By Roy Urrico
Spurred on by the emergence of digital channels, the banking industry has experienced a deterioration in branch transactions over the past decade. This has raised questions about the branch channel’s impending demise. However, the reality is more nuanced according to financial services consulting firm Bancography.
Founder and president Steven Reider, and founding principal and director of marketing research, Kimberly Clay of the Birmingham, Ala.-based Bancography recently sat down with Finopotamus to discuss some of the key industry insights and research about branch banking as presented in Bancography’s Bancology Summer 2024 Newsletter.
The conversation focused on four main themes:
Defying the Trends: Where Branch Counts Remain Steady (or even growing). While digital channels have reshaped the banking landscape, the impact on branches is more complex. Despite the predictions, many markets are defying the trends, with branch counts remaining steady or even growing in cities like Austin and Dallas, Texas, and Charlotte, N.C.
Retail Branch Benchmarks. There continued to be a decline of in-person transactions at the branch. For bank branches, average transactions decreased by 37% from 2018 levels, and credit union branches experienced an even greater decline of more than 50% in that timeframe.
Loyalty by Age – Branch Versus Digital Transactors. Looking at customers who visited branches in the last three months versus those who conducted business via digital channels – how likely are they to recommend their institution?
The Efficiency Ratio, and How Much Scale Matters. Calculated as noninterest expense divided by the sum of net interest margin plus noninterest revenue, the efficiency ratio frames performance in an answer to a simple question: How many cents in expense does it take us to generate a dollar in revenue?
“One of the conclusions is that (for) credit unions and banks alike, we are past the stage of just wholesale rampant consolidation. Now it is really a much more judicious approach to markets where we are seeing more reallocation of resources away from lower opportunity markets and certainly concentration of those resources back into higher opportunity markets,” Reider explained to Finopotamus.
Branches also breed allegiance. “Those who use the branch, and especially those who open the accounts in the branch, are statistically more loyal to their PFI (primary financial institution) than those who are digital only,” said Clay.
In the first of a two-part article Finopotamus focuses on trends and benchmark. The second part (later this week) zeroes in on loyalty and efficiency.
Defying the Trends
“You're hard pressed to pick up a copy of Fortune or Business Week or Wall Street Journal or any other general business publication, to see an article about our industry that doesn't harp on the decline in branch counts, question the wisdom of branches, whether we're going to maintain branches.” Reider told Finopotamus.
Bancography’s research confirmed banks and credit unions lost a net 8,500 branches over the past four years. That total of 95,000 bank and credit union branches in the U.S. stands at 16% under the peak levels of 2010.
“But that pace of decline is slow,” said Reider. “I mean, if you look underneath that in a little bit more detail at the market level, what you will see is that there are plenty of markets where branch counts are not declining or even ticking upward as you might expect. Those tend to be high-growth metropolitan areas with strong underlying economic fundamentals.”
Reider also pointed out that much of the decline in branch counts reflects institutions closing direct overlaps that arose from in-market mergers. Closures that followed the merger of BB&T and SunTrust into the newly named Truist accounted for more than 10% of the industry’s entire net branch decline from 2019 - 2023., according to Bancography.
“We lost a net 3,000 branches in the industry in the FDIC reporting year ending June 30, 2021,” said Reider. He added, even in the year ending June, 2023, the pace of closures had slowed. In the 2023 FDIC reporting year, the industry’s net decline of more than 1,500 branches was a composite of 2,530 branch closures, offset by more than 1,000 branch openings.
Bancography calculated the construction of 1,000 new branches likely represents a capital investment of more than $2 billion in new branches in the U.S. in the past year.
Another point of divergence across the top-tier markets lies in branch concentration. Bancography reported that it would be logical that markets with high per-capita branch concentration levels would show greater levels of branch consolidation. However, at a time when nationwide there is one branch for every 1,340 households, Omaha, Neb.; Fayetteville, Ark.; and Des Moines, Iowa; each show ratios of 1,000 to 1,100 households per branch.
At the opposite end of the spectrum, Austin (Texas), Charlotte (N.C.) and Dallas all show ratios near 1,600 households per branch, indicating ample capacity for these markets to absorb additional branching and still remain comfortably above typical branch concentration levels.
Retail Branch Benchmarks
“At Bancography we run through about 80 or so projects a year. So, in the course of that analysis, we are continually surveying our client base out there and gathering data from their experiences, which we can share back to the family of clients in the form of ‘here's how you fare against the universe of institutions and branches that we've examined recently,’” Reider told Finopotamus. Data is compiled from Bancography clients during 2023 and 2024, and where applicable, current statistics are compared to its 2018 benchmarking data.
Highlights from the data:
· For bank branches, average transactions decreased by 37% from 2018 levels, and credit union branches experienced an even greater decline of more than 50% in that timeframe. These reductions stem from additional retail branch benchmarks such as mobile and online capabilities, as well as increased use of interactive teller machines (i.e., video remote tellers), especially among credit unions.
· Freestanding branches, as expected, see a greater volume of transactions than smaller inline or in-store branches. Credit union freestanding branches reported the highest transaction counts of all branch types (5,000 per month).
· On the sales front, bank branches have seen an increase in monthly direct loan production and a slight decrease in new deposit account openings. In contrast, credit union branches saw a decrease in both loan and deposit account production over 2018 levels. Some of the credit union branch loan production decline is attributed to an increase in indirect lending with auto dealers.
· Decreases in deposit account production likely reflect online account opening capabilities that both banks and credit unions have implemented over the past several years. Staffing in the branches remains in the five to seven full-time equivalent (FTE) range, with the bank branch median at five FTEs and the credit union branch median at seven FTEs.