A recent study concludes that heavy foot traffic in a supermarket does not necessarily translate into similar volumes of business at the in-store banking branch.

MarkeTech Systems Inc. found that in-store branches generally attract fewer customers and lower deposit levels than brick-and-mortar branches. Worse, the disparity was said to widen over time.

But another analysis, by Geosegment Systems Corp., revealed that some banks are attracting $20 million to $30 million and more at in-store branches. "Banks that can combine all of the strategic and tactical elements become not only profitable, but really profitable," according to this study.

Both reports are right. Many in-store operators are having disappointing results, while others - including some of the country's leading financial institutions - are doing very well.

Geosegment Systems found that National Commerce Bancorp., one of the top-performing banks during the past several years, averaged deposits of $21.1 million during 1997 in supermarket branches that had been open since 1994.

What is not true is that in-store banking is a fail-safe, "build it and they will come" proposition.

Some banks that have learned this lesson from experience are becoming frustrated and are questioning the channel's viability. Others, however, have realized that they cannot become more efficient by simply tacking on in on-store branches. They have found that they must build a new, lower- cost mix of branches that serves the customer as well or better than before.

National Commerce, the first to make in-store banking successful on a large scale, today has 116 of its 148 branches in retail stores in six states. My company, the National Commerce Bank Services subsidiary, has worked with more than 300 banks and 60 supermarkets and retail chains in establishing and managing in-store branches in the past dozen years.

Experience tells us that any supermarket branch can generate some level of business-say, $4 million to $6 million of deposits and $1 million or $2 million in loans. According to MarkeTech, median total deposits at in-store branches are $5.7 million after three years, compared to $15.5 million at conventional branches.

The difficult part is taking the in-store branch from a plateau to a higher level. NCBC's in-store business has plateaued several times over the years, but the company has always found a way to regain momentum.

By now, strategies of NCBC and other leading players, such as Fifth Third, Firstar, and SunTrust, are widely known. In-store bankers must hire retail-oriented people; they must train them specifically for the supermarket environment; and they must promote the bank proactively in the store.

But the real keys are leveraging demographic information to understand the supermarket's shoppers and their needs, methodically building and pricing profitable relationships, and designing a delivery network that is integrated and low-cost.

Banks thus positioned are probably running money-making programs. Many other banks are flying blind and have built unprofitable programs burdened with high-transaction, low-balance accounts.

In Richmond, Va., Ukrop's Super Markets and First Market Bank are putting information-based marketing to work for the benefit of both companies. In so doing, they are breaking tradition in both of their industries.

Grocers have long advertised low-price specials to attract business. Unfortunately, this tactic draws opportunistic cherry-pickers who target discounts at several stores but are loyal to none. Similarly, banks have offered free checking and other enticements that lure mostly nonprofitable business. Such programs counterproductively encourage undesirable behavior while ignoring good customers.

By contrast, Ukrop's and First Market Bank work together to identify and reward their most loyal and valuable customers.

As an example, a Valued Customer Card tracks a customer's business with the supermarket and the bank and provides special offers at both for certain levels of patronage. The Valued Customer Card doubles as the First Market Bank debit card.

There is another way to attract business by rewarding customers: offer above-market rates on money market deposits. Many banks shun this approach because it lowers margins, but this effect is offset by the efficiencies of a strategically planned and well-managed delivery system that includes in- store branches.

Money market balances usually grow at the expense of certificates of deposit, giving the bank more rate flexibility and the customer a more liquid investment. And money market customers often represent consumer lending opportunities. NCBC, for example, enjoys an 85% loan-to-deposit ratio systemwide.

Lest we forget, the days of free money are dwindling rapidly. As the Geosegment report says: "Consumers are increasingly demanding 'market rates' for their deposits; in this sense NCBC may be ahead of the industry in both margin erosion and consumer-based product strategy."

NCBC uses conventional branches as hubs, surrounded by the in-store spokes. The latter serve retail and small-business customers and leave most commercial and private banking services to the nearest conventional branch. The fact that there are many more spokes than hubs contributed to the company's 1998 efficiency ratio of 48.29%, one of the industry's lowest.

To enter new markets, a bank can begin with in-store branches and attract deposits with premium rates that are affordable due to the low cost of entry. The in-store presence creates awareness and builds demand for conventional branches that can be added later.

While the evolution to banking by telephone, Internet, and the like will continue, branch banking is not going away any time soon. They will change as financial institutions seek to leverage them for higher productivity and efficiency. And in-store banking will continue to grow and succeed for those banks that use the channel effectively to meet organizational goals. Mr. Holmes is president and chief executive officer of National Commerce Bank Services Inc., an affiliate of National Commerce Bancorp. in Memphis.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.