As Banking Goes Digital, How Much Does Geography Still Matter?

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Can a New York edge be a nationwide edge? Amalgamated Bank is betting on it.

The $4 billion-asset bank known for its ties to unions and progressive politics is embarking on a national digital consumer expansion, hoping its mission will resonate beyond the Big Apple.

For its first experiment, it partnered with national organizations like Civic Action, Color of Change and the YWCA to connect with their followers and supporters. People who signed up for Amalgamated accounts got $150 for themselves and $50 for the organizations.

"If we really want to be oriented and connected to progressive causes, we need to go national and find the segments of people who are looking to align themselves with the causes they support," said Martin Murrell, executive vice president of consumer banking at Amalgamated.

The affinity relationships were a no-brainer and good place to start, said Murrell, previously an executive with the direct banking divisions of American Express and Capital One. In many cases, the organizations are already banking with Amalgamated and such groups have vast networks of leaders, employees, interns, supporters and donors.

Although Amalgamated has a clear niche, its decision to go national fits into a broader narrative of banking and geography.

Clearly, location still matters – Murrell is also charged with overseeing the bank's branches in New York, Washington and California, for instance. But it perhaps matters less as digital channels improve and consumers start to judge banks on the ease of getting what they need on an app rather than the ease of getting to a branch.

For instance, Citi has managed to hold on to more than half of the deposit customers in markets it left as part of its restructuring. Earlier this year, John Gerspach, Citi's chief financial officer, said that stickiness is driving its digital strategy.

"We think that that's more responsive to the way people are really going to access their bank in the future," he said.

Also, this week, Banco Popular North America, a unit of Puerto Rico's Popular Inc., announced the launch of Popular Direct, a national online banking platform focused on certificates of deposit and savings accounts. The move is noteworthy as the bank sold off branches in central Florida, Chicago and Southern California two years ago in an effort to narrow its focus.

Popular is also in the midst of upgrading its technology at its branches.

Observers are split about the waning importance of geography. An Aite Group study from last year found that 73% of accounts are opened in a branch. This is often cited as evidence of the importance of physical locations. But others see it a little differently.

"Geography matters for those 73%, but for more than a quarter of people opening accounts, it doesn't matter," said Christopher Donat, an analyst at Sandler O'Neill who covers companies such as Capital One, Ally Financial and American Express.

Others say it depends on the type of account – people might be reluctant to have their primary relationship with a bank outside their city, but might not mind having a secondary account there.

"Even if they are using it less, people have a strong affinity for the branch; they still like having that security blanket," said Emmett Higdon, director of mobile at Javelin Strategy & Research. "People want the ability to access all of the channels and that includes the branch."

Also, it helps that Amalgamated and Popular, which has deep ties within the Latino community, have specific niches that can play on a national stage.

Launching a widespread digital expansion would likely not work for a typical community bank observers say, especially should rates go up. The larger direct banks that have succeeded can pay a higher yield because they tend to have lower expenses and use the deposits to fund credit cards.

"You need a brand that resonates with people for whatever reason," Donat said. "That is critical and is likely why an ordinary community bank wouldn't do this. If rates go up, rates will be thing that resonates with a lot of customers."

Although Banco Popular has brand awareness among Latinos, the $7.8 billion-asset bank's national play does not rely on that, said Manuel Chinea, its chief operating officer.

"Obviously we have a strong affinity with the Hispanic market, but we are not exclusively catering to Hispanics," he said. "It boils down to experience – they might have an affinity to our brand, but they aren't going to cut us any slack ... it is only an advantage if our offering is up to the standards expected by everybody else."

For Banco Popular, the expansion is all about finding new ways to get deposits.

"When you rely on branches, your deposit gathering is somewhat limited by distribution," Chinea said. "This gives us flexibility ... to us, it is supplementing our brick-and-mortar."

Because the company sees the national online business as merely one lever in deposit gathering, Chinea said it could pull back if rates went up and the bank could not compete effectively with other direct banks.

"We see it as a tool," he said.

Amalgamated's "Banking that Gives Back" promotion ended June 30. Murrell said it was too early to give quantitative results of the program, but said he was pleased with the feedback the product has received so far.

Next up is determining what it needs from a technology perspective to make an ongoing national project work.

"What I don't want to do is build the infrastructure if we don't know what the customers want," Murrell said.

Part of that challenge is determining what "shrink-wrapped" products to buy from core providers and what should be customized.

"At $4 billion in assets, this is very different than Amex where we a significant budget with large internal capabilities," Murrell said. "Ten years ago we would have struggled with this, but a number of providers have figured out how to make industrial-strength capabilities. The challenge now is figuring out what to customize."

The bank still also needs to find a way to turn the national business into a major contributor to the bottom line. Much of that will depend what happens on the other side of the balance sheet.

"Simply growing a banking business online is not a profitable enterprise," Murrell said. "You make money building out the lending side."

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