Toronto-Dominion Bank (TD) is betting big on the future of branches, investing in a massive brick-and-mortar expansion even as its U.S. competitors increasingly question the future of the traditional storefront.
The wisdom of investing in bank branches has become a fiercely-debated topic in recent months. Banks are slowing their branch expansion efforts, as persistently low interest rates, the soft economy and decreased foot traffic all reduce the profitability of the physical locations.
Some bankers are trying to revamp their real estate by adding untraditional perks to the teller windows, including yoga classes and coffee bars. Other industry members are trying to do away with branches altogether. But TD, which last week announced ambitious plans to expand its New York City footprint, is sticking with a more traditional approach.
"Customers are still very attracted to branches," Chief Financial Officer Colleen Johnston told American Banker in an interview last week.
"They will still make the decision on where to bank based on the location of your branch and the convenience and service as well," she says.
Johnston was speaking after TD's annual shareholder meeting, where Chief Executive Ed Clark unveiled a plan to open more than 50 branches in New York City over the next four years. The plan would give the Toronto company at least 139 branches in New York alone, and make it the third-largest retail bank by deposits in the area. (It is currently fifth.) Last year, TD opened about 37 new branches in the U.S. and about 24 in Canada.
Despite widespread questions about the future of the bank branch, analysts say that TD's plan to open new branches is the fastest and most effective way to steal market share in the Big Apple.
"Consumers and businesses still like to open their checking accounts in branches," says Mary Beth Sullivan, a managing partner at Capital Performance Group. "They will open other types of products online, but when it comes to their checking accounts, it seems to be the continued preference to walk into an office and get yourself set up to make sure everything is okay before you walk out."
But such rapid expansion is expensive, especially if TD wants to make a grab for more retail deposits in the already-saturated New York market. It will be going up against the massive branch networks of the biggest U.S. banks, including JPMorgan Chase (JPM), Bank of America (BAC) and Wells Fargo (WFC).
Johnston acknowledged that TD's expansion would be "costly," though she declined to provide specifics of its investment.
It typically takes two or three years for a branch to become profitable, according to Morningstar analyst Dan Werner, who says that TD would be able to take on the costs due to its "financial strength and capital." For the fiscal year that ended Oct. 31, the company's U.S. profits were up 24% year-over-year to $1.5 billion.
New York is particularly expensive for banks looking to do business, because real estate and personnel costs are higher, says Mark Fitzgibbon, a director of research at Sandler O'Neill.
But the city is undeniably attractive, given its massive deposit base, high population density, and large affluent population. To be successful, TD will have to look beyond just its branch locations to find "the right relationship people that have strong ties to the communities," Fitzgibbon says.
Branch skeptics question the wisdom of investing in such a massive infrastructure project, just to attract new customers — especially as banks are facing other costs.
New regulations have cut into the fees that banks charge and that were "carrying the cost of the expensive branch network," says Nigel Smith, managing director of Accenture's banking distribution and marketing services in North America.
He predicts that within the next five years, banks will need to begin making changes at scale to their national branch systems. These changes may include having "differentiated branch models" based on the needs of the customers in a particular area, he says. For example, a bank may need to make half of a branch a private banking client lounge and use the rest as a smaller retail location, he adds.
Brett King, founder of the mobile startup Movenbank and a prominent skeptic of traditional brick-and-mortar storefronts, says that TD will have to innovate in order to justify its investment.
"Some feel that putting a branch on the corner is a psychological comfort to customers. From my point of view, that is a pretty heavy investment to make people think your bank is real," he says.
Instead, banks need to balance spending on branches with investment in digital technology, something that TD has done, King says.
Johnston calls such alternatives "vitally important" and says that TD was making "a big strategic investment in our capabilities around direct channel," or ways to reach out to customers outside of branches.
She adds that TD will focus on providing traditional customer service at its planned New York City branches by creating an "inviting environment where people feel welcomed, where they are greeted warmly and are treated well and efficiently."
That strategy has worked well so far, though Capital Performance's Sullivan expresses doubts about its limits.
"They've had that more convenience positioning and I think that positioning works for them," she says. "But 10 years from right now, I don't know."