CINCINNATI — As banks cut back on branches, credit unions are stepping up their interest in bricks-and-mortar service delivery.
Credit union executives as well as design and build experts say CUs are beginning to loosen the belts on their facilities budgets after having tightened them during the recession. And, as expansion decisions are being made, opinions on how CUs should — and will — expand vary, ranging from the traditional full-service office to the "personless" branch.
NCUA data found that in 2009, 91 credit unions said they were considering branch expansion. In 2013 that figure jumped a whopping 648% to nearly 700.
"That is a dramatic increase," said Mike King, VP of strategic planning at design and build firm DEI. "In my opinion, that really quantifies credit unions' growing interest in branching."
The apparent CU interest contrasts what SNL Financial recently reported — that banks, on average, are cutting back sharply on facilities.
U.S. banking companies shuttered more branches than they opened during the first quarter of 2014, continuing a trend that spanned all of 2013 as bank customers increasingly do more business online, SNL reported.
An SNL analysis found that banks collectively reduced the nation's branch count by 281 locations during the first quarter, roughly on par with the reduction of 276 branches during the final quarter of 2013. Over the course of the past four quarters, banks scaled back by more than 1,500 branches.
The largest credit union in the nation, Navy FCU plans to add 60 more offices, most in the United States, by 2016, giving the $58 billion CU 307 offices worldwide. "In no way is the branch dead at Navy," said Jeanette Mack, manager of corporate communications at the Vienna, Va., CU.
Also, unlike proponents of increasing the CU's branch footprint with smaller offices that de-emphasize transactions, Mack said Navy's new offices will remain traditional in focus.
"And size will simply be based on the situation at the time — the amount of available space, whether we are leasing or buying." she noted.
The branch is where Navy concentrates on relationship building. "It's a place for members to get education about financial services and products. It's a place for face-to-face contact, a place for members to get their first loans," said Mack, who added Navy offices today receive a significant amount of traffic from millennials. "The branch is the perfect way to build relationships that last a long time."
NCUA data found that federally insured CU branching slowed during the recession. While most credit unions postponed expansion, and mergers and acquisitions continued at about 200 to 300 annually, credit union branch totals rose, overall, in the last four years. In 2009, federally insured CU offices totaled 20,979, 21,066 in 2010, 21,070 in 2011, 20,180 in 2012 and 20,221 in 2013.
The marked drop-off in 2012, of almost 900 offices, analysts indicated, resulted from NCUA changing how credit unions report a main office, resulting in an accounting drop of almost 500 locations.
"Unlike [what's happening with banks], the number of CU branches in the U.S. has yet to show any substantial declines," said Luis Dopico, senior researcher at the Filene Research Institute in Madison, Wis.
"Many financial customers choose credit unions instead of commercial banks because they prefer customer services in person with employees they can see, know and trust," said Dopico. "These factors will likely delay for credit unions the ongoing changes in technologies and customer preferences that are making branches less profitable for banks, and making banks depart from decades-long expansions in their branch networks."
Filene Research Director Ben Rogers said, "Branching is something credit unions love to do — be available to their members. Considering the economy and the shrinking number of credit unions, the relatively flat growth of CU branches over the last four years is still a growth story."
Jon Jeffreys, managing partner at Callahan & Associates, Washington, contends that credit unions are coming out of the recession — a time when CUs recorded record member growth — with branch expansion plans focused on greater efficiency and online channel emphasis.
Branches Will Live In New Form
"The branch will stay around, but the death of the traditional branch will be real," said Jeffreys, who expects more credit unions to introduce sophisticated branch technology, like personal teller machines that connect with a live person, and begin to construct smaller offices.
Like Navy, Coastal FCU in Raleigh, N.C., has plans to expand, but in a different way than the credit union giant. Coastal has centralized its teller functions and replaced branch personnel with personal teller machines (PTM).
The credit union has replaced teller lines with an average of three PTMs at each of its 16 locations. A member hits the PTM's start button and connects via video screen with a live teller from a central CU location to perform any typical teller transaction.
Lauren Stranch, networking PR specialist, said the $2.3 billion Coastal has not made plans for the number of branches it will add in the next five years. "But we do plan to expand our footprint with our current branch model, which is PTMs, a branch manager and a loan officer," she said.
Employing PTMs has allowed Coastal to reduce its teller force by 40%, which also helps cut down expansion costs, according to Stranch.
"Members like the PTMs," she said. "In fact, they seem to forget how things used to be. Members get quicker response time at the PTMs, lines move faster and we are opening more checking accounts as a result."
DEI and other facilities experts say they are seeing an increase in the number of credit union offices becoming financial centers as opposed to transaction hubs, which is leading to smaller branch offices. "The actual retail space in the branch is getting smaller than it was five years ago," said Jeff Boehmer, regional VP.
