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.