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Trends in Branch Banking

Implications for Banking Employment

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The banking sector has, in recent decades, alternated between cycles of opening and closing branches, driven largely by shifting perceptions of the tradeoffs between the costs thereof, and their potential for capturing incremental customers and revenues. This is yet another manifestation of the sometimes manic depressive nature of the financial services industry, which leads, inevitably, to recurring patterns of net hiring and net layoffs.

Nonetheless, the long term secular trend in U.S. bank branches has been upward, with roughly eight times as many commercial bank branches in 2011 as in 1960, per data compiled by the FDIC and cited in Forbes magazine ("Who Needs Bank Branches?" 8/22/2011). The same article pegs the total number of U.S. branches, including 10,800 savings bank and S&L locations, at 98,500 in 2011. It also mentions the movement of deposit and checking accounts to brokerage and mutual fund companies (which do not maintain branches, but which allow clients to withdraw cash through other banks' ATMs and often reimburse the associated fees), plus the acceptance of new technology (such as depositing checks via scanning with a mobile device), as trends likely to result in branch contraction.

According to consulting firm Novantas, bank branches remain the preferred sales and service channel for certain types of customer activities, though the percentage of customers whose interactions with their banks are primarily through the branches is declining rapidly. Here is a list of key activities, with the approximate percentages of customers preferring to execute them through a branch, in both 2005 and 2010, respectively:

  • Opening accounts (from 85% to 75%)
  • Buying products (from 78% to 62%)
  • Getting advice (from 70% to 58%)
  • Resolving problems (from 50% to 38%)
  • Transferring money (from 45% to 18%)

In general, while growing numbers of customers find bank branches increasingly less convenient or necessary for a variety of routine transactions, they still value face to face interactions when engaged in more complicated activities.

Other surveys indicate that:

  • About 7% of the funds invested in what banks call money market accounts are with online banks.
  • About 50% of U.S. households bank online to some degree
  • About 10 to 15% of U.S. households engage in mobile banking, using portable devices like smart phones

Partially to take advantage of these trends in customer preferences, and partially in response to the attractive economics of online banking, Capital One will purchase ING Direct from the latter's Dutch parent for $9 billion. Furthermore, as the public becomes more used to making deposits with online banks, the interest rates that they must pay are declining towards rough parity with those offered by traditional bricks and mortar institutions.

Nonetheless, these same surveys find that even those who prefer to bank online or via smart phones frequently choose their bank based on the availability of nearby branches, presumably in case they encounter situations or problems that warrant resolution via face to face interaction with bank staff.

In addition to tellers and loan officers, bank branches are increasingly places where one may find financial advisors, if the bank also offers brokerage and investment services. Bank of America, for example, plans a 100% increase in the number of financial advisors in its branches in 2011.

There is an overall trend towards the closure of bank branches in the current cycle. Bank of America, for example, indicates that it will shut 10% of its locations and attempt to drive customers towards online transactions by imposing fees related to branch usage. News and data provider SNL Financial reports that about 12,000 branches have closed in the U.S. from 2007 to 2012 ("From Cache to Cachet: Landlords Repurpose Classic Bank Vaults," The Wall Street Journal, December 6, 2012). However, there are notable exceptions.

  • JPMorgan Chase finds its branches to be profitable, and plans to add 2,000 more locations, so as to vault past both Bank of America and Wells Fargo, to create the most extensive branch network in the U.S.
  • PNC is buying the extensive network of branches that RBC owns in the southeast, to tap that region for the first time.
  • Local banking markets may have dynamics at variance from the national trend. In the City of New York, for example, (particularly within the borough of Manhattan) the major banking players are still aggressively opening new branches, willing to pay the escalating rents that have driven restaurants and retailers from the same spaces.
  • The opening of small branches in supermarkets is a low cost way (only 10 to 15% of the setup costs and 50% of the recurring costs associated with standalone branches) in which some banks are expanding their footprint. A related phenomenon is the movement into banking by some major retailers.

To expand on the last point, it has long been common in the U.S. for supermarkets to rent counter space to accommodate small branches of independent local banks. Meanwhile, industry analysts find that supermarkets normally have better dedication to customer service, while banks are more blatantly profit driven. They also indicate that supermarkets have a very low cost of customer acquisition, since they already serve large numbers of shoppers daily. Walmart already has made forays into financial planning services. It also is reinventing itself as a low cost banking alternative for low-income individuals who typically utilize expensive check cashing services. Additionally, Walmart already is a principal landlord for national tax preparation franchise firms, most notably H&R Block and Jackson Hewitt.

Primary source: "American retail banking: The road to agnosticism," The Economist, 6/25/2011.

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