Asset Based Lending
Chief Investment Officer
Commercial Loan Automation
BirdsEye Viewwhat will we do with all these branches?
Reacting to my BEV about reserves, Tim Hart, Treasurer of First National of Nebraska, says: "I think the article is off. Reserves are suppose to cover expected losses and capital is suppose to cover unexpected losses. Most banks have loan losses, excluding consumer, of 20 basis points. The examiniers demand a 1% reserve, therefore giving us a 5X reserve. Guess what- if we have losses and actual use the reserve we have to replenish the reserve anyway. Look at how the asset backed financing are executed- you don't have reserves OR capital. You have subordination and cash accounts. The capital markets have it right in trying to estimate the coverage on potential losses. The regulators have one concern- protecting the FDIC fund, so naturally the larger the reserves the better. "
Arik is competing in the California State Championship for wrestling this week. Keep your fingers crossed, and I promise to report back.
Have a great week,
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, broke 80,000 in 2007, almost double 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:
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.
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!