Where is the Virtual Branch located on your General Ledger?

This is another blog post that aligns with the classes I recently taught at GSBC focused on how financial institutions (FI) treat the virtual branch.  First, let’s define the “virtual branch”:  A virtual branch is a combination of digital services that a FI provides to allow customers to interact with it and utilize services of the FI outside of a physical branch location.  Services may include the following:

  • Consumer Online Banking
  • Online Cash Management / Treasury Services
  • Mobile Banking
  • Executing Payments (including Bill Payment)
  • Access to eCommerce (i.e.: EFT/POS Network)

There are other elements that could be considered as belonging to the virtual branch (VB). Telephone banking (IVR) has been thought to be a dead service for many years, yet it is still robustly used in many banks.  Text banking (SMS) is another service that might live in the VB. I would certainly include any Online Account Opening (OAO) tools you have for opening deposit or loan accounts. Shoot, I know FIs that include the call center in the VB.  What you decide to include in your VB may not be as key as how you treat the VB; specifically:

  • How the VB is represented on your general ledger;
  • How the VB is represented within your senior management leadership team; and
  • How much buy-in and support the VB has from the C-Suite/Board.

Let me paint this scenario: you are a community bank with $250mm in assets and three physical branches. Your physical branches are identified as Elm Street, Pine Street and Oak Street.  You also offer an Online Account Opening (OAO) mobile app for new deposit accounts.  Now consider the following events:

  1. A customer comes into the Elm Street branch and opens an account, where will that customer show up on your G/L? Of course, under the Elm Street branch.
  2. A customer goes online and uses your mobile OAO tool to open a deposit account, where will that customer show up on your G/L? Hmmm, now it depends on whether you have a separate VB setup on your G/L for this online account opening.  If you do, this customer would be placed into that VB account on the GL. If not, this customer may default to the main office; for this example, the Oak Street Branch.
  3. A customer goes online and uses your mobile OAO tool to open a deposit but subsequently does none of their transactions online. Since the Pine Street Branch is close to where they work, all their transactions are done at that location. Where will that customer show up on your G/L? I’m guessing that if you have a VB setup, that is where the customer will show up on the G/L. But if not, as indicated above, this customer will show up in the Oak Street G/L, even though all their transactions are performed in the Pine Street branch.
  4. The same customer in the first event who opened their account at the Elm Street Branch actually performs substantively all their transactions online and never visits the Elm Street branch after the account was opened. Where will that customer show up on your G/L? Almost certainly they will be reflected on the G/L as part of the Elm Street branch.

I could give more examples but here’s the point: you may not be accurately aligning the actual activity of customers with where the related income and expense appears on the G/L. In a perfect world, you would use the capability of your core system to know where transactions and other income/expense activity occurs and it would allocate these transactions across the G/L categories providing you a very accurate picture of the income and expense for each physical and virtual location.  Absent your accounting system doing this automatically, it would be very unwieldy to attempt to achieve this manually, so instead, all income and expense related to a customer is tied to the G/L of the branch where the account was opened.  The result of this type of posting is that it is almost a certainty that the system is grossly understating the impact of the virtual branch and overstating the profitability of the physical branches.

One reason why G/L accounting is so important is that it drives executive decision on where money is spent. Say that you have little to no revenue associated with your VB and the VP of Operations presents a proposal for an upgrade of your online banking and mobile platforms at a cost of $200,000.  It is likely that the entire C-Suite would look at all of this as an expense-only purchase since there is no representation of the VB on the G/L, when you may have 15,000 customers who can be accurately defined as being served by the VB. If all of their profitability were accurately posted on the G/L, then the monthly VB profitability might show that spending the $200,000 for upgrades is a 10 month break even. That is a much different decision than a $200,000 expense. I find that CEOs have no issue upgrading the physical branches, updating furniture, flooring and other “paint and powder” flourishes.  They know that the look and feel of your physical branches is essential to your branding and won’t stand for the branches to look anything but spectacular.  Why is the virtual branch any different?  It’s not, but the CEO may not have the perspective of just how important the VB is since there is no profitability represented on the G/L. But be aware, as soon as you accurately represent the VB on the G/L, the profitability of the physical branches will change as all the VB customers that have been associated with those physical branches are removed.  Might change your decision to upgrade all that branch furniture.

Does the Elm, Pine and Oak Street branches have a branch manager? Of course!  Who is the manager of the VB? For most FIs, there is no single person that “owns” the virtual branch.  There is no budget, no targets for customers or profitability.  No one is in charge, so is it really so odd that the virtual branch gets no love?  The VB must have its own management and budget, no different than any physical branch.  Who organizes events to be held on the virtual branch?  Who decides about marketing and advocating for the virtual branch?  Who recommends the upgrades needed to keep the virtual branch running at peak efficiency with an exemplary customer experience? Assigning a SVP over the VB as their only responsibility is a difficult decision for bankers since it flies in the face of traditional org charts.  But defining what the virtual branch includes for your institution and then putting all those functions and staff under a single person’s leadership is the first step in enabling your virtual branch services to really take off.

Finally, but perhaps most importantly, the support of the VB by the C-Suite and board must be equal to or exceed the support given to physical branches. The future of banking services is likely to be more digital oriented, translating to the fact that the customers you need to replenish those who you will lose are young millennials and Gen Zs. (Here’s a sobering statistic: Baby boomers are dying at the rate of 10,000 every day. Ugghhh!) These younger prospects are not technology savvy, they are technology critics. They are digital natives and have highly developed expectations about how a digital experience should work. The fact that your institution has chosen an online and mobile banking solution that only offers the lowest common denominator of banking services so that the expense is minimal, will not be viewed as acceptable. So, investment in the virtual branch is strategic, perhaps even mission critical, for your institution’s long term success.

Does your VB get that kind of attention as it is set up today? If not, what would it take for you to examine the true impact of the virtual branch?  Here is an exercise that is not really that hard to do. Export your G/L to an excel spreadsheet and make an estimate of the amount of income and expense across your existing branches that should be moved to VB accounts.  Make those changes in the spreadsheet for the most recent month end and look at the related profitability.  It will be readily evident that the VB is your largest, most profitable branch and similarly, the existing branch profitability drops.  This exercise will not only highlight the need for a permanent change to the G/L account structure but make it clearer that the VB needs to be upgraded versus new tile for the 3 physical branches.

I get that I am leaving a lot of questions unanswered.  Like “How will we define what constitutes a customer going into VB profitability?  Good question. Does it have to be 100% of all transactions? What about 50% + 1 transaction.  Maybe you will settle on something like 60% or 70%, or online activity pushes a customer into the VB on the G/L. These and other questions are certainly worth exploring.  Think about how the VB can be defined and codified on the G/L, then shoot me a note at dpeterson@bankers-bank.com and let’s discuss it.