Most large banks are competing to build bigger and better branches, but HSBC (HBC) is betting that smaller is smarter.
The British bank spent the past two years shedding real estate in the wealthy New York region, selling off its branches in the suburbs and farther upstate. In the city, big competitors like JPMorgan Chase (JPM), Citigroup (NYSE: C) and Bank of America (BAC) are unveiling shiny glass boxes on high-traffic corners, but HSBC is sticking with its staid, conservative storefronts. It is building branches in other U.S. markets, particularly on the West Coast, but they will be much smaller — 2,500 to 3,500 square feet, compared to its 8,000 to 15,000 square-foot floor plans of yore.
"Customers don't need [big branches]. They're expensive. Footprint just costs money and at the end of the day, either the shareholder gets less return or the customers pay more. Someone has to pay for all this space you're not using," says Kevin Martin, the head of HSBC's North American retail banking and wealth management operations.
Some of HSBC's recent branch pullback was born of necessity, as the struggling and scandal-buffeted parent company dumped unwanted U.S. assets. Some of it is a deliberate effort to focus more on wealthy and international customers, who expect their bankers to come to them. Martin says that HSBC Premier customers, who deposit and invest at least $100,000 with the bank, get "personalized relationship managers," who pick up the phone at all hours, stop by their customers' homes or offices, and help coordinate any sort of specialized banking services customers may need. And when your bankers specialize in making house calls, you don't spend money building mass-market clinics.
Some of HSBC's branch strategy is also a response to the growing reality of online and mobile banking technology, which has bank customers of most income levels relying less on their local tellers — and has many banks rethinking how much to invest in their branch networks.
"I think that branches are really critical, I really do. I'm just not sure that they need to be as big and as retail, as transactional, as they used to be," Martin said in an interview last month.
He acknowledged that HSBC's 100 or so remaining New York branches aren't "as big and as flashy" as some competitors' newest locations, but "I just don't think they need to be," he says. "I never get complaints from customers saying, 'If only you had another branch, I'd open my account with you.' It's just not what they say anymore."
Transactions at HSBC branches are down "something like 60%," according to Martin, who adds that a third of its customer deposits now happen at ATMs instead of at teller windows. During the interview in Martin's office, his Blackberry, iPhone 5 and iPad mini were carefully stacked next to him on a conference table, as if to illustrate how many different ways bank customers now have to avoid a branch visit. He also dismissed some banks' efforts to make their branches more high-tech by adding bells and whistles like videophones.
"The thing is, high-tech [banking] works at home. If I want to talk to my adviser, I just pull out my iPad and go on Skype or FaceTime," Martin says. "If you think about what people use banks for, the physical locations are for if I've got a really complex need — so I'm buying a house, or I need some wealth advice, or I'm opening a new account or I'm swapping banks. In that particular case, I just find out where [the branches] are, and I go to them. It doesn't matter whether I walk past them or not."
While HSBC is maintaining the status quo in New York, it is expanding on the West Coast, where it is hoping to cultivate more customers with work and family ties to Asia. But even these new branches are relatively sparse; Martin says they contain little more than a couple of customer lounges, meeting rooms, a television and a coffee machine.
"If you want to come in, you make an appointment … and if they want to do their [basic] banking, they just do it through the ATMs," he says. "That to me is an efficient use of resources, reflecting the changing behaviors of our customers, and reflecting the changing future of banking."
That strategy appears to be working for HSBC. While its U.S. branch numbers have been cut in half, from almost 500 at the beginning of 2011 to about 250 now, its overall U.S. deposit levels have ticked up slightly; it had $93.8 billion in deposits at the end of September, compared to $92.2 billion two years earlier, according to the Federal Deposit Insurance Corp.
Whether such a pullback would work as well for other U.S. banks is another question. HSBC is trying to forget its ill-fated foray into U.S. subprime lending, and is no longer trying to attract mass-market deposits in this country. That leads Martin to shrug when asked about competitive threats from aggressively expanding banks, including Canada's Toronto-Dominion Bank (TD), which last year announced plans to open 50 new branches in New York City.
"Every week on the Upper West Side, there's another bank that opens," says Martin, referring to the well-heeled Manhattan neighborhood where he's lived with his family for years. "They've all got their own perks. … If it's a customer who literally just wants to be able to bank and deposit some change on a Sunday, then they're probably better off just going to TD for it, and honestly that's ok. We've put our [stake] in the ground, and it's simple. This is who we are and this is what we do."
HSBC is now largely focused on the internationally wealthy, or those who are likely to become so. Martin says the bank is interested in more than just the rich, pointing out that of its 2.5 million U.S. customers, only 350,000 have the $100,000-or-more Premier accounts. But his definition of "international" is different from the immigrants that some U.S. banks like Wells Fargo (WFC) and U.S. Bancorp (USB) are increasingly trying to cultivate. Far from competing with payday lenders and remittance providers to bank the underbanked, HSBC is looking for the upwardly mobile white-collar workers who have work or family abroad.
"An overseas Chinese customer in Los Angeles or San Francisco [or] a young Indian professional who's building out a medical practice in Maryland or Virginia, they're on a different journey. It's more about the way they think than the amount of money they have," Martin says.
An HSBC spokesman adds that of about 1 million U.S. checking customers, the "vast majority" have either an "Advance" account, which requires at least $15,000 in money parked at HSBC, or a "Choice" account, which costs $8 per month unless customers use direct deposit or have at least $1,500 in the account. (The bank also offers a "basic" checking account for $3 per month.)
Martin, 52, joined HSBC in 1987 and previously ran marketing for its U.S. bank, before being promoted to his current role three years ago. A tall, gregarious Australian whose accent has been somewhat softened by years of living in New York, he welcomed a reporter to his office on the morning that his team moved to a building across Bryant Park from HSBC's headquarters. Opening the window to the bright, unseasonably warm December day, he joked about hosting barbecues on the balcony outside his new office.
The building relocation was intended to consolidate all of the operations Martin oversees — he is also responsible for wealth management and marketing — into the same office. HSBC was recently hit with a $1.9 billion fine by U.S. regulators to atone for years of money-laundering violations, but Martin says the bank is not planning any sort of advertising push to help repair its brand in this country.
"We have to earn this back," he says. "If we make a mistake, we need to put our hand up and say, 'I'm sorry, we've made a mistake and this is what we'll do to fix it.' … We're not hiding behind any of it, and we're certainly not going to hide behind an ad campaign."