I’ve mentioned before how surprised I am that the banking industry hasn’t spent more time figuring out how to cut its distribution costs. This shouldn’t be a secret problem. The backbone of banking distribution is almost as old as the industry itself: the branch. But branches are expensive to maintain, and the transactions that happen in them are rapidly getting disintermediated by technology. (The latest example: deposit gathering.)
Nor should it be news that consumer banking fees are under huge pressure. NSF fees, swipe fees, you-name-it fees. Most have either fallen or disappeared entirely.
So costs are up and revenues are falling. As I say, a problem. Yet I’m astonished at how simple-minded have been the proposed solutions to it that have so emerged. “I believe that the new earnings dynamics in retail banking suggest that branches may be more important than ever to future profitability,” writes Mary Beth Sullivan (free sub. required) in BAI Banking Strategies. She’s a banking consultant at Capital Performance Group in Washington. “Consolidating branches and cutting staff may make sense in some markets and for short-term profit improvement. But taking these steps before the bank has a clear plan for building new sources of revenue – and defining the branch role in delivering on that plan – may be a mistake.”
So banks should simply keep their branches as is, and concoct a “plan for building new sources of revenue” for them. Easy! Sullivan even has a few suggestions: investment management retirement planning and insurance, for instance.
There’s only one problem: Sullivan is living in dreamland. Of course banks would love to develop new sources of revenue to run through their branches. They’ve been trying to do that for years. No, decades. But it’s not so easy. Businesses like investment management and insurance happen to be highly competitive. (If you doubt it, ask Allstate.) At the vast majority of retail banks, Sullivan’s recommendation simply won’t work-but not for lack of trying.
Alternatively, analysts like consultant Steve Topper, of Acton Marketing, seem to think that for branches, this time the end really is nigh. “I’m aware that others have been predicting the end of branch banking for years and have been wrong,” he writes. “Actually, it’s just that their timing has been wrong. If we’re honest with ourselves, we’ll acknowledge that we’ve entered a new era of rapid changes in both technology and consumer behavior that could mean the end of bank branching as we’ve known it all these years.”
Topper is on to something-almost. On the one hand, some of the best-run and best-regarded financial institutions, such as USAA and ING Direct, have no branches at all and operate at no competitive disadvantage whatsoever. Just the reverse. But they serve extremely narrowly defined markets nearly custom-made for branchlessness. (USAA, for instance, serves military personnel, who of course relocate regularly and are often overseas.) But even on-line providers such as TDAmeritrade and Schwab have found that they have to have some brick and mortar around to serve customers. If a Schwab customer wants to have a branch to duck into now and then, the typical Mr. Main Street banking customer will insist on one.
So bank branches in some form or another aren’t going anywhere. Yet, to date, the argument about the future of branch banking-of the cost of banking distribution generally-apparently hasn’t gotten past the-status-quo-won’t-change vs. branches-are-totally-obsolete. That’s overly simplified. I haven’t figured out yet what the right answer will be. (Thoughtful suggestions welcome below.) But I do know this: the Distribution Cost Question is one of the most profoundly important ones the banking industry faces. How many branches is the right number for a bank of a given size? How big should they be? Where should they be located, and when should they be open? The companies that get the answers to these questions right will be among the big winners in the future.
What do you think? Let me know!