Banks’ Branch Strategies Must Involve More Than Just Closing Branches

September 30, 2016

According to the FDIC, U.S. banks have been cutting branches steadily in recent years. Offices in FDIC-insured institutions reached a high of 99,500 at the end of 2Q09, but have declined by almost 8% since then, to less than 92,000.

Bank branch reductions are primarily driven by two factors: cutting costs in a low-revenue-growth environment; and the belief that customers’ increase use of electronic channels for everyday banking needs means that banks need fewer branches. According to the American Bankers Association, 73% of U.S. adults identified the Internet and mobile as their preferred banking methods, with only 14% naming branches. However, customers remain committed to branches. According to a March 2016 Accenture survey, 87% of North American banking customers expect to still use bank branches two years in the future. A branch strategy that simply consists of branch cuts fails to take into account customers’ ongoing branch affinity, as well as ignores the significant role that branches can play in helping banks meet sales and service goals. Here are four strategies that banks can follow to optimize their branch investments:

Create specialist branches. Some banks are opening offices to target specific segments, such as commercial clients or high-net-worth individuals. For example, BMO Harris opened a commercial banking office in Dallas in June 2016, while Wells Fargo opened a Middle Market Banking office in Albany in August 2016. These branches are located, designed and staffed to cater to the characteristics and unique financial needs of these segments. Unlike traditional branches that tend to form part of a network, these specialists branches can operate on a standalone basis, thereby ensuring that costs stay under control.
Use branches to promote digital services. Recognizing the transition to electronic channels for everyday banking transactions, banks can leverage their branch network to demonstrate the ease-of-use and value of these digital services to customers who are slow to embrace technology, while also showcasing innovations to early adopters of new technologies. Bank of America has deployed 3,800 ‘digital ambassadors’ in its branches who help customers understand and use its online and mobile banking services.
Overhaul branch staffing. Smaller branches require fewer personnel, but the staff must be comfortable with performing a range of service and sales activities. Embracing this model, PNC plans that half of its branches will have converted to ‘universal branches’ by 2020 (18% have done so to date)
Scale down the overall branch footprint. As they seek to reduce branch costs, banks need to take into account the benefits of having a physical presence in markets. This can involve using smaller branch formats (one extreme example is PNC’s portable 160-foot “Tiny Branch” on the West Virginia University’s Morganstown campus), reducing branch density, replacing a series of existing branches with one big flagship store, or even opening new branches in high-growth/high-potential markets. Decisions on the number, location and format of branches should be based on analyzing a number of key factors, including: competitive intensity; market size, growth and composition; current branch usage; short-term costs; and longer-term savings.

Four Channel Trends in Leading Bank 4Q15 Financials

January 27, 2016

The largest U.S. banks have been publishing their quarterly and full-year financials over the past two weeks. Within these reports, we can discern a number of channel-related trends. These trends have a direct impact on how banks interact with their customer base in terms of providing everyday banking and value-added services as well as cross-selling additional products and services.

We’ve listed these key channel trends below:

Banks are continuing to reduce their branch networks. According to SNL Financial, the total U.S. branch network fell by 1,614 branches and is now at 92,997, a decline of 1.7%. These declines are driven by banks’ desire to cut costs, as well as from a recognition that greater usage of self-service channels for everyday banking transactions may enable banks to reduce bank density. The following chart looks at net changes in branch numbers for leading banks with more than 500 branches:

Citibank reported that it plans to close an additional 50 branches in the first quarter of 2016 as it exits certain markets (including Boston) and will concentrate its branch presence in six key metro markets. It is worth noting that in other markets where Citibank has cut its branch presence, it claims to have retained over 50% of deposits through its online and mobile channels.

Banks are overhauling branch design and staffing. Not only are banks reducing their overall branch numbers, they are changing how branches are designed and staffed. In its 4Q15 earnings conference call, SunTrust mentioned that it is relocating to new, smaller branch locations in Richmond and Raleigh, which will reduce its square footage in these markets by half. Overall, it has reduced its branch footprint by 2.5 million square feet over the past four years. PNC reported that 375 of its 2,600 branches have been converted to its Universal Banker model, and it plans to convert an additional 100 branches in 2016.
Mobile banking is maintaining its strong growth trajectory. According to Javelin Strategy & Research, 30% of U.S. adults used a mobile banking service weekly in 2015. Reflecting this trend, leading banks continue to show double-digit y/y growth in mobile banking users (Chase +20% to 22.8 million; Bank of America +13% to 18.7 million; and Wells Fargo +15% to 16.2 million). These customers are also using mobile banking for a greater variety of transactions. For example, Bank of America reported that mobile banking’s share of total deposit transactions rose steadily from 4% in 4Q12 to 15% in 4Q15.
Online banking usage remains strong…and is growing. While mobile banking garners most of the headline in financial trade press, online banking remains a key customer service channel, and some leading banks continue to register strong growth rates in online banking users. This is likely due to a number of factors, including overall account growth, increased customer comfort with using online banking, new online banking functionality, as well as lingering concerns over mobile banking security. The following table compares 2015 online and mobile banking users and growth rates for Chase, Bank of America and Wells Fargo:

We expect that as banks continue their migration towards self-service channels for a growing number of everyday banking transactions, banks will continue to scale back their branch networks. This will involve reducing branch density in particular markets, as well as exiting markets where they lack a critical mass or where their branches are underperforming. However, banks in general want to maintain a physical presence in markets, so they can leverage the power of the branch as both a sales channel and a branding beacon.

