What's Coming in 2012: A New Approach to Branches

With all the continuing financial pressure on banks, it was surprising to learn yesterday that Citigroup plans to continue to open new branches, despite its rising expenses.

What Citigroup needs -- as do many banks -- is a more enlightened approach to branch banking. I'm expecting that to be one of the major themes of 2012.

It is simply impossible for banks to consider their branches without also pondering the entire gamut of their retail banking operations. Online banking and mobile banking, in particular, have already changed how consumers view their banking practices (and the fees they pay -- a topic I will address in a future blog). Banks should, too.

One bank that clearly understands this change is U.S. Bancorp. Richard Davis, U.S. Bancorp's chairman, yesterday laid out his principles for branch banking, and they deserve investigation. First, Davis said banks need to understand the changes in consumer behavior.

First of all, the transaction activity in the branches more likely, I think, we all agree is going to come down. People have, with mobile banking and just changing behaviors, they don't see the need to come into a branch as often as they used it to meet with the teller for a nonconsultative activity just to move money across the counter.

Because of this, Davis said, banks need to change their branches' DNA.

I think we also see an entirely higher value of this guidance-giving consultative role that you have for an investment decision, a trust, a long-term family trust, an opportunity to buy a home. And in this case with interests low, you can't see the value of what branches will become when rates start to move up again. And the traditional old-fashioned CD, which just rolls over on its own, starts to become less attractive like it was 5 or 6 years ago because there is a less-insured alternative in a mutual fund or an annuity that really deserves a lot of conversation and some eyeball-to-eyeball opportunity or branches will kick in big time and will have all kinds of opportunities for them to become more effective.

So what should banks do practically? Here's Davis's recipe:

Shrink the teller line;
Increase the privacy areas;
Change your hours to make the bank more available to people when they need to come and talk about something private and personal; and
Change the branch's staffing composition accordingly.

But Davis emphasized that branches still serve a profound need.

[Y]ou still have those locations on the corner of Main and Wall, I guess, for people to come in and do what they can't do over the phone, and probably for a long time, won't want to do online.

2012 will be the year when banks -- other than Citibank, it seems -- will start transitioning their branch banking strategies. The transactional model just doesn't work anymore. The faster banks realize this, the better.

Tags: Citi, Citigroup, US Bancorp, branch banking, branches, citigroup, retail, us-bancorp

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Comment by Chad Davis on January 19, 2012 at 8:56am: Great post. The decline in year-over-year transaction volumes at branches are minimal. However, this gradual decline has been happening for many years and there is no sign of this letting up. It does start to add up. The workforce optimization company, FMSI, publishes an annual teller line study that showcases branch transaction volume trending charts. This year's study revealed a 41.9% industry drop over the last twenty years. You can find the study here: http://www.fmsi.com/tellerlinestudy/

Comment by Chris Berry on January 19, 2012 at 10:14am: Retailers have discovered the reality of the impact of the 'virtual' world on their need for physical stores but somehow bankers still keep justifying and updating a legacy channel (Citi must be nuts to plan for even more). I really believe we should be focussing on what customers really need that cannot be delivered virtually and then scale branch networks to the volume of essential services - alternatively we should just start setting up coffee shops in the empty space as there will never be virtual coffee!

Comment by Antony Peck on January 19, 2012 at 10:27am: What bank branches are used for will change over time - and they will need to adapt. However, growing banks might need to invest in new branches. Whether a particular brand is opening or closing branches will depend on the existing portfolio, the targeted customer base & their changing needs and the bank's ambition for the future.

Comment by JJ Hornblass on January 19, 2012 at 11:54am: Chris, I happen to like coffee.

Comment by JJ Hornblass on January 19, 2012 at 11:55am: Antony, Chris -- check this out. JPM is still drinking the branch banking Kool-Aid.

Comment by Greg Cote on January 19, 2012 at 3:36pm

@JJ - Here are a couple of statistics from JPM's 15FEB11 Investor Day presentation:

On average, branches breakeven at 30 months +/-
On average, new builds pay back within 3-5 years
Contribution of new builds once seasoned is >$1 million per branch per year

While the historical averages may change based on new trends, it's safe to say that JPM is the one of the best when it comes to monitoring the metrics that drive their business. I believe they are building branches because they are filling in a national footprint and more importantly believe it will drive bottom line profitability.

I agree with your main argument in this post. The branch has to adapt to the current usage patterns driven by consumers. The data I have seen on why consumers change banks is still heavily weighted towards having convenient branches close by their work or home. As the model moves towards the branch competing with your broker for your investment dollars, convenient branches become more important. Those branches, as you pointed out, have to change their DNA and feel more like a place you would go for investment or retirement advice. It will be critical for banks to begin investing in systems to modernize and automate the basic but necessary functions of teller transactions and account openings to allow more time for the important tasks of cross selling new products and delivering advisory services.

Comment by JJ Hornblass on January 19, 2012 at 3:48pm: That's true about JPM, Greg, but even at JPM there's an evolutionary approach to branch banking. Here's how Jamie Dimon, JPM CEO, explained it earlier this week during the company's earnings call:

[T]o the extent that we could open a branch and get a very good return, we're going to continue to do it. Remember, and a lot of this is in California, Florida, where there's a huge benefit to clustering, i.e. increasing the market share inside local markets. So we're going to modify the size of the branch, locations, the types of products and services and -- but we're going to continue to open branch.

It's not just branch banking as it has always been done at JPM. The Chase branch expansion is taking place in particular locations, and even then the composition of the branches is changing. For example, the number of sales people in the branch network is expanding greatly within Chase. This all points to an evolving approach to branch banking, although at JPM that still means more branches, not less.

Comment by Frank Rauscher on January 19, 2012 at 3:54pm: I believe this conversation started decades ago.

The marginal value of the branch is heavily dependent on the products sold through the location and the "internal transfer rate" for the value of those products. That transfer rate is heavily weighted and determined by the top 3 or 4 executives at bank and it is often set for self-interest reasons by the more powerful executives.

Comment by Greg Cote on January 19, 2012 at 3:56pm: I agree. They have to adapt the mission of the branch, but it's still their front line delivery channel for the important interactions that build customer loyalty, not just build customer satsifaction.

Comment by Greg Cote on January 19, 2012 at 4:00pm: @Frank - You are right. The same debate about the future of branch banking was raging when I joined Detroit Bank & Trust as a credit analyst in the late 80's.

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