Electronic banking initiatives are succeeding wildly by some measures, but they have not helped much toward the goal of closing branches.

Even as transactions through automated teller machines, telephones, and personal computers rise at double-digit annual rates, the industry clings to its historical branch-office pattern. The number of branches operated by federally insured banks and thrifts in 1996 was about the same as in 1991.

But beneath those numbers are indications that financial institutions are coming to grips with both the forces of technology and many customers' continuing desire to do business in person. Bankers say they are finding a new middle ground - making branches cheaper to run, instead of closing so many of them that customers are turned off.

They may be on the verge of an elusive breakthrough, using electronic systems in ways that reduce overhead rather than adding new layers of cost.

"The stage is set for banks to change the way they deliver some of their services," said Timothy Ryan, principal with Verdi Ryan Associates, a consulting company based in Williamsville, N.Y. But "much of the opportunity for change is still in the future."

Several leading retail banks have made noteworthy progress toward that future.

Fleet Financial Group recently decided to eliminate 800 branch jobs and replace them with a comparable number in telephone banking and investment services. It is one of the most overt cases of a bank increasing emphasis on remote channels at the expense of physical offices.

Fleet spokesman James Mahoney said an internal study had indicated there was a surplus of branch employees while telephone banking was understaffed. National surveys have shown that ATMs and telephone centers are responsible for a majority of retail banking transactions, but only recently have there been signs of a slight decline in total branch transactions.

"Fleet's decision makes a lot of sense," said Frank Barkocy, an analyst at Josephthal Lyon & Ross in New York. "There are many companies like it trying to maximize revenue potential."

Yet Fleet does not plan to close any of its 1,200 branches as a direct result of the employee shift. The goal, analysts said, is to continue satisfying the branch-using public while reducing costs.

"This is what happens in the evolution of banking," said Anthony J. Polini, an analyst at Advest Group.

Supermarket branches have emerged as a popular means to the end of changing the cost structure of retail banking. The idea behind the branches is simple: To reduce occupancy costs while gaining access to a steady stream of current and prospective customers.

Opening a supermarket branch is said to be as much as $800,000 less expensive than building a full service, stand-alone location. Ongoing expenses also are less.

Such smaller, leaner outlets can go a long way toward lowering staff costs. A typical supermarket branch has just three to six employees. And some mini-branch models have even fewer, yet with ATMs and other technology their services are available as many hours as the stores are open.

"The single most important driver of cost within the branch is the underutilization of teller and platform personnel," said Jeremy Eden, managing director with Tandon Capital Associates,a New York consulting firm closely associated with the reengineering movement.

Cost benefits are a big factor in the popularity of nontraditional office locations. International Banking Technologies, an Atlanta-based consulting unit of First Data Corp. that specializes in supermarket banking, said in-store branches increased by 40% last year, to 4,398. Bank branches also are migrating to other types of retail outlets, like discount and home improvement stores.

"We have to understand in the banking industry that branches are retail floor space, and retail floor space is very, very expensive," said Emerson L. Brumback, director of retail distribution at Banc One Corp.

But costs are not the only explanation for the popularity of the branch alternatives. Bankers see them as a sort of compromise that satisfies customer demands for physical locations while simultaneously reducing costs.

Still, there are questions about overall profitability.

"The jury is still out with regard to the in-store branch," said Michael E. Smith, a vice president with Mercer Management Consulting, New York.

"A relatively small percentage of the total population generates most of the value in banking," and it remains to be seen whether these most profitable customers want to do their banking at in-store locations, he said.

Others view supermarket branching as a sign that banks are at least thinking creatively about ways to reduce costs.

"The branch is not dead," said Gordon Goetzmann, a senior engagement manager at First Manhattan Consulting Group, New York. "The concept of the one branch size fits all-that's obsolete."

The extent to which banks are moving to change their branch networks is reflected in an Ernst & Young study, in which 100% of respondents said they planned to open new branches in the next three years, and 84% planned to reduce the number of branches.

"Branches are both a significant part of the cost structure and a significant advantage that banks have over other institutions," said Robert Landry, an analyst with the Tower Group, a Newton, Mass.-based research company.

According to the Tower Group, a transaction at an average branch teller costs a bank $1.60. Transactions at the customer-service platform are $4.20.

Electronic delivery, not surprisingly, is cheaper: Automated phone banking systems cost 15 cents per transaction; PC banking, 20 cents; ATMs, 40 cents.

Banks have for years been encouraging the use of electronic channels, and they are likely to continue to do so. A MasterCard International report on 1995 data from major retail banks, a follow-up to the Bank Administration Institute's 1993 retail delivery systems study, showed branches were handling about a third of all transactions. ATMs had become preferred for cash withdrawals, telephone centers for customer inquiries.

But customers continue to use branches, and they are still the primary medium for direct product sales.

According to the American Banker/Gallup 1996 Consumer Survey, consumers 18 to 44 visit branches an average of 3.3 times per month. Consumers in the 45 to 64 age range visit 3.2 times per month, and those over 65 averaged 2.1 times per month.

The upshot is that bankers must support more infrastructure than ever. Given the fact that heavy branch users tend to be the most profitable bank customers, urging them to stop using branches is not tenable.

If customers use only electronic channels, banks run the risk of losing the most important part of those relationships, said Robert E. Hall, chief executive officer of Action Systems Inc., Dallas. "If we're not careful, we'll lose all human contact with them."

That said, retail costs are still too high, and many bankers are looking for lower-cost alternatives to stave off branch closings.

Reasoning that customer fees should reflect transaction costs, First Chicago NBD Corp. changed its pricing structure in 1995. It broke with time-honored industry practice by charging for certain branch services. Teller transactions have dropped 20% since, but First Chicago claims its customers are both more profitable and satisfied.

Mellon Bank Corp. attacked personnel costs. The Pittsburgh-based bank is installing video terminals in all of its branches to reduce the number of specialists who must be stationed at each location.

A Coopers & Lybrand Consulting report indicated that retail banks must reduce their staffs by up to 50% over the next decade to remain competitive. Though Federal Deposit Insurance Corp. statistics do not break out retail numbers alone, they showed banks and thrifts have reduced total head count by only about 3% since 1991.

For banks to achieve their cost-cutting goals, they must give consumers "bridges" to get "from where they are today to more convenient channels," said Banc One's Mr. Brumback. "You can't simply push them off the cliff. ... That's kind of what the banking industry has done in the past."

Part of the answer is in using branch personnel to sell and educate consumers on new delivery channels.

"In the past, we've talked a lot about selling products," said Mr. Hall. "We've got to become as competent at selling channels."

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