The great debate over branches in the banking industry has raged for years. It’s trendy to dismiss branches as “dead” because transaction volumes have dropped. But it isn’t that simple. The purpose and pace driving branch network decisions involves a myriad of complex issues. Here are 13 points that frequently elude consideration.
1. Psychological Security
Consumers like to think their money is warehoused locally — that they can run in and grab it at any time. They think of branches like money under the mattress. They don’t understand that if everyone went down to the branch all at once and asked for their money that 90% of them would go home empty handed. They don’t grasp the concept of FDIC insurance, capital reserves and deposit-to-lending ratios. All they understand is the idea of a piggybank — “I put my money here in this thing and it’s there later when I need it.” If they knew how banking really worked, maybe they wouldn’t be so psychologically attached to branches.
“We still believe that stores are important, and we believe that because our customers tell us that.”
— John Stumpf, CEO/Wells Fargo
Many consumers like the idea that they can confront a real, live human being if financial problems arise. We aren’t talking about problems with your cell phone bill. We’re talking about problems with your money, and for many people money is the most important thing in their lives (if not, then the second-most important thing). In this day and age — dominated by automated phone trees, call centers in other continents, self-serve technologies, and impersonal robots — consumers like the idea that they can corner a service rep who can’t walk away. Instead of feeling trapped in some infernal service purgatory, they can turn the table around: bankers with physical offices can’t hide. Consumers instinctively sense this, and they really like having the option to raise hell — in person — even if they never have a reason to do it.
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3. Mergers & Acquisitions
Banks get bigger by acquiring and merging with other banks. No surprise, it’s always been this way. But these consolidations inevitably create redundancies. More mergers mean more redundancies. During the housing bubble, banks needed more and more deposits, so M&A activity increased. Banks took over other banks at a breakneck pace, not so much for the branch locations but for the deposits that came along with them. Lending money wasn’t the problem back then; finding money to lend was. So they went out on a bank-buying binge.
After the storm, many had to rationalize their branch networks. As things calmed down, banks finally had the opportunity (and motive) to circle back and deal with redundancies and deadwood. Take Wells Fargo and Wachovia as a hypothetical example. At the time of the merger, both banks could have had 50 branches in one city… with 25 of them right across the street from one another. So Wells could close 25, leaving them with a citywide branch network now numbering 75 — that’s net +25 branches. Yes, the overall banking industry lost 25 branches, but Wells gained 25.
4. Branch Density
According to Steven Reider, founder and president of Bancography, a company that closely monitors branching activity, big banks are closing locations in markets where their network density lags way behind competitors. If a bank only has 20 branches in a market where the dominant players have 100, they might just choose to exit the market. If the bank has 80 locations in another market where the top dogs also have 100 branches, they might consider relocating 20 branches to achieve parity.
Reider says there is no evidence in any metro of a big bank choosing to gamble on broader network spacing — e.g., 3-mile versus 2-mile spacing between branches.
“When fewer than 50% of customers at big banks live within two miles of a branch, then we’ll know we’ve seen a sea change,” Reider stresses. “But I challenge anyone to show evidence of major banks executing closures that yield dramatically less coverage — as defined by % of customers living w/in x miles of one of their branches — in a major metro. Yes, there are closures, but it’s all redundancies and outliers, not core service points.”
5. Deposits? Bah, Who Needs Them?
For a long time, financial institutions desperately needed deposits. They needed them to fund all those mortgage loans that inflated the housing bubble. Back then, they couldn’t bring deposits in the door fast enough. Branches have always proven to be one of the most effective ways to grow deposits. But pop that housing bubble and poof… the need for branches starts to dry up too.
Maybe a few big banks are shuttering locations — for their own strategic reasons — but it doesn’t sound like the same rationale applies to smaller, community-based institutions.
“Community banks don’t have many superfluous branches [to close] because they didn’t join the branching boom just to capitalize on an overheated economy,” says Terry J. Jorde, Sr. EVP and chief of staff for the ICBA. “While the nation’s total branch count rose by 24% from 2001 to 2011, community bank branches increased by less than 3%.”
6. Wait a Second, Not So Fast… You May Need Those Branches After All
Skip ahead a couple years. What happens if financial institutions once again find themselves hungry for deposits? Will they regret closing as many branches as they did? If you run a bank’s branch network, you have to be asking yourself: Is it more expensive to maintain a few borderline branches we have today than it is to close-and-then-reopen locations if/when they are needed in the future?
“As the economy recovers and the loan to deposit ratios jump past 90% again, you can bet we’ll place increased value on deposits again,” says Reider at Bancography. “It’s already happening in some markets, just not those still trapped in recession.”
