Rural branching strategy turns 'bigger is better' on its head

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Simplicity Credit Union is betting the success of its newest branch could hold the key to a new path for growth – one that other institutions could emulate.

The Marshfield, Wis.-based institution opened a branch this summer in Neillsville, a town of less than 2,500 people about 35 minutes from where the credit union is headquartered. The move was driven in part by Simplicity’s decision to enter smaller markets as a new way to pursue organic growth.

“We all know some of the larger players aren’t necessarily interested in smaller loans or smaller accounts, so a lot of the population of that community feels they’re neglected,” said Alan Bergstrom, CEO of Exclamation Services, a credit union service organization wholly owned by Simplicity. “Those [consumers] that have accounts at some of the banks … don’t feel the banks are really interested in them. They feel they’re being taken advantage of with the typical higher fees and higher interest rates.”

Credit union branch numbers have stayed relatively steady even as the number of institutions continues to shrink, and shared branch networks mean the majority of consumers are never far from a credit union.

According to analysis from CO-OP Financial Services, which runs the nation’s largest shared branching network, even the top five states with the lowest population density still have nearly 100 live-teller branches.

In Neillsville, Wis., Chase, Associated and BMO Harris all have a presence, but there was no credit union in town until this summer. With plenty of banking options already in the area, Bergstrom acknowledged that the $250 million-asset shop was taking a risk. In order to mitigate that, however, it opted for a non-traditional branch strategy, renovating a small house instead of building a new facility.

The house was zoned for either residential or commercial use, and staffed by two and a half employees. During the renovation process the kitchen was downsized while other rooms were tweaked to ensure privacy. The credit union even purchased the property next door and paved it for a parking lot. And, in a unique twist, some concessions were made for the local Amish community.

“It is a rural community – a lot of farmland and the heart of Wisconsin Amish country,” Bergstrom said. “One thing we did was put in a hitching post in the parking lot. The Amish are pretty conservative and they don’t drive vehicles, so they come there by horse and buggy, and no other financial institution in town offers them the ability to tie up a horse and do business.”

As of mid-September the branch had opened about 200 new accounts. The new location has primarily been a hub for deposits rather than loans so far, but Bergstrom said he believes that is likely linked to a deposit promotion Simplicity was running at the time the branch opened.

The new location has been successful enough that Bergstrom said Simplicity’s leadership is likely to consider a similar strategy for future branches, though no exact plans have been drawn up yet.

The facility also cost just $240,000 to set up, rather than the millions that traditional locations require. That should give Simplicity some flexibility if its plans change.

“It’s not like we’re building a $2.5 million branch that nobody’s going to buy,” Bergstrom said. “It’s a house and it can be turned back into a house pretty quickly and easily without much financial loss if for some reason it doesn’t work out.”

Urban vs. rural

Some analysts believe Simplicity could have found a strong differentiator for credit unions.

“With rural deployment there is a lot of opportunity, because [rural consumers] tend to be underserved,” said Tim Klatt, director of retail strategies at La Machia Group. “Not only does that fit the mission of credit unions, but it’s a point of differentiation where they can be seen as investing in these smaller communities and being a part of the community in a much stronger way than a lot of banks are.”

As banks have consolidated, he added, their presence in rural areas tends to be through acquisitions of small or regional community banks, and their focus is often on business clients rather than consumers. This could lead to growth opportunities for small or mid-sized CUs.

“Urban environments are getting crowded,” he explained. “The expansion you’ve seen among big credit unions in urban markets has made things more competitive. For small and mid-size credit unions, this can be a nice addition. It isn’t as competitive, because the bigger organizations are not really looking at them because they realize they can get more value by strengthening their network in a really dense population network.”

But, sources said, the traditional branch structure – already on the decline – largely won’t translate in smaller markets.

“What you’re seeing in these rural branches [is that] the days of the Taj Mahal buildings are gone, because branch traffic patterns are very different today than they were 10 years ago,” said Greyson Tuck, a director at the legal and consulting firm Gerrish Smith Tuck.

While consumer interactions are different than in the past – chiefly less frequent but more in-depth, he said – what hasn’t changed is the need for credit.

“The need for people to borrow money to buy cars or houses or run small businesses, that’s not any different and I don’t think it will be any different,” he said. “What is significantly different today are the various suppliers, if you will, that are there to meet that demand.”

Big fish or small fish?

Along with CUs independently moving into rural spaces, the National Credit Union Administration could take steps to increase opportunity for the industry in these communities. During his Senate testimony last winter, NCUA Chairman Rodney Hood, a former staffer at the Department of Agriculture, spoke about a desire to help broaden membership opportunities for rural consumers.

Hood was unavailable for an interview for this story. But any efforts the agency takes in this area will likely be centered on reforms included in its controversial field-of-membership rule, which is still in the midst of a lawsuit.

“The reality is field of membership constraints are part of the Federal Credit Union Act and they need to be abided by,” said John McKechnie, a Washington-based credit union consultant and former NCUA staffer. “Even though the agency won a clear victory versus the [American Bankers Association] in the lawsuit recently, it’s a reminder that there are folks out there who want to try to restrict credit union access. I think politically that’s a losing hand for bankers to say to consumers, ‘We want to dictate where you do your financial services.’”

Until then, Tuck said credit unions have to answer a simple question.

“Particularly for a small credit union, the alternatives are would you rather be a big fish in a small pond or a small fish in a big pond?” he said. “Most credit unions, in particular smaller ones, would rather say, ‘Look, we’ll let the big boys battle it out [in the city], that’s not our mission; our mission, our strategy, is to serve the customer base in areas that are still in need, but there’s a smaller need.’ The pond is smaller, but that’s OK.”

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Branch banking Branch management Consumer banking Field of membership Under-served populations Wisconsin