After 40 years of building branch networks, the US is to witness a massive reduction in operating branches, according to a new report from Celent: Branch Boom Gone Bust. Katy Maydon takes a closer look a the report
The US banking market hosts approximately 14,300 deposit-taking financial institutions (January 1, 2013); Celent purports that these institutions will witness a 30-40% reduction in the number of bank and credit union branches over the next 10 years.
Over the last 20 years, the report states, the US has witnessed a branch "boom" with the total US branch count increasing by 280%: a density growth of 150%, from 107 branches per million people to 270 branches per million.
During these two decades, the US banking landscape saw considerable consolidation of deposits among the top banks. In 1995, the top five US banks enjoyed 11% of deposits. By 2012, that had grown to 37%.
During the branch boom, the bulk of branch growth has been at the hands of these larger banks seeking to grow physical footprint. Since 1982, community banks have contributed nothing to the branch boom, and mid-tier institutions have contributed only a small amount.
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Community bank ranks declined sharply since the early nineties. In 1994, banks with less than $1bn in assets represented around 50% of the total branch/office footprint of US banks; by 2012 that number had shrunk to just 28% of the total 28,100 branches.
Conversely, the largest banks (>$50 billion in assets) climbed from 28% of the total branch network in 2000 to 42% in just over a decade.
Celent now estimates that this ‘branch boom’ will ‘go bust’, purporting a 30-40% reduction in bank branches over the next 10 years.
Over the past ten years, in comparison to other US retail markets, retail bank branches are an anomaly. Between 2000-2010 grocery, music, book and clothing stores have all decreased in branch outlets, while financial institutions increase. For example, the closure of Blockbuster in favour of direct and online video rentals such as Lovefilm and Netflix can be used as an example of retail institutions veering towards the direct market. Celent expect that banks will follow other retailers in this trend, moving toward direct banking.
The reduction, according to Celent, would be led, as the climb was, by large banks as they experiment with alternative branch designs and move on cost cutting initiatives.
The report argues that a re-sizing of US retail banking branches is unavoidable for four reasons: customers’ preferences for online and mobile channels will continue to grow, cost cutting initiatives and pressures will persist, branch visits will become far less frequent and banks will relax their historic dependence on the branch channel for selling.
Celent predict a growth in alternative channels, such as direct banks, internet and mobile usage. Direct banks have much lower overhead than traditional banks. With lower expenses, direct banks are able to offer better rates, thus gaining competitive advantage. This is why income and expense don’t give the whole picture. Expenses are lower, but so is income, because the cost savings of not having a physical branch network are passed on to the consumer. Additionally, branch employees are expensive, and banks with large branch counts are realizing the struggles of maintaining them.
Globally, internet banking usage has grown in tandem with general internet usage and banks are moving towards self service more and more, banks are even introducing internet only subsidiaries such as the European internet bank Hello Bank, hosted by BNP Parabias. Branch visits are therefore expected to become far less frequent.
The report purports that new branch designs show a move towards alternative channels, banks are changing their retail operating models to favour smaller, more automated branches designed for this new interaction mix, staffed with fewer, more highly trained, and highly compensated personnel. Additionally, investing in more effective lead generation and management capability in digital channels to feed the branch network, will reduce branch densities as transactions leave the channel and average visit frequency sharply declines.
Celent estimates a 30% to 40% industry wide reduction in branch densities through 2020. Banking is continually evolving, as is the consumer way of life. Consumers are increasingly finding it unnecessary to visit a branch. Instead, they’re looking for around-the-clock access to information and transactions no matter where there are. Industries everywhere are evolving to meet the demand that has been created by the Internet and mobility.
Most US banks have been slow to act. Celent argues that if banks don’t align their multichannel strategies to account for these emerging trends, and continue to unflinchingly resist downsizing or adapting their branch networks, they’ll inevitably be at competitive disadvantage.