In addition, banks need to provide a consistent user experience across their online and mobile channels. In the short term, banks will continue to provide more functionality in the online channel, as consumers build trust in using their mobile devices for more complex financial transactions. But the distinctions between online and mobile channels are blurring, and banks are already starting to refer to “digital channels” to encompass desktop, tablet and mobile channels. Even the traditional delineations between “online” and “offline” channels are breaking down, as banks showcase their digital services in branches, and as digital channels include functions to enable customers make in-branch appointments.

7 Ways Banks Are Adapting Branch Networks to New Realities

September 28, 2015

According to the FDIC, there were just over 94,000 domestic bank branches at the end of June 2015: a net reduction of almost 1,400 branches from end-June 2014, and a decline of more than 6,000 branches since the U.S. passed the 100,000 branch threshold in mid-2009.

The recent decrease in the number of branches is being driven by a number of factors, including banks’ focus on cutting costs in recent years. In addition, the emergence and strong growth of online and mobile banking usage has led to consumers significantly reducing their use of branches for transaction processing. So how are banks adapting their branch networks to this changing channel environment? An analysis of presentations by leading U.S. banks at the recent Barclays Global Financial Services Conference identified a number of ways that banks are restructuring, repositioning, redesigning and restaffing their branches to ensure that this channel survives and thrives into the future.

Continuing to pursue branch consolidation. While banks continue to emphasize their commitment to the branch channel in general, they have cut their overall number of branches in recent years, and will continue to do so. At the Barclays conference, KeyBank reported that it had cut its branch network by 10% in the past three years, and envisages a further ongoing reduction at a rate of 2-3% per year.
Selling off (and acquiring) branch networks. Most leading banks believe they need to have critical mass in particular markets. If they feel that they cannot achieve this goal, they may decide to exit the market entirely. Citi is exiting a number of markets, as it seeks to focus on just 6 major metro markets. Fifth Third recently announced that it is ending its branch presence in Pennsylvania. These branch sell-offs create opportunities for other banks who want to grow their presence in those markets (BB&T acquired Citi’s branch network in Texas, and F.N.B is buying Fifth Third’s 17 branches in Pittsburgh).
Developing a hub-and-spoke approach. Rather than having a dense network of similarly-sized branches, some banks are looking to establish a hub-and-spoke approach in specific markets. This approach typically features a flagship branch as well as a reduced number of small branches. At the Barclays conference, Synovus claimed that it was applying a hub-and-spoke system. Other banks with flagship branches include Bank of America and Citibank, which now has flagship branches in four of its six target U.S. metro markets.
Redesigning and re-staffing branches. As the branch channel’s primary role shifts from transaction processing to sales and service, leading banks are overhauling store layouts and are replacing tellers with product experts. In addition to closing or consolidating 400 branches in recent years, PNC reported that it has converted 300 branches to its universal banking model (featuring concierge stations and reformatted teller stations). In addition to providing enhanced sales and services to branch visitors, PNC claims that these branches cost 45% less than traditional branches. In terms of staffing, Bank of America reported that it has added nearly 1,200 financial solutions advisers and small business bankers over the past two years.
Growing in-store branch networks. Banks like Huntington and U.S. Bank have significant in-store or on-campus branch networks, and remain committed to this channel. Huntington Bank recently announced that it was adding 43 in-store branches in Michigan via its relationship with Meijer Stores.
Incorporating new functionality into online and mobile banking services to drive branch traffic. Bank of America reported that its clients used the bank’s online and mobile apps to schedule an average of 14,000 branch appointments per week in August 2015. And in September 2015, Bank of America announced online and mobile banking enhancements, which included enabling clients to make same-day financial center appointments.
Applying guerrilla marketing tactics. Banks are becoming more creative in how they establish a physical presence to better interact with clients and prospects. Leveraging its relationship with the Green Bay Packers, Associated Bank has set up a virtual branch in the parking lot of Lambeau Field to target tailgaters.

While the overall number of branches is likely to continue to decline, most banks appreciate the key role that branches play in sales, service and branding, and remain committed to the channel. However, banks will continue to adjust branch density, design, layout, staffing and integration with other channels, in order to control costs and adapt to new consumer preferences and behaviors in how they interact with their banks.