The accelerating growth of electronic delivery plus recent financial pressures have reversed the trend of branch expansion. While still vital, the branch channel is changing.
Fewer, leaner, and more engaging
Mergers, cost reduction, technology have an impact, but the channel remains vital
By Gary Stein
The current state of branch banking reflects the confluence of long-term trends with the near-term effects of the financial crisis and recession. As a result, the picture presented in this third annual survey of branch banking trends is complex.
Our two previous studies of the branch channel found that banks are balancing their substantial investment in branch delivery with the well-documented movement of transactions to other channels, and that branches remain critical tools for acquiring new customers and providing excellent service. The studies also confirmed that elements of branch banking are changing in many ways to enhance the customer experience and improve relationship banking.
Those trends continue, but now that we’re three years into the financial crisis and its aftermath, the resulting economic turmoil has caused consumers to think differently about their finances and seek help to regain their footings. They are more concerned today about rebuilding savings, reducing debt levels, and affording retirement. The question is, how will these altered consumer attitudes and concerns impact the branch channel?
For this year’s survey of branch banking trends and best practices, we analyzed available data on branch openings and closures. We also interviewed senior executives at banks of varying sizes in an attempt to dimension how the channel will change as a result of recent events and to revisit earlier findings. One thing is clear: the branch remains crucial to effective delivery of products, account servicing, and advice, and central to the marketing and positioning of banks in the communities they serve.
THE NEW FUTURE: FEWER BRANCHES
This year will mark the first time in over a decade that the number of bank and thrift branches decreased from July of the prior year (see chart, p. 28). In fact, Capital Performance Group projects (based on analysis of SNL Financial data) that closures will outnumber de novos from July 2009 through June 2010 by a ratio of 1.64 to 1.
What is driving this trend change? Closure activity remained high over the past year. The number of branch closures is on track to decline slightly from a decade high of 2,318 for the period ending June 30, 2009, to a projected total of 2,113 for the period ending June 30, 2010. The closures reflect some large banks’ drive to reduce costs as well as banks closing branches of acquired institutions.
The real story, however, is the dramatic tapering off of de novo branch openings. While 2010 will mark the third consecutive year of decline in the number of de novo branches, the year-to-year decrease is noteworthy. CPG predicts the aggregate number of branch de novos will fall by nearly 50% from 2,479 for the year ending in June 2009 to only 1,292 this year. As recently as two years ago, the industry opened 3,764 new branches to only 2,048 closures, and the year before witnessed even higher levels of net expansion.
Limiting the number of new branches at this time is a rational response to the financial pressures faced by the industry. In addition, the regulators have approved very few new bank charters since the crisis began, which has contributed to the slow pace of de novo branching. Still, some banks continue to pledge their commitment to expanding their branch networks. In May, KeyCorp’s Chief Financial Officer, Jeffery Wheeden, announced plans to build 40 new offices and modernize 85 others in 2010. For banks with investment capital and growth plans, the current environment—with reduced real estate prices and distracted competitors—provides an opportunity for expansion.
Next expansion will be less dramatic
Many healthy banks, however, are holding off on de novo openings in anticipation of weaker competitors failing, putting themselves on the market, or divesting individual locations. Between June 30, 2009, and the time that this article went to press, 267 offices had been sold via branch transactions and 2,989 via whole company transactions (both assisted and unassisted). For several reasons, we foresee more branches changing hands through traditional (i.e., unassisted) whole bank mergers and acquisitions than through deals for individual branches or FDIC-assisted acquisitions.
First, it appears that slim pickings of choice individual locations are muting would-be buyer interest.
Second, competition for FDIC-assisted deals is intense. Deal terms are now more favorable to the FDIC, making assisted transactions less attractive for buyers.
Third, many banks—especially smaller banks—will be under tremendous profit pressures for many years causing some to seek buyers.
In the not-too-distant-future, we expect to see low property costs drive some increase in de novo activity. Real estate services firm Grubb & Ellis does not predict most markets will begin to turn around until 2011. By that time, we anticipate that optimism of economic recovery, combined with still-low rents, should entice banks looking for new branch locations to get back into the game. In addition, as good retail space becomes available, banks will look for opportunities to relocate offices to growth areas from less attractive, more mature markets. We will not, however, return to the level of new branch expansion that we saw prior to the financial crisis as investment continues to shift towards improving online, mobile, ATM, and other forms of automated delivery.
