Tag Archives: branch

Market-Specific Metrics Inform Bank Branch Network Investments

The emergence of virtual channels, the need to cut costs and speculation of more industry consolidation are all spurring banks to reconsider their branch networks.  Recently, EMI Strategic Marketing Inc. published blogs on the changing role of the branch, as well as trends in branch numbers for leading U.S. banks.

Banks have reiterated their commitment to the branch channel, but many are unlikely to maintain branch numbers at current levels.  Bank decisions of branch numbers and deployments are increasingly based on an analysis to the bank’s relative strengths in different markets.  Is the bank’s branch network spread too thinly, with few branches and low deposit shares in many markets?  Does it have critical mass in terms of branch numbers and/or deposit share in particular market? If it does not have sufficient scale at present, should it expand its branch network organically or through acquisition? Or should it leave some markets?

EMI Strategic Marketing Inc. analyzed end-2Q11 FDIC data on the branch footprint of the top 15 retail banks. (Note: this does not include M&A activity over the past year, such as PNC’s acquisition of RBC Bank.)  We focused on the number of metropolitan statistical areas (MSAs) where these banks had branches, branch concentration levels, and market strength indicators.

  • The banks with the most extensive branch networks are Bank of America and Wells Fargo, who both have branches in more than 200 MSA markets.
  • Regional banks naturally have a more concentrated branch presence.  RBS Citizens, PNC and M&T all have more than 60% of their branches in 10 markets.
    • RBS Citizens has top-three share in only 14% of the 49 markets where it has a physical presence.  Recent speculation indicates it may sell off its branch network in Illinois and Michigan.  The bank has branches in seven MSAs in these two states, but does not have a top-three deposit share in any of these markets.
  • Market strength: Wells Fargo has a top-three deposit share in 70% of its MSAs.   Four other banks (M&T, Bank of America, SunTrust and PNC) are ranked in the top three in more than 40% of their markets.
  • In late 2010, Citigroup announced that it would be concentrating on 16 U.S. metro markets.  This helps to explain why 61% of Citibank’s branches are in just 10 MSAs.  On the other hand, it has five or fewer branches in more than half of its markets.  Given its stated objective to concentrate its efforts on about 15 metro markets, we can expect Citibank to leave many of these markets where it has a token presence.  However, it will be aiming to significantly grow share in its target markets.
  • Capital One, which has built a retail branch presence in recent years through acquisition, has 84% of its branches in just 10 MSAs. (In fact, 57% of Capital One branches are in just two MSAs: Washington-Arlington-Alexandria, DC-VA-MD-WV and New York-Northern New Jersey-Long Island, NY-NJ-PA.)

Customers reducing branch usage, but some banks growing branches

Many recent surveys have pointed to customers’ reduced branch usage for everyday banking, as they embrace Internet and mobile banking. Many of the leading banks have reported very strong year-over-year growth in mobile banking active users in 2Q12, including Bank of America (+35%, to almost 10.3 million), Chase (+38% to just over 9 million), and Wells Fargo (+ 38%, to 8.3 million).  At the same time, many banks are implementing aggressive cost savings programs.

Based on this, one would expect banks to significantly cut back on their branch investment.  FDIC data bears this out, with total U.S. bank branch numbers falling by more than 500 in the year to end-March 2012.  However, the following chart reveals that this trend is not universal, with many leading banks increasing branch numbers over the past year.

While some banks (such as Chase) have grown their networks organically, the increase in branch numbers for most of the other banks listed above was a result of branch/bank acquisitions.

  • PNC grew its branch network following the acquisition of RBC Bank, as well as the purchasing of branches from Flagstar Bank.
  • Chase grew its branch network in growth markets like California and Florida.  However, it has scaled back ambitious plans to grow its network further in the coming years.  Chase has also radically expanded its Private Client locations, from 16 in 2Q11 to 738 in 2Q12.
  • KeyBank’s net increase of 14 branches was due to the acquisition of 37 branches in upstate New York, partially offset by branch closures.  The bank has reported that branch rationalization is one of the central elements of its new efficiency initiative, and it plans to cut 5% of its branches in the next 18 months.

Factors that impact bank branch numbers include:

  • M&A activity (highlighted in the examples above)
  • Strategic decisions to increase/reduce presence in specific markets (e.g., grow branch numbers in targeted markets, or reduce branches in other markets where the bank’s branch presence is below a minimum threshold)
  • Ability of specific branches to meet performance goals (e.g., growth, profitability)
  • Competitive activity

Though surveys indicate that branch usage is declining, a majority of consumers and small businesses still value branches, as they want a multi-channel bank relationship (encompassing physical and virtual channels).  This is leading banks to change branch design and staffing models in order to reposition branches to provide a broader role for the bank, in areas like selling, relationship development, product testing, and branding. (See our recent blog on the changing role of the branch.)

Banks Adapting Branch Networks to New Realities

For decades, bank branches have been focused on everyday banking transactions. However, with electronic self-service channels now handling a dominant share of these transactions, branches have come under intense scrutiny, with many industry commentators predicting the decline and even extinction of the branch channel.  This view has been strengthened by the fact that banks are focusing significant attention on cutting costs in an era where revenue growth remains elusive.  And branches represent a significant cost for banks.

Banks are belately beginning to react to this new environment by developing new branch strategies that recognize its changing role.  Banks are now putting less emphasis on the branch as a channel for day-to-day financial transactions.  Instead, branch investments are being directed to capture the potential of the branch as a key channel for sales, customer relationship development (through the provision of complex and/or sensitive financial advice), and branding (even customers who bank online tend to want the physical reassurance of the branch).  In addition, banks are increasingly aware of the research value of branches, both in terms of directly surveying branch visitors as well as testing new product or service innovations in selected branches before full roll-outs.

Some examples of new bank branch strategies:

  • In a presentation this week at the Morgan Stanley Financials Conference, PNC outlined a vision of its branch network that involves a more dynamic definition of branches, which includes multiple physical formats, as well as greater integration with both remote sales people and electronic channels.
  • Huntington recently reported branch plans driven by both the desire for cost savings (closing traditional branches and opening in-store branches) as well as to leverage the latest technology (such as branch image capture and processing) to drive efficiency.
  • U.S. Bank has three branch models, which enables the bank to tailor branch investments to market composition and opportunity.
  • Wells Fargo continues to have a strong commitment to the branch channel, as it claims that the vast majority of financial products are bought in a branch. It follows a specific model for branch productivity that is based on both in network density and retail execution, and which is seen in the following chart from its recent Investor Day:
  • At its 2012 Investor Day, Chase discussed a number of branch innovations designed to reduce costs and improve the customer experience. These include self-service tellers, paperless tellers, instant-issue cards and access to remote sales specialists through video. It is testing other innovations like next-generation ATMs, paperless sales, and mobile demonstration zones. Chase is also continuing to deploy additional sales personnel in branches; at the end of 1Q12, Chase had more than 6,000 sales specialists (y/y increase of 21%).

As electronic channels continue to change how consumers and businesses interact with their banks, many banks are reassessing the level and type of investments in their branch networks.  Though most are still committed to the branch model—noting its importance in sales and understanding that many customers still want to have the reassurance of a physical presence—the role of the branch is evolving and this has important implications for issues like branch sizing, design, staffing, technology deployment, and merchandising, as well as integration with other channels.