how banks manage and structure time. This is where the significance of work process has the greatest impact. Independent studies conducted by the Robert E. Nolan Company show that high-performing banks have a work distribution of 55 percent on sales and account opening, 18 percent on fee and non-fee services, 8 percent on customer problem resolution, and 19 percent on administration and other. Average performing banks, on the other hand, see their CSRs spending more time in problem resolution (25 percent) and less time (30 percent) in actual sales and account opening.  A factor influencing this difference in performance is that average performing bank CSRs spend more time opening individual accounts and therefore open fewer accounts per month than the time allows.

When we examine the details of high-performing banks versus average performers, we discover additional detail on what the drives branch performance.

High performing banks put on 152 new accounts per employee versus the average bank’s 139 new accounts, an increase of 9.35 percent. Looking deeper into the data, high-performing banks open only 25 percent of new deposits to the total deposit account balances with their efforts as opposed to 32 percent for the average bank. When we further dissect the information, we see the new non-time deposit account balances as a percentage of total non-time deposit balances was 14 percent in top-tier banks versus 20 percent on average. These measures support the conclusion that the high performing banks do not need to open as much in new deposit balances since they retain their existing deposits better than the average banks. What are the underlying factors that might support this outcome? They are likely the focus on new business in average performing banks versus the focus on net new business in high-performing banks.

The emphasis on developing a sales culture has made a dramatic impact on many banks. In some cases, it has literally transformed the retail banks from “order takers” to “business development” engines. CSRs have had their offerings expand to include insurance, investment and select deposit products. It can be difficult to train CSRs in the relative benefits of each vehicle and often the weight of the incentive to the product drives them, not the need. 

Not every bank has experienced the same success in terms of this change translating directly to the bottom line. When banks examine the incentives that are paid to CSRs there are a couple of telling characteristics to look for. Many banks base incentives on the first sale meaning banks are paying for every new account regardless of how it was sold. The customer could have been inclined to set up the account prior to walking into the branch, or the CSR could have sold the account based on its features. Successful banks establish both branch and individual sales thresholds before incentives are earned.

A second element to consider is what the bank is strategically trying to achieve—net new business. In many of the campaigns and programs, booked new business is the only criteria, not what it has achieved in terms of net bottom line. The subliminal message is that servicing existing customers is not as important to achieving individual or bank goals leading to service time spent on difficulties booking new business correctly and not primarily servicing existing customers. Not every bank or branch location has the same potential for growth in their marketplace, so they should model each location on its individual characteristics and opportunity for growth. The development of excellent market data has greatly assisted the banks who understand where to place their sales and service emphasis.

Segmentation of the market is significant since it is not so much a measure of the actual effort as where the effort is extended. Today over 400 CRM models are on the market, and the tools are more affordable with greater applications. Deployment is as much a part of the success of the tools as it is with any technology. Often the marketing teams concentrate on a specific use and not on developing market intelligence. For example, the data may help banks to determine which customers have a product, but unless they understand why the customer has that product, they may miss a targeted marketing opportunity. The reason may be due to the specific product offering which may not convert to an interest in other product offerings. Applying science and analytics to the data suggests that the most pertinent information will lead to selling new products to existing customers.

This analysis also applies to the possible loss of customers. In this way, banks may prevent the attrition of their customer base. Banks that see a gap in their product offering often rush to put together a campaign before understanding the potential customer acceptance and impact on existing work processes. Often this happens with HELOC campaigns and the CSRs cannot meet customer service expectations. This is an example of short-term application with a potentially long-term strategic tool.

The work processes are as significant to the overall time success as any factor in the performance equation. Many new business processes are burdened at the point of the CSR, with too many unconnected information inputs. As mentioned earlier, it is common that 65 percent to 80 percent of new sales are due to existing customers, but ironically, processes are not structured to take advantage of that information in an automated way. Often banks profess to have their process integrated, but rather have a series of largely manual steps.

For instance, they take an application for a retail loan and submit it for credit approval. It is common to find that the input form or screen for credit differs from the loan application, thus requiring a separate input. When the loan is approved, there is a separate input form or screen for document preparation. In many cases, the CSR needs to prepare a separate document to show that they have properly completed an assessment of the customer’s full investment, loan and deposit account needs with an entirely separate input form and screen. After the loan is approved, a separate incentive form or screen may need to be completed. Lastly, separate boarding documents get the loan booked on the accounting system. Every step in the process may be thought of as employing technology, but without integration, it requires multiple inputs of the same information. A significant portion of CSR effectiveness is in the details of the process.

The staffing and scheduling element has as much to do with success in CSR effectiveness as with teller effectiveness. Banks should utilize the proper information to determine how many CSRs are deployed, and see that they have the right tools and products to be successful. Unfortunately, very little science has been applied to the CSR position in banks, and this is where the sales service face is presented to the customer and potential customer base.

Summary

The findings noted here from the 2003 Nolan Efficiency Ratio Benchmarking Study should not be surprising to most bankers since the behavioral basis today is basically the same in the top-performing banks as it has been for decades. What makes the difference between the top-performing retail banks and the average performers is the way they design and deploy their resources to achieve sales and service goals for their customers. The numbers tell a story over time. The comparative gap in efficiency ratio between the top performers, 27.1 percent and the average bank, 47.5 percent is significant at 20.4 percent. Interestingly, of the 20.4 percent gap, the personnel cost gap is 10 percent and the other operating expenses is 10.4 percent. 

The ways people, processes and technology are designed, integrated and deployed make the difference. The analysis conducted in the annual Nolan study of the top-performing banks year after year shows that improvements are ongoing—that is what makes a single target elusive. The key to success is to understand that policy, process, technology and deployment should be the source of your measures and the basis for your improvement opportunities.