The Hub-and-Spoke Distribution Model

By Steve Reider

As electronic channels have supplanted in-branch transactions, financial institutions have embraced smaller branch floor plans. Branches built a generation ago required numerous teller windows, ample lobby space for customer queuing, and large vaults to store cash.

Today, most salary and benefit checks are paid by direct deposit, more consumers use ATMs or in-store cash-back options, and most retail purchases use credit or debit cards, reducing the need for transaction processing and cash storage space at branches—and enabling smaller facilities.

Accordingly, with smaller floor plans taking hold throughout the industry, bankers are increasingly expressing interest in hub-and-spoke branch delivery models.

But the term hub-and-spoke—though widely cited—is often ill-defined and misunderstood to refer specifically to branch size, with large branches representing hubs and smaller offices representing spokes. That portrayal overly simplifies a complex topic, and confuses the end with the means.

Small branches are not the enabler of hub-and-spoke models, but a pleasant consequence of a personnel and management strategy.

Before describing the hub-and-spoke concept, we first need to define the term. Hub and spoke refers to a branch delivery model wherein certain branches do not offer the full array of an institution’s services with in-house staff, but rather rely on nearby branches to fulfill those customer needs. The elimination of certain functions from the spoke branches is what allows those branches to employ smaller footprints. That is, the smaller scope of the spokes is a reflection of their different functionality, not the cause of that different functionality.

Branch design should always emanate from an assessment of required functionality, which should in turn reflect market demographics and demand, so effective hub-and-spoke branching requires an assessment of market composition.

In deploying a hub-and-spoke model, bankers need to consider issues of:

  • Consumer purchase behavior
  • Geography
  • Management span of control
  • Market demographics

The most important issue to consider in designing a hub-and-spoke distribution model is functionality: which services will the institution offer at every location, and which will it deliver from a subset of locations (i.e., the hubs)?

Consumers frame perceptions of location convenience in two contexts: frequency and time.

For a frequent purchase/use item, consumers demand proximity and convenience; thus the proliferation of neighborhood dry cleaners, service stations, and grocery stores. Few consumers will travel an hour for a weekly errand. But for an infrequent purchase/use product, consumers will tolerate longer travel times, especially for significant value in price or other features—for example, to an auto dealership one hour away, or to visit a medical specialist.

In banking, those frequent-use, proximity-dependent services are the deposit transaction services, such as in-branch or ATM deposits and withdrawals; while mortgage loans and wealth management accounts fall into the low-frequency category.

In a hub-and-spoke model, this implies offering checking, money market, and savings account-opening and transactions at all branches—but restricting mortgage, wealth, and commercial lending to the hub branches.

In that dynamic of convenience versus value-driven products, how far is too far?

On average, consumers live 2.5 miles from the branch where they establish their checking account. The distance varies by market population density, with consumers in high-density areas (e.g., Midtown Manhattan) living closer to their branches. That disparity reflects the consumer’s consideration as not one of distance but of time, and if seeking a branch within 10 minutes of home, that time equates to a shorter distance in a dense urban market than in a rural market.

But distance varies by product type, too—and in contrast to that 2.5 mile average distance from home to branch for transaction accounts, consumers on average live eight miles from their mortgage provider (if obtained at a branch) and 12 miles from their trust/investment provider. Commercial clients show an average distance of about four miles from their lender in high-density markets; about six miles in lower-density markets.

That greater distance/time tolerance for the infrequent-use products gives a general spacing rule for hub branches.

From a customer-service perspective, the hub can serve as the primary domiciling branch for wealth, mortgage, or commercial officers serving a 6 – 10 mile radius. However, whether a single hub can address an area of that breadth also depends upon the number of other branches within that cluster, i.e., the spokes.

In its fully realized form, the hub-and-spoke model can centralize not only certain business lines, but also the retail sales-management function, with a single senior-grade branch manager leading the sales program across the entire branch cluster.

This allows the bank to use an assistant-manager-grade staffer as the highest-ranking officer in the spoke branches, providing additional cost savings. However, if one manager is to oversee multiple branches—if one wealth or mortgage officer is to coordinate sales across multiple submarkets—then the bank must consider a feasible span of control for those officers.

At most institutions, sales-management carries a span of one manager per three or four branches (including the hub), while the specialty lines of business carry spans of one officer per six to eight branches. This can yield a multi-tiered strategy where corridor hubs sit atop retail hubs which sit atop spokes, with each tier adding offerings as illustrated in the example below.



Finally, bankers still need to assess each branch’s trade area demographics to determine where to deploy the hub offices. Those decisions should reflect market demand but also daytime population, as consumers often address non-retail products in branches closer to their workplaces. This often yields an architecture of hub branches in downtown, midtown/professional districts, or suburban mixed-use/retail submarkets with spokes in urban neighborhoods or residentially skewed bedroom suburbs.

Once a financial institution decides the optimal locations for each tier of branches, only then should it commence branch design (or reconfiguration), aligning the size of the branch footprint with the employee roles the branch will house.

Steve Reider is president of Bancography, based in Birmingham, Ala. Bancography provides consulting services, software tools, and marketing research to financial institutions.