Many banks plan to add to their branch networks over the next few years even though all the evidence suggests that foot traffic is declining and that most banking transactions are now conducted online.
More than six in 10 banks say they expect to have more branches in five years than they do now, while less than 20% say they will have fewer, according to a new report from the consulting firm Celent. That's despite the fact that branch traffic has been declining by 5% a year and accelerating to the point that between 30% and 60% of all branch traffic could disappear within five years, according to banks surveyed by Celent.
"There's a widespread belief that branches are going to die but everyone still wants more branches," says Bob Meara, a senior analyst at Celent and co-author of the report.
Celent insists in its report that shifting consumer patterns will force banks to substantially reduce branch counts by as much as 40% within a decade, but its advice to banks is "why wait?" Even with banks looking to turn branches into sales, rather than transaction centers, foot traffic will only continue to decline as technology improves and customers become more and more comfortable doing their banking on tablets or smartphones.
"Rather than resisting branch closures or considering closure a move of last resort banks [should] adopt a proactive, strategic view of this opportunity," Celent said in the report. "Then, resources can be applied to leveraging competitive advantage gained through [multichannel] banking rather than a persistent overreliance on the branch channel."
To be sure, many banks are pruning their branch networks both in response to industry trends and to cut costs. Bank of America (BAC) and Wells Fargo (WFC) collectively closed 626 branches from 2009 to 2012, and Citigroup (NYSE: C) is closing dozens of branches as part of a larger cost-cutting plan. Regional banks that have been closing branches include PNC Financial Services Group (PNC), SunTrust Banks (STI), Associated Banc-Corp (ASBC) and KeyCorp (KEY).
On a conference call with analysts last month, Philip Flynn, Associated's chief executive , cited "the industrywide trend of less and less foot traffic in branches" for its decision to close roughly 10% of its branches. "We'll be very cognizant of that as we think about how many branches we operate."
But most banks are considering relatively minor changes to their branches "when they need to be radical," Celent's Meara says. He notes that nearly 80% of day-to-day bank transactions such as checking an account balance, paying a bill or transferring funds, are now conducted online. Customers go to branches primarily for two types of transactions, applying for a loan and getting customer support, but even 40% of loan applications now are completed online, Celent found.
Some banks may be reacting slowly because they are stuck in long-term leases or are waiting for interest rates to rise so that they can better absorb the costs of closing branches.
Others, however, remain bullish on branches because they see them as the best channel for acquiring customers. Huntington Bancshares (HBAN) has opened close to 100 in-store branches over the last two years (while closing about 5% of its traditional branches) and cites the expansion as a key reason for its double-digit growth in consumer and business accounts.
JPMorgan Chase (JPM) has opened 300 new branches in California, a market where it had no branches four years ago, and plans to add another 200 in select markets this year and next. It is closing branches as well about 35 a year but like Huntington it is opening them at a much faster clip.
In a recent investor presentation, JPMorgan Chase said it is targeting higher-value markets such as in California where the bank is "underpenetrated," and it is turning branches (or "service centers" as it calls them) into "sales and advice centers." It also sees expansion as a way to attract higher-net-worth clients.
Most observers agree that branches have value as sales and service centers, but there is some debate on whether branches need to be located so close to their customers. Bankers have long maintained that living close to a branch was critical in choosing a bank, and that helps explain why roughly 20% of bank customers live less than a mile from a branch and 60% of customers of large national banks live less than two miles from the nearest branch.
Celent argues that technology has largely negated the proximity argument and points to deposit growth to support its point. Only 7% of credit union customers live within a mile of their branch, versus 20% for banks, yet credit union deposit growth has outpaced bank deposit growth over the last two decades.
But new research from Synergistics suggests that location matters. Nearly 30% of consumers surveyed said they moved accounts to another bank after a nearby branch was closed.
David Darst, an analyst at Guggenheim Securities, says large banks could close more than 500 branches this year while banks with assets of between $5 billion to $65 billion could consolidate roughly 800 branches this year. Banks that have been active acquirers in deals with the Federal Deposit Insurance Corp., including Hancock (HBHC), FirstMerit (FMER), First Financial (FFBC) and Capital Bank (CBF), have the best opportunity to improve profitability by closing branches, Darst says.
There are practical reasons why banks are holding on to branches. Many banks are trapped in expensive leases that have been renegotiated to 20-year terms or they have renovated a branch and amortized the cost over five to 10 years and would have to take a financial hit, says Kevin Travis, a managing director at the consulting firm Novantas. Others have been waiting for interest rates to rise before absorbing the roughly $500,000 cost of closing a branch. Roughly 25% of branches are unprofitable, he says.
"The problem is that closing branches costs money," Travis says. "Many banks are waiting for the interest rate curve to turn, thinking they will become more profitable and can take the charges when margins are rising. But the flip side is that interest rate relief from widening spreads will lessen the financial pressure to cut costs. And hope is not a strategy."
Banks may be forced to shed branches because of competition from direct banks such as Ally Bank, Charles Schwab (SCHW), Discover Bank (DFS), EverBank (EVER) and Capital One 360 (formerly ING Direct). The Celent report compares direct banks to the rise of Netflix and online streaming video providers like Redbox that essentially felled the giant movie retailer Blockbuster. Direct banks have gained a significant share of U.S. deposits through the costs saving of having no branches.
Though some banks have made it particularly difficult to open a new account online, direct banks could upend that relationship once rates move higher, Travis says. With rates so low for so long, many customers have traded price for the convenience of getting a branch network, but that could change.
"Once interest rates rise and price comes back to the table, it's possible that direct banks will become killer apps," Travis says.
Many banks are responding to the decrease in customer visits by shrinking their branches, but Tony Driscoll, a principal at Continuum, a design and consulting firm that is working with Birmingham, Ala.-based BBVA Compass, says reducing square footage and reorienting branches is not an easy thing to do.
"Bank branches are heavily dependent on selling with all the incentives based on converting foot traffic into sales," says Driscoll. "That's really hard to give up because all the employees are trying to hit these monthly sales quotas."
He noted that the Celent report took a cue from banks by referring to mobile or online banking as "alternative channels," which "shows that they were built independently and are not part of the bank culture."
Carol McMullen, chief innovation officer at the consulting firm Crossland Group, and former executive vice president at Eastern Bank in Boston, says banks are not aggressively closing branches because senior executives come from a mind-set of being rewarded for mergers and acquisitions.
"It's very difficult to be an innovator when how senior executives become successful and learned to succeed in banking is essentially through bulking up on acquisitions and having the bank name on as many branches as possible," McMullen says.
Banks don't have to maintain their current branches to serve customers, Meara says, adding that smaller, automated branches can be just as effective while lowering costs. He uses the analogy of shooting a bird to describe how banks are missing out on the opportunity to change.
"You can be an ace shot but you have to aim ahead of the bird to shoot it," he says. "Everyone knows that mobile is hot but bankers always point out that it's a small percentage of their overall transactions. They have to invest now because by the time the investment is implemented it will be 18 months from now."