Cost Management: Recent Federal Action Makes Understanding Branch Economics Critical

With the recent announcement from the Federal Reserve of a continued environment of low interest rates into 2015, the question of branch economics will continue to be a major focus for many financial service companies. We believe the announcement confirms our view on the sluggishness of the recovery and also the challenges in the business environment for the near future. Historically, low interest rates and slow asset growth will come together to stress the economics of many branch distribution networks.

A few larger financial service companies are utilizing the branch network in an attempt to deliver on the promise of a financial supermarket. The success of many is up for debate, but the diversification of products and services will help support branch economics. The challenge for many mid-size and smaller institutions that lack diversification is that the branch network has primarily become a mechanism for gathering and servicing deposits.

Because of this, the potential for an extended period of low rates could disproportionally impact many of the mid-size and smaller retail oriented financial services companies. Many distribution networks were expanded in a very different environment of strong asset origination and more appealing deposit economics. We believe sales and asset origination opportunities for many institutions will not return to levels seen prior to the financial crisis.

Understanding economic profitability supported by strategic cost management will be increasingly important in deducing how products and services are consumed, how they are delivered in branches, and by various distribution channels. This will assist companies to more effectively align financial and human capital to business lines, products, and customer segments with the highest risk adjusted returns. Improved performance management will also assist with the rationalization of delivery networks and the appropriate pricing of products and services.

Strategic cost management provides a framework to understand overall capacity and how to more effectively utilize available capacity. Strategic cost management also provides additional insight on how to more intelligently grow or how to reduce capacity as needed in order to better align with the needs of your current and future customer base.

With the economic and rate environment far from certain, strategic cost management also enables an organization to model various scenarios. This prospective modeling capability combined with a more granular economic view of historical results will be essential for creating opportunities moving forward.

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