Inside Financial Services

Banks Need to Re-Think Their Distribution Systems

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Did you see earlier this month that, to cut costs, a couple of banks in the Midwest announced they’re shutting down some of their underperforming branches? Good for them. I’m just surprised more banks aren’t doing the same thing.

One of the more pressing-and least-talked-about-issues facing the banking industry is the question of what the heck banks are going to do to contain the costs of their sprawling distribution systems, particularly their branches. Even before the passage of Dodd-Frank added new financial burdens to the industry, branch networks were set to become a serious money pit. First, alternative delivery channels, from ATMs to on-line banking, are cheaper and more convenient for customers. (The newest innovation set to go mainstream, remote deposit capture, will dispose of the final rationale for many more bank customers to ever visit their branches at all.) As it is, in-branch transactions have been declining for years. By many measures, the numbers are truly tiny. For example, the typical branch generates just 20 new demand deposit accounts per month. Yet the industry remains wildly overbuilt, thanks to the branch-building boom that took place during the middle of the last decade. Many of these newer branches (along with marginal legacy branches) are burning cash. This can’t go on forever.

The economics of bank branches vary broadly and can change depending in the level of interest rates, but a good rule of thumb is that a branch needs to have $40 million in deposits to be profitable. If that’s so, a huge number of the country’s bank branches are money losers as it is-and many more will be once interest rates start to rise from their ultra-low levels and savers pull their deposits to seek higher yields elsewhere. Some banks have done what they could to bring branch costs down-by cutting staff, for instance. But in many cases, that won’t be enough. Managements who think they can magically make their most marginal branches profitable are kidding themselves.

Yet despite the challenges branches face, the bankers I talk to seem to be dealing with the problem by basically not thinking about it. Too many apparently believe it will go away by itself. Which is why I think it’s great that Independent Bank Corp. and Old National are proactively recognizing that they have a problem, and are doing something about it.

New technology (and poor prior branch-opening decisions) are making branch banking in its current form untenable. The sooner banks tackle the problem, the better.

What do you think? Let me know!

9 Responses to “Banks Need to Re-Think Their Distribution Systems”

  1. rivvir

    Hasn’t this been a problem forever, at least as far back as i can remember? So many different banks, so many branches crowding neighborhoods, each fighting the other to get customers. For how many years have i heard we need extensive consolidation in the banking industry? I don’t know if i can count that high anymore. Competition is very good, over-competition, competing for customers without having the prospect for a decent return on the money you spend even if you get your share and maybe a little more, is simply wasteful. Of course this is not gonna help employment figures 8>) I know, i know, obama’s fault, the unions’ fault, the left wing’s fault-lol. Never the fault of anal retentive far right wingers ROTFL!!!


    Wow! Wadda revelation. Tom will be soon predicting that email might affect the USPS.

  3. Sam

    The next question is which REIT’s are over exposed to bank branches. My office building has a large branch in it and I use it. But I also know in 5 years it will likely be gone. It covers most of the a floor and is painfully slow. The landlord should catch on and reduce their rent for a long extension.

  4. SW Pilgrim

    Real Estate #101– Highest and Best Use! With online back-office functions, much of the original space is unused. The selling space for customer interaction is utilized approximately 40 hours, max, versus MSB hours, minimum, 7X12= 84 hours or fastfood outlet 7x 18= 126 hours.
    Secondly, much branch real estate is one or two-floor density in evolved neighborhoods where the current zoning on the combined site(parking included) would allow for much higher value end use. There is a real estate play somewhere in the medium/low-end performers.

  5. David Foster

    At the same time banks have spent a lot of money building out their branch networks, they have systematically disempowered the branch management and employees. Many have even made it difficult to *call* the local branch, preferring instead to direct everyone to an 800 number.

  6. parker kennedy

    The problem is that the least profitable banks are in the bad area of the market. If the banks close these banks they are accused of abandoning the underserved or worst yet racists.

  7. WhereisVernon

    “Upstart lender Metro Bank,” opened last year by former Commerce Bank boss Vernon Hill, “wants to open seven new branches by the end of this year after completing a £126m capital raising.” Ceo Craig Donaldson confirmed Metro is still planning a public stock offering in 2014.

  8. Tim


    You have been saying this for how long now? Has it occurred to you that your repeated expressions of amazement are an indication that you really do not understand the dynamic behind bank decision-making when it comes to branches?

    Branches are not built to handle transactions; they are built to make it more likely that targeted customers will find the bank more attractive. Being able to handle transactions—whenever the customer decides this is the best option—is part of what a branch needs to do in order to fulfill this mission. The actual number of transactions performed has nothing whatsoever to do with the fact that customers value the availability of branches. Branches can and should be smaller and cheaper to run, as transaction volume declines. But predictions of mass branch closings are as wrong now than they were a dozen years ago.

  9. Kerridge International

    Your article is right on the money and the solution is at hand! All bankers need to do is pull their heads out of the sand and look around! We have the technology, we can rebuild the system!

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