Banking's Big Challenge: Breaking Away from the Branch Model

Bank of America is running television ads depicting a son telling the story of how family loyalty to the bank is based on his parents approaching their local B of A branch manager some 71 years ago to finance selling hot dogs from their stand on a local corner. The piece notes that the parents offered no collateral but gained the confidence of the local manager of their potential success. This story is consistent with the history of the bank going back to its founder, A.P. Giannini who consistently worked to meet the needs of small businesses in developing areas and during difficult times.

For years the successful model for banking growth and profits was built around the local branch and its manager who was empowered to support the banking needs of individuals and small businesses with loans, checking accounts and plethora of banking services. There was often a race to be the first branch to open in a new development or town and many times an effort to start a community bank by the local business people

Today, however, the typical branch managers is no longer empowered to personally finance hot dog stands as most all branch decisions and policies, are made at central headquarters. The typical manager’s role is to oversee the branch operation and collect loan applications from consumers and small business to be centrally processed through a computer based model.

Long standing branch income sources have also diminished as many of these traditional services have either been centralized, faced new non-bank competition or lost to changed customer demand.

The new accepted and less costly model for accommodating mainstream consumer and small business customers is built on the application of technology for marketing, communicating and processing. This includes the internet, cell phones, social networks and technology based decisions plus the traditional ATMs instead of tellers, mailers and local community based decisions. The cost of an ATM or computer sourced transaction is less than 10% the cost of using a branch, paper order or using a teller just as debit card usage is considerably less costly than a written check.

For many banks the lower cost technology-based model is in conflict with the thousands of branches that continue to provide a local reference for their customers, primarily serving older traditionalists while the young fully embrace technology and rarely, if ever, enter a branch. But even this is changing. A new survey from ABA shows that last year 57% of customers over 55 as compared to 20% the prior year preferred on-line banking over branch use.

The number of banks as well as the number of branches per household has been steadily declining over the past few years according to FDIC data and many say that both trends will most likely continue. Consolidations failures and fewer new bank charters will continue reducing the number of banks as the growing move to technology and centrally processed services will leave many branches closed, consolidated or underutilized.

So the dilemma for many larger banks is how they can continue to successfully support two models to service the millions of consumer and small business customers. One model which is clearly the future and another that is worn-out involving high operating costs and the investment of billions dollars in thousands in less-used physical facilities.

This gets to the question of how banks can transition to a technology based model and continue to support a higher cost branch model whose remaining value seems to be only identity and serving the remaining traditionalist. There's not an easy answer, especially when the public and the government see banks as both responsible for serving the financial needs of all and yet trying to take financial advantage of many while minimizing overall customer service and convenience.