'Personless' Branches & Holographs
Some industry experts and insiders say that space will get a lot smaller, eventually leading to the "personless" branch. These smaller offices will offer full services but delivered via technology — such as PTMs or holographic tellers and sophisticated cash machines — without any onsite staff.
Jeffreys predicts a credit union or bank will introduce the personless 24/7 branch within the next two years. "We just held a branching roundtable with chief retail officers from 20 credit unions and this is the sort of future many of them laid out," he said.
Retail banking giant JP Morgan Chase & Co. is advertising a new office in San Francisco that is high tech, including self-service banking kiosks that can be partitioned off to be used 24/7, when the office is closed.
Richard Grow, DEI owner and president, agreed that the personless branch isn't far off for credit unions. "DEI currently partners with a company on the Omni-Series [banking kiosk], which offers a full-sized, 3D [holographic], full-eye-contact remarkably realistic presence that leverages time, talent and location," said Grow. "It provides members with on-demand access to your subject matter experts and CSRs anywhere at any time."
Grow said DEI has expanded this technology and designed the "telepresence branch," a prototype for a supermarket location (see rendering). "It can be manned by just one person to maintain the personal touch or be entirely personless, having people greeted by a staffer on the 3D screen who can see people approach."
But Kevin Blair, CEO and president at design/build firm NewGround, St. Louis, cautions about relying too much on technology.
"Thinking you can replace the current full-service branch model with an office that has no people is a huge strategic mistake," said Blair. "There is still the need to have physical contact with the member. The further you push members away from this [face-to-face] model the greater the potential you may lose them."
Blair said the model for CU branching should be multifaceted, taking into account members are split evenly into three types: those who use the branch, those who rely on virtual and physical channels and members who prefer virtual.
"It's an omni-channel approach where the credit union chooses the right type of office to fit the right application: the standard full-service branch, the smaller neighborhood branch, the smaller neighborhood boutique, the micro office and then the full-service ATM," explained Blair. "In a proper retail delivery network you have a combination of all of the above."
Blair also cautioned that investing in new branch technology should be carefully considered, as emerging technology sometimes leapfrogs current tech. He noted that mobile banking could become sophisticated enough that members have little need for the personless branch. "Why go down to the personless office when I have the mobile phone in the palm of my hand?"
To be sure, expanding branches, no matter the approach, may not be in every credit union's best interests as revenue pressures increase, noted Cornerstone Advisors, which predicts CU branch totals will begin to decline.
"Substantially fewer credit unions will exist in the future due to the regulatory environment," said Eric Weikart, managing director at Cornerstone Advisors, in Scottsdale, Ariz.
"It's harder for smaller credit unions to keep up with the changing regulatory environment that is forcing more and more investments in people and software," he said. "Cornerstone believes this, along with more pressure to cut costs due to margin compression and political pressures on non-interest income, will force credit unions to make a choice in how they deliver services."
Weikart contends that a sizeable number of CUs don't see the trouble ahead.
"We don't think that some credit unions have come to this realization as many continue to grow their branch footprint, increase contact center hours and staffing, invest in more ATMs and kiosks and spend a lot of money in electronic delivery."
Those responsible for most of the branch growth are the large CUs, according to Callahan & Associates.
"From 2009 to 2013, credit unions under $20 million have fewer branches," said Jeffreys. "Credit unions in the $20 million to $50 million range show flat branch growth, and then the $50 million and above have more branches today than five years ago. Those from $500 million to $1 billion have 13% more offices and CUs above $1 billion have 15% more."
NewGround's Blair said branches will continue to grow, as predictions of the death of the branch come and go. Blair's career in the financial services facilities business spans 35 years, and four times he's seen the industry predict the death of the traditional branch.
"One of those times came with the dot-com boom and branch construction slowed in the late '90s with everyone saying banking was going online," noted Blair. "But then between 2000 to 2007 we saw an explosion of retail outlets."
The recession caused FI branch expansion to fall from a $1.8 billion investment in 2007 to $600 million in 2010, according to Blair.
"Due to panic, conserving capital and regulators literally telling FI execs to hold off on expansion to ensure there was enough to cover loan losses, branching took a big hit," he said. "In 2011 and 2012 regulatory pressure began to ease, and in 2013 we started to see branching tick up."
FMSI, Alpharetta, Ga., which works with credit unions across the nation in optimizing branch performance, said the recession has led to indecision among CUs.
"I believe most of our clients believe the branch is not dead," said COO Meredith Deen. "It just has to serve a different purpose and be designed in a way to serve that purpose. So maybe there has been a bit of inertia as credit unions try to figure out how they serve members in the most appropriate way."