Reider also points out that some banks expanded their networks during the bubble in “exurbs.”
“We’ve seen a one-time phenomenon in closures in areas where planned housing never materialized,” Reider explains. “When the economy crashed, the rationale for branches built on the edge of Phoenix, Las Vegas, San Bernardino, Sacramento — in anticipation of housing growth — that just disappeared.”
7. It Doesn’t Matter What BofA Does
“Branches do remain a critical component of everything we do.”
— Bruce Thompson, CFO for BofA, in 2014 shareholder meeting
What big boys with hundreds and thousands of branches are doing probably has little correlation to the experience and reality of other banks. There’s a law that caps the percentage of U.S. deposits any one bank can hold at 10%. BofA has been wrestling with this cap for years. Selling branches (and the deposits that go with them) is one way they can keep their head from hitting the ceiling. According to Reider, BofA is selling branches so they can concentrate on building relationships in markets with better cross-selling potential. And it’s no coincidence that BofA has simultaneously been pouring millions into developing a killer online and mobile banking platform. The two issues are deeply interconnected.
8. Branch Traffic is Down… and That’s a Bad Thing?
Branch traffic is down. Why? Fewer people are coming in to conduct transactions. But is that such a bad thing? Transactions cost money —transactions that require infrastructure, technology and plumbin… all very expensive.
As Bancogrpahy’s Reider points out, if all transactions moved to non-branch channels, “we wouldn’t need vaults or under-counter steel or security systems, which would reduce the cost of a branch so substantially that we could then afford put a branch just about anywhere and it would be profitable.”
Reider says he can foresee a state where the industry has small sales branches everywhere, in hospitals, train stations, university centers, mall kiosks — just about anywhere you can park a sales person with a laptop — because the fixed costs would be so minimal.
“After all, what’s the breakeven on a branch that needs no equipment?” quips Reider. “A couple hundred accounts and we’re positive?”
9. There’s More to Branches Than Just Transactions
Those who have condemned branches to death almost always point to the decline in branch transaction volumes, but almost never discuss the importance consumers place on branches in a sales capacity. For opening accounts and other, more complex financial processes (e.g., mortgage loans, business accounts/loans) consumers continue to express a strong preference for an in-person experience. This trend extends all the way down through Gen-Y, and probably won’t change much. When people make big financial decisions — that often involve tens or hundreds of thousands of dollars — they like to look someone in the eye (see point 2).
10. Physical Instruments of Banking
“When banking customers come to a branch, it’s usually because they don’t have another choice.”
— Carl Snyder, Sr. Industry Principal/SAP Financial Services
It is entirely possible to disintermediate branches from the banking supply chain. But it’s going to take a while, because we first need to eliminate all the physical instruments from consumers’ financial lives — checks, cash and coins, physical signatures, even debit cards. Unless/until that happens, people will still have a need/desire to use physical facilities. And that’s a massive sea of change that needs to occur in an industry not known for its agility or speed of innovation.
11. Not Everyone Trusts Tech
Industry pundits often presume that the entire world is as ready for tech to replace banking’s outmoded, offline tools as they are. Not the case. Many studies have established that consumers are still very wary when digital technologies intersect with their money. It took years for people to establish a basic level of trust with online banking, and they have serious questions about the security of mobile banking. Consumers get frequent reminders of how perilous the world of digital finance can be (e.g., massive Target data breach). It may take a generation or two or even three before consumers feel comfortable fully embracing the digital channel. Until then, many would prefer to keep at least one foot in the real world, tethered to the comfort and security of cash and the brick-and-mortar channel.
12. You’ve Ridiculed Other Banks That Closed Branches
Dave Martin, EVP/Chief Development Officer with Financial Supermarkets, points out that local banks have exploited big bank branch closures in their marketing for many years — “Bank X is closing branches in this community because they don’t care about it.” But marketers might regret all their finger pointing, because they could be the ones needing to close a branch or two next. No one wants to be a hypocrite. And as Martin suggests, they might think twice about closing any branches if they know their competitors will publicly criticize them for it.
13. Branches Are Billboards
Sure, you can run a bank without any branches. ING Direct proved it. Ally Bank and First Direct in the UK does it. But they also have to spend 10-20 times more than you do on marketing — that’s expensive. And they have technology that rocks — that’s even more expensive.
For many smaller institutions, branches are a huge component of their marketing strategy. If you’re a $300 million dollar institution and close all three of your branches, how are consumers going to learn about you, especially when your marketing budget is only $30,000? How do you generate brand and name awareness with $30K?