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BirdsEye View

what will we do with all these branches?

This week's article has to do with a major strategic issue that is looming ahead: dealing with the branch network, facilities, format, configuration and staffing, as the world turns...and customers change behavior. Thank you in advance for your perspective and insights on this issue as it unfolds.

Also, check out Liat's latest contribution: a brief reaction to the Virginia Tech Massacre. As always, she has a way with words and a fresh view of the world combined!

What Will We Do With All These Branches?

The number of bank charters continues to decline, but the number of branches is at an all time high, closing in on 80,000 in 2006, up from less than 45,000 in 1984. It reminds me of the airline industry pre 9/11, when the number of airlines shrank but the number of seats up in the air continued to grow, yielding lower per passenger income and increasing costs. It took a catastrophic disaster like 9/11 to rationalize the airline industry and ground all those superfluous planes; will it take a debacle to rationalize the branching frenzy we've enjoyed all these years?

Consider the following facts:

  • The number of checks has finally started to decline, as predicted for decades, last year; the number of electronic transactions has surpassed the number of paper ones
  • Internet banking penetration and usage continue to climb
  • Debit card transactions are growing at a 17% CAGR, and average transaction size is declining
  • Remote deposit capture is growing at a rapid pace, and customer demand for it far exceeds supply
  • ING Direct, Citibank's online bank, Zion's Bank Direct and many other online deposit gathering facilities are growing faster than their physical distribution brethren
  • Less than 40% of all consumers used the mail to view their bank account statements during the past year; the number is as low as 27% among Gen Y-er females
  • While only 12% of senior females and 17% of senior males have viewed their bank statements online, 50% of Gen X-er males and 60% of Gen Y-er females have, and their mail counterparts aren't far behind
  • A recent survey of de novo branches indicates that the average branch deposit base after 5 years is $19 million; it also shows that the top third of branches ranges between $30-$60 million in deposits

These changes, while evolutionary, are the harbinger of a revolution. Customers are still branch-bound, and the most profitable customers are indeed branch visitors, yet the frequency of such visits is declining, and the acceptance of alternative payment and transaction vehicles is growing rapidly. This is particularly true, predictably, among younger customers, who represent our future, yet we continue to build and buy branches.

Consider the last time you took a plane anywhere. Did you use a machine to get your boarding pass or did you stand in line to see the solitary agent? When I ask this question in speeches I give or at our Forums, at least 85% have used their home computer or a check-in machine at the airport.

Another pertinent example is the impact Netflix had on Blockbuster. In two years Netflix made Blockbuster's current distribution model obsolete, and the company is now closing outlets and rethinking the appropriate ratio of stores to population, realizing that, due to this new internet channel, it has many more stores than it needs.

The implications are profound, since the functionality is similar to our teller functionality. We are amidst a major transition in consumer behavior, yet we build the same old branches, and staff them the same old way.

I believe that branch usage will change dramatically in the coming 3-5 years. It needs to evolve primarily into a sales outlet, and avoid the transaction mortuary fate it might otherwise suffer. We need to start thinking about reducing the number of tellers, increasing the number of ATMs and staffing our branches with proactive, skilled bankers who can parlay customer contact through any channel into needs-based sales. I was struck by a discussion I recently heard on Saturday hours. The bankers were talking about how far to extend banking hours, and how many tellers they'd need to be open those hours. My question is: why do you need tellers at all for Saturday and Sunday banking? These are the best sales days for couples; don't we want to have bankers on hand to take care of their needs, pre-schedule appointments for account opening etc.? If we continue to staff our branches mainly with tellers during extended hours, why are we surprised we don't get additional business out of that investment?

Our marketplace is changing before our eyes. Consumers and commercial enterprises alike are more open to receiving information online and doing certain basic business on the internet. However, they still look for the physical outlet to "touch the merchandise" before they buy. I believe that same behavior we see in retailing will become more pronounced in banking as well. Retailing shows us that all distribution modes need to be available to optimize the customer value: in-person, by phone, through fax, online, etc. Witness Williams-Sonoma, Sharper Image, Pottery Barn and countless others that started as catalog houses and ended as multi-channels sales power houses. We are on the path toward a similar transformation. Just walk into any Fidelity or Schwab office and you'll see what I mean.

Our industry has a tremendous opportunity to take the next step toward optimizing the customer value by clarifying the role that each channel is to play in acquiring, expanding and retaining customer relationships. The implication to both branch number and structure need to be drawn and implemented. Otherwise, we will build it but they will not come!