From dead weight to gold mine: the recent revival of branch banking

March 3, 2009

It looked like branch banking had finally found itself again. Even in the spring of 2007, newspapers were reporting that banks are on a “building binge.” According to the New York Times

“As of last year, there were some 94,559 federally insured branches in the United States, up from 92,394 in 2005, and 82,302 in 1996, according to the Federal Deposit Insurance Corporation.”

This expansion was taking place in both urban and suburban areas, but downtown Manhattan was the most extravagant; the New York Times counted as many as four new bank branches on a single city block. Later in that year, the subprime crisis hit the news and the moment of retail finance seemed to be over. Or was it? Was the efflorescence of branches part of the expanding bubble, or were banks onto something about the use of face-to-face methods and physical spaces?

While in the 1990s the banking sector predicted the “death of the branch” as the physical gives way to the virtual—the new millennium saw branches springing up left and right in both the most “developed” countries such as the U.S. and in countries with a shorter history of competitive banking such as Hungary. Last year the Fed reported that the total branch network of retail banks in the U.S. grew by 27% between 1994 and 2006 and found it significant given the opposite trend towards alternative sales channels. Meanwhile in Eastern Europe, banks launched into a branch-building frenzy from 2004-2006—over 15 years after socialism—up until then they, too, had focused on electronic services.

This turnaround was the most discussed buzz in retail banking and it puzzled regulators precisely because banks’ return to the branch was not a necessary move—they could have given them up. Various reasons are cited by banks themselves for why they resorted to the branch, from external demand (customers’ desire for personal interaction), to internal market dynamics (imitation of competitors). A different theory is that they had written off branches too soon at the time of the internet bubble, and their revival shows they have learned their lesson. Unfortunately, this lesson was learnt during what we now call the next bubble…

The question is what happens to the branches after the real estate bubble burst? Ironically, banks have stood on both sides of the real estate equation. Branch expansion intensified at the height of the real estate boom—while money poured into banks from mortgages, they happily poured some of it into enhancing the retail experience. Landlords have favored banks as tenants over many other businesses because they paid promptly, brought a clean look, and were willing to commit to long-term leases. Now branches are locked into typically 10-year leases—at least in New York—which leaves their struggling headquarters with a dilemma. If banks don’t break leases, then they will go forward with the project of face-to-face interaction started before the crisis, so they can exploit the branch, the most expensive sales channel.

The branch was recognized as a goldmine—but for gold to acquire value, one has to locate, detach, isolate, clean, weigh, and package it. In the next post I will talk about how banks were able to mine the interaction with clients that branches provide. Their strategy was to turn the branch into high-tech spaces, as Daniel has mentioned, spaces geared towards selling. We are going to look at how, in their effort to provide the familiarity of your local grocery store, banks brought the tools of relational marketing into the branch.

In fact, regulators may have been catching on to market dynamics too late—branch growth was cooling off well before the crisis exploded, and branch expansion strategies that purportedly served to attract deposits had to shift to the task of customer retention. This is where Customer Relationship Management enters the picture.

12 Responses to “From dead weight to gold mine: the recent revival of branch banking”

  1. danielbeunza Says:

    The fall and rise of the bank branch is a truly amazing story, with unexpected implications for urban space.

    In New York, the demise of the branch emptied out beautiful, temple-like beaux-arts buildings from the turn of the 20th century. In the past years, I’ve been photographing them and posted them here:

    august 020

  2. […] guest blogger Zsuzsanna Vargha is writing about the revival of bank branches. The posts (first one here) are based on her dissertation work at Columbia University. While in the 1990s the banking sector […]

  3. zsuzsannavargha Says:


    Your photos do give us the seriousness and heavy presence that banks once had in a cityscape. This is a look that exudes authority. The task of new branch design is to unravel this dark and imposed sense of trust. If you look at the CommerceBank-turned-TD Bank on Broadway, you can see that they conceive of trust as transparency. It is a strange experience to walk past a branch with a full glass wall, and see the tidy desks of account managers from behind. These employees are the face of the bank, but their backs are visible to the man on the street. And so are their hand lotions and family photos.

