CHICAGO—The math behind branch banking—at least based on how many financial institutions currently run their bricks-and-mortar networks–doesn’t work, contends one CEO whose credit union relies heavily on a remote delivery model.
David Mooney, CEO of the $8.4-billion Alliant CU here, said that despite the online model not being for every FI, as well as consumers who continue to value branch access, there is no doubt the world needs fewer and much smaller branches.
Several major banks slashed their networks to boost efficiencies and cut costs during the recession, but that has not had a big effect on the glut of branches that remain in most markets. Mooney said changes in remote delivery, the ongoing evolution of the Internet, new competitors and new adjustments in consumers’ banking habits are all combining to demand changes in branch strategies.
“There is far too much branch capacity relative to branch use and revenue-generating potential, and this will only get worse in the future without significant thinning,” explained Mooney, who said Alliant looks a lot like a direct bank. “The costs have to be brought in line with the revenues. Shrinking margins just make the economics worse and the need for capacity reduction greater. Meanwhile, online providers are unconstrained by branch footprint, and are translating their lower operating costs into a price advantage and growing faster than the market.”
Historically, competition in banking was defined locally, reminded Mooney, who noted that banking not that long ago required the exchange of documents—checks, cash, withdrawal, transfer forms and more paper.
“The consumer’s choice set was limited to institutions with branches near their home or office,” said Mooney. “Market share largely mirrored share of branches, which led to a branching arms race.”
The Internet, too, has eroded geographic boundaries and banking has become much less local. Consumers now have access to a national set of providers.
“There is easy price and terms discovery,” Mooney said. “Accounts can be opened and accessed online. Money has largely been digitized—there is very little need to exchange physical documents.”
Citing studies that show branch traffic is falling at a steady 3%-5% clip annually, Mooney said proximity becomes less important.
“The average U.S. bank branch opens one to two new accounts per day, and that number hasn’t changed in over two decades,” said Mooney, pointing to data from Bancography and Cornerstone Advisors. “And consider that approximately 80% of accounts are break-even or unprofitable.”
Only So Much Branch Business
Mooney added that many banks and credit unions plan to increase branch sales, but with a fixed amount of financial services demand, it isn’t possible for everyone to do so.
“With traffic falling, there are fewer branch sales opportunities. And do you think that consumers will purchase online more, or less, in the future? I’m betting that the trends will continue, and they’ll purchase more online, particularly as banks and credit unions improve the ease and efficiency of online account opening,” said Mooney.
Mooney said that Alliant’s operating costs, which run about one-third of the average branch-based credit union, allows it to give more back to members and to pay top-of-market rates. Mooney said that at the typical branch-based bank or credit union, approximately 60% of operating costs are in the branch system.
“Staff, real estate, systems and networks,” he said. “Much of these costs are fixed by location.”