Veteran banking consultant George R. Frerichs does not expect all branches to disappear anytime soon. But he says bankers must quickly change their branching approaches, lest they be overtaken by nonbanks offering more attractive -nonbanks - and less costly - modes of service delivery.

Mr. Frerichs, chairman of GRFI-Frerichs Group, a 25-year-old firm based in Chicago, discussed the state of branching in this recent conversation with American Banker executive editor Jeffrey Kutler.


How much life is left in branches as we know them?

FRERICHS: The traditional, teller-dominant branch in neighborhood environments - we call them small-draw locations - is going to be short- lived. You won't be able to support those types of facilities in a transaction mode. They will have to convert to sales and service and be supported by automated transactions. Even then, the neighborhood facility's economics will be questionable.

We have four classifications - neighborhood, community, regional, and core/downtown. It requires at least a large-community or regional draw for a facility as we know it today to be viable, and even then a lot of it would have to be automated.

We see the future of the branch primarily in sales, service, and education. It will have seminars, small-business resource centers, real estate and other specialty lending centers, investment areas. They will be like boutiques in department stores, much more of a shopping or retailing environment.

Extended hours will be critical, so customers in two-earner households can address mortgage or home equity or investment needs directly with a banker. Good daytime traffic would come from professionals and entrepreneurs using the branch in much the way retail customers do today.

In addition we see the melding of investment and trust services, drawing from a much larger geographical area than would a small neighborhood location. A community or regional location could draw from six to eight times the area, so you have 600% to 800% greater efficiency, enhanced by evening, Saturday, and where appropriate Sunday hours. The branch of the future has to become more retail-oriented.

What happens to the number of branches?

FRERICHS: This is the old, or new-old, concept of hubs within larger geographical areas. Where you might have 20 branches in a major metropolitan area, you'd end up with 12, which can be supported by specialty outlets, such as in grocery stores, high-traffic areas like malls, or places of employment.

We are strongly recommending to bankers with employer clients that they put in electronic walls, which can consist of automated teller machines, fax machines, telephones, and which can tie the employees to the bank.

There will still be branches, but in totally different configurations because of the many alternatives for handling transactions: ATMs with a broader menu of transactions, home banking by PC, banking at work, by phone, and in shopping centers that can deliver services in at least a semi-secure environment.

Security will become a major factor, which is why some neighborhood branches won't make it. Larger centers with more traffic and better lighting will be more familiar, safe, and inviting to customers.

A lot of what you say is in the future tense. How close is it to reality?

FRERICHS: We've been talking about a lot of these things for a lot of years. Finally we're finding a great propensity to take action, at least in test or pilot modes. Through experimentation bankers can become familiar with the concepts and how to apply them in various branch environments.

We also see more concern about branch accounting - we have helped develop cost accounting systems to better enable banks to make the necessary changes based on profit considerations. We're seeing a much more sophisticated client that is measuring efficiencies on a dollars-per- square-foot basis, revenue growth and net contribution to overhead. With that retailing sophistication, conversions will come much quicker.

In the next three to five years there will be a lot of movement. In 10 years, distribution will be vastly different from what we know today.

It's not going to happen overnight because people don't change that quickly. As people now in their late 20s and 30s, who have done most of their banking transactions through automation, require more counseling about investments and retirement, banks will have to fulfill those needs or the customers will go elsewhere. To do that, banks will have to change, or they will lose out to nonbanks or banks that are better equipped.

So you see the branch as one element in a multiple-choice delivery network?

FRERICHS: Yes. The branch today is staff- and transaction-oriented. That takes up about 60% of the square footage. I see that being relegated to 15% or 20%, with sales, service, and education accounting for the balance. How do we operate at extended hours and make the numbers work? There will be a drastic change in the personnel staffing these facilities. Many will be compensated according to sales and service performance, rather than transactions.

I don't see half the population banking via home PCs in five years. I do see many customers migrating to electronics in the form of ATMs and phones, the latter including proactive sales calls based on the bank's understanding of customer needs.