  4. zsuzsannavargha Says:

    Here is the link to the photo of the newly designed TD branch:

  5. joedeville Says:

    Really interesting stuff Zsuzsanna. From a UK perspective, it’s likely I suspect that another factor to consider will be the recent round of mergers/takeovers in the retail banking sector, which many anticipate will seriously curtail the scope of the branch network.

    Oh and it has been something of a trend to transform venerable bank buildings into … pubs! An example I found:

  6. zsuzsannavargha Says:

    Joe, that’s a good point and consolidation applies to the U.S. as well. For example, Washington Mutual was sold to JP Morgan Chase and they recently announced that many WaMu branches will be closed:

    Geographic de-penetration could mean that banks will try to go even more in-depth in the branch.

    To remain banks, they will need to take deposits and lend, and won’t be able to leverage to the previous extent, so deposits might get more spotlight. Given that consumers are now starting to save more, banks could end up competing for their money. And branch banking has been recently touted for its ability to attract deposits.

  7. Peter Klein Says:

    Zsuzsanna, how are “branches” defined in the
    FDIC data you cite above? Is a branch simply a physical banking location, or are branches of a state or national bank distinguished from standalone banks? The number of branches per se has increased dramatically over the last two decades as states relaxed restrictions on intra-state branching and interstate banking — even more so since the Riegle-Neal Act removed most of the interstate restrictions in 1994. But much of this represents a change in ownership or governance, not an increase in the number of physical banking locations. Can you clarify? Thanks.

  8. zsuzsannavargha Says:

    Yes, they don’t really define it but it’s physical banking location. In the FDIC “Future of Banking” report in 2008:

    “The number of institution charters has been declining since 1984, and in the decade between 1994 and 2003, dropped almost 29 percent.1 At the same time, however, the number of physical bank offices has been steadily increasing, driven by an increase in branches (see Chart). In the decade between 1994 and 2003, the number of bank branches increased 15 percent.”

    Although they note that the Riegle-Neal Act contributed to the growth of branch networks, they still see net growth of locations. I think in their data they probably pick up ownership changes as drop in the size of one branch network and increase in the other, the net result being overall increase.

  9. dani f. Says:

    Very interesting, Zsuzsanna. And great pics, Daniel. This reminded me of the financial crisis in Argentina in 2001. When the government froze deposits, customers had somewhere to go, make noise, draw graffiti and perhaps destroy some bank property. Protest effectiveness is debatable, but I’m sure customers were happy to have a spacial opportunity for expressing their frustration. Bank branches covered their glass windows with solid metal (where protesters worked with their hammers, producing less destruction but more noise). They looked like fortresses, conveying security, but in a military sense.

    Buenos Aires bank 2002

  10. zsuzsannavargha Says:

    Dani, Thanks for the photo. The bank seems to be open. Was there any banking being done inside? I admire the persistence of protesters, switching tools to make themselves heard. Apparently Icelandic protesters did the same but with their parliament building. It’s interesting that the Argentinians took it out on the individual bank, although it was the government that froze the deposits. It is interesting that Icelanders took it out on the parliament, although it was the banks that collapsed… Maybe in Argentina the central government building was far and already protected; people located responsibility more in the banks and less in the government; and they were overpowered by the physical sense of property–you are so close to your money, it’s right there in the bank, but you can’t see it or touch it.

  11. dani f. Says:

    Well, Argentines took it out with most public and some private institutions at the time. When that picture was taken, a couple of presidents had already gone down. And bank customers were not the only ones protesting.

    If I remember correctly, the issue with foreign banks was that the headquarters in the original countries were not covering their branches in Argentina when the latter failed. They had portrayed themselves as secure and permanent (by virtue of the foreignness) but they turned out to be like any domestic bank, and customers were angry about that. Also, the government froze deposits (and then bailed banks and debtors out) only to avoid an even worse catastrophe in the financial system (sounds familiar!). So most customers saw that banks were simply not fulfilling their promise and it were banks who were keeping savers’ money (and I think I’m using customers properly, protesting in front of the parliament should mobilize other identities). As you say, Zsuzsanna, the money should be in there after all, so close.

    There was banking inside most of the time, though probably not so much when the actual protests were taking place.

  12. danielbeunza Says:

    I read Dani’s comment on my pda while riding the suwbway, so I could see the photo of BBVA/Banco Frances surrounded by anti-riot steel walls.


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