Count the Federal Reserve Board’s restrictions on debit card interchange fees that take effect Oct. 1 as yet another reason for banks to close branches.
International Bancshares Corp. in Laredo, Texas, said last week it would shutter 55 of its in-store IBC Bank branches (
A closer look at International Bancshares suggests, however, that interchange limits simply may be a contributor to the decision, if not a scapegoat for a decision to close 21% of its branches. That is important to understand as industry observers watch for similar moves by other banks.
"It's not necessarily that Durbin is forcing banks to close" branches, says Jim Schlegel, a senior product manager at ACI Worldwide Inc., a New York-based company that licenses debit card software to banks. "But it's yet one more thing to drive that trend."
A key reason why banks would consider closures is that many branches are too small to justify the cost, says Christopher Marinac, an analyst at FIG Partners LLC. That is the case at International Bancshares, and others soon could follow its lead, he says.
"I absolutely expect banks to close small inefficient and ineffective branches," Marinac says. "It is time to focus here."
For industry observers, it is undeniable that the cap on debit cad interchange has been a factor in banks pulling the cost-cutting lever because of expectations of lost revenue. Nearly two-thirds of big banks have eliminated free checking since the end of 2009, according to Lake Bluff, Ill., research firm Moebs Services Inc. (
Cuts are coming from many places. SunTrust Banks Inc. and USAA Federal Savings Bank, among others, have eliminated debit card rewards. Wells Fargo & Co. said last month that it would charge some customers $3 a month to use debit cards (
Still, the cap on interchange is just one factor that will drive a branch rationalization, Marinac says. Too many small banks, or those with $1 billion in assets or less, operate branches that generate insufficient deposits to justify their existence, he says.
International Bancshares' in-store branches hold a small portion of the company's overall deposits, Marinac says. Their small size was dragging down ratios for the entire company, which had a deposits-per-branch ratio of less than $26 million at midyear, Marinac sys. He estimates a branch should have at least $40 million in deposits to be reliably profitable.
Ken Thomas, a Miami-based economist and branching expert, says branches with less than $10 million in deposits are "usually unprofitable." (About 90% of IBC Bank's in-store branches were in that category at June 30, 2010, based on data from the Federal Deposit Insurance Corp.)
Marinac, referring to FDIC data, says the median deposits-per-branch figure was $42 million for the more than 3,000 banks nationwide with $100 million or more in assets.
International Bancshares will close 54 branches located inside H-E-B grocery stores in more than two-dozen Texas cities, and a branch located inside a Randall's grocery store, according to a company press release.
Nixon on Sept. 28 would not say how much revenue he expects International Bancshares to lose because of reduced interchange fees, saying that such information is "proprietary." The company could have eliminated some free services, but instead opted for shuttering branches, he said.
"Our customers have indicated they prefer to keep free checking products and services," Nixon said.
Nixon declined to say whether the branches to be closed were too small to justify their cost. He also declined to say whether the in-store branches performed worse than traditional branches.
"When they eliminated the debit card interchange revenue, that was a critical source of revenue that supported these branches; that seriously damaged the viability of these branches," Nixon said.
Bank of America Corp. is leading the charge to close branches. Brian Moynihan, BofA's president and chief executive, has said the Charlotte, N.C.-based company would close about 750 branches nationwide under a massive cost-cutting initiative. BofA has not specifically said it's selling the branches.
Richard Bove, an analyst at Rochdale Securities, wrote in a note to clients earlier this month that BofA does not need the branches slated for closure or the deposits they hold.
In the case of International Bancshares, there is an issue of branches inside grocery stores. Thomas says he has never favored such locations because their deposit balances are too small to produce a profit, despite less overhead.
Many big banks over time have closed the in-store branches they have acquired through mergers. Such branches are difficult to staff, and they are subject to problems outside a bank's control, he says.
"Who wants to work in one with screaming kids, grocery carts all over the place and the smells of groceries, versus a nice, quiet, professional bank office?" Thomas asks. "There are also potential union problems if store workers go on strike."