How much do we know about customers' satisfaction with today's branches?

FRERICHS: We do surveys in every branch we analyze and have seen much change. The biggest is increased use of third parties, or nonbanks. The average household is using 2.5 to 3.5 institutions, and that is expanding because the banks are not fulfilling the total financial role. A bank typically has less than 20% of a customer's financial relationship, and that is decreasing. Our goal is to get customers up to 40% with their designated primary bank. That can happen by offering more convenient access to products and services, with a more knowledgeable staff in the branch, on an extended-hour basis in pleasant settings.

That's a lot different than today's branches with eight or 10 teller positions, only three of them staffed, with little if any merchandising or boutiquing, and with a staff that cannot adequately respond to questions. Salespeople have to be universal, capable of meeting the needs of everyone coming through, with the possible exception of trust and commercial needs that can be met by arranging appointments with people who have that knowledge. Such a branch becomes a hub in the true sense, where I can access all products and services.

On the bright side, doesn't the existing infrastructure give banks a good foundation for attacking the nonbanks?

FRERICHS: Yes. But too many branches have not been reconfigured. They are still staff-transaction facilities, with little or no provision for good service, no greeter, no systems to inquire about the needs of customers or prospective customers. It's not that they have to close that many - they just have to change their mode of operation.

Probably 60% of accounts within a traditional branch are unprofitable. You can't keep operating that way if the mode of banking is changing and the profitable business is switching to other institutions. When you reconfigure, restaff, and reorient, profits can increase dramatically. But time is short. Is it tomorrow? No. But banks should do some experimentation and testing, determine the opportunities - a lot just don't know the market potential - and whether they can get an adequate return on the required new investments.

Is a community bank's approach to these questions different from a regional or superregional's?

FRERICHS: Community banks have a tremendous opportunity if they really make an effort to build relationships, which means going back to basics. With micromarketing, you can obtain all the data on customers, their habits and likes and lifestyles, and then turn to anticipatory or proactive sales and service. These data bases are the answer for community banks: If I buy a new car every two years, I get a call from my banker ahead of time offering a preapproved loan. The asset side of the business, rather than the liability side, could be the precursor to deeper relationships in both assets and liabilities.

But the banks have a long way to go. When we ask our client banks to give us a list of their 20 most profitable accounts, virtually none of them can. They market in the dark. They should be able to identify the 15% who account for 85% of their profits, and the next 15% who can become like the top 15%.

We'd like to bring the 60% unprofitable number down to 20%. It changes the whole dynamic of service; I can do much more in terms of reconfiguration and hours of operation and types of personnel. We say, Don't try to change the entire bank - you'll ruin it. Experiment. Do pilots. Learn from them about relationship sales and micromarketing, different types of staffing and hours of operation. Based on what works, roll out the changes in an orderly manner over three to five years, and you won't get caught in the bind of having the competition head and shoulders above you. Now is the time to get ready, test the waters, become comfortable with the alternatives.

The nationals or regionals will be much more mass-advertising- and automation-driven. Looking at their numbers, they are not likely to build the same kind of interpersonal relationships. It's not that they can't do it in certain areas, but they won't have the flexibility of a community banker.

Has the attention to supermarket banking been out of proportion to its place in your delivery scheme?

FRERICHS: It can play a real role. It gives me a chance to provide extended-hour banking in an area that might not justify a full facility, perhaps in an urban area that might be perceived as less safe, or as a way to supplement a nearby facility that I am unable to expand. It can also be a way to enter into new areas. But today we have clients that want to look at supermarkets as an alternative, and they find most of the better locations have already been taken.

Some went into supermarkets without knowing the true potential, and some are faltering. But others are succeeding very nicely, usually when they are a separate operation within the bank, with their own hours, personnel, costs, and product parameters - all dedicated to the types of sales and service that can be provided in that environment. If the supermarket becomes a staff-transaction branch, it leaves little opportunity for profit. You have to be smart, fill a specific need, and design, staff, and operate it to meet a particular objective.

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