In-store has fewer adherents
Interestingly, we see a mixed future for in-store branches. In-store de novo activity declined even more sharply than that of traditional branch offices over the last 12 months. A number of prominent banks have signaled that the channel does not make sense for them. Capital One’s Chevy Chase Bank closed all of its Giant Food in-stores in 2009, while Zions has done the same with all of its Utah Smith Food & Drug in-store offices. For these and many other banks, in-stores have stood primarily as transaction processing centers, and today, ATMs and online technology represent cheaper approaches. There are, however, banks that report success in cross-selling services and acquiring customers via in-stores. Pat Piper, executive vice-president of BOK Financial, “loves the fact that as online capabilities give customers fewer reasons to enter a bank branch these days, the great majority of these same customers still prefer to buy groceries in person.”
INSIDE THE BRANCH: DESIGN, TECHNOLOGY & STAFFING
We closed our 2009 ABA Banking Journal branch-banking article by predicting that the channel would evolve as banks update design standards to reflect better their individual brands and an understanding of local market characteristics. NewAlliance Bank’s new Hartford branch provides an example of that evolution.
NewAlliance Bank recently fine-tuned its brand with a promise to help its customers to thrive. In addition, the New Haven, CT-based institution has a unique history and deep ties to its footprint communities. Mark Gibson, NewAlliance’s chief marketing officer, says the bank’s leadership sought to make their Hartford de novo the embodiment of these concepts.
The new branch houses five specific zones within the 3,500 square foot facility. The zone design is intended to promote NewAlliance’s commitment to the local community while making it easier for customers to accomplish their banking needs. Two of the zones are intentionally traditional: 1. the Teller Zone accommodates fewer teller windows than some of the bank’s older branches but ensures customers recognize that they are in a bank branch and know where to go to conduct transactions; and 2. the Sales and Advice Zone provides typical platform capabilities and employs work stations designed to help facilitate customer-staff interaction.
The other three zones help to distinguish the branch. The Dwell Zone (pictured above) engages customers waiting for staff assistance, thereby reducing perceived wait times. This area features a flat screen TV, free WiFi, brand messaging, and the “eBar,” a self service station that can also be used by employees to demonstrate online capabilities.
The Community Zone includes a large storefront window with a changeable three-dimensional display publicizing the bank’s relationship with the local community. The adjoining Brand Zone primarily serves as an attractive in-store billboard expressing who NewAlliance is and how the bank differs from other institutions.
Another community bank using branches to reinforce ties to the towns in which the bank operates is Benchmark Community Bank. It’s South Hill, Va., branch (currently under construction) will feature a community wall showcasing Little League sponsorships, hometown military personnel and war heroes, community events, and local businesses, According to Don Tate, Principal with Richmond, Va.-based design firm, Baskervill.
Enhanced engagement continues
Whether they are using recycled materials or not, many modern branch designs aim to utilize space and furniture to drive more customer engagement. This trend is reflective of the ongoing movement toward relationship banking and focus on cultivating primary customer relationships rather than transactional accounts. Large, intimidating oak desks are increasingly forsaken for sleeker, “P-top” tables (shaped like the letter “P”) that facilitate discussion between staff and customers rather than negotiation. We have seen a number of banks deploy monitors that can swivel and enable platform personnel to share information with customers.
Bankers that do not consider themselves to be technology innovators or leaders still need to maintain a keen eye towards enhancements that assist with customers’ day-to-day needs and reduce manual processing. This was NewAlliance’s motive in using their new Hartford branch to pilot the bank’s deployment of envelope-less ATMs. At the teller windows, banks are increasingly utilizing teller capture stations, cash counters and recyclers to reduce teller key entry. Standard customer service transactions will continue to be made more efficient and more will be done via self-service methods, enabling the staff in the branch to spend time on customer-facing activities. This has long been the goal, but with profits under pressure and customer cross-sell more important than ever, we expect to see more progress at many more banks on this front.
Late last year, BBVA Compass began testing video kiosks that connect branch customers with centrally-deployed mortgage and investment services specialists to enable “remote face-to-face” sales interactions. The kiosk stations feature high resolution screens, a video camera, a scanner, and a printer and were piloted at six offices prior to an anticipated roll out to 60 to 70 branches this year. While many banks have had mixed results with video kiosks in the past, BBVA Compass’ customer assessments of the new systems have been very positive thus far. (See Tech Topics, p. 21, for more on video banking.)
In fact, all of the branching trends described above will gain in popularity over the next several years as bankers continue to focus on enhancing the customer experience, improving customer relationship capabilities, and reducing delivery system costs.
Industry adoption of new branch design principles will take many years due to continued pressure on earnings and limited investment capital. However, technology and the economy are rapidly shaping customer needs and expectations, and it is imperative that the industry keep pace. â–
Gary Stein is a partner with Capital Performance Group, LLC, www.capitalperform.com, a management consulting firm providing advisory, planning, analytic, and project management services exclusively to the financial services industry.
The electronic version of this article available at: http://www.nxtbook.com/nxtbooks/sb/ababj0810/index.php?startid=26