Feb 152012

The question of branch viability has been an ongoing debate for years.  Those favoring branches insist that face-to-face interaction, presumably in the branch, is vital to stewarding relationships.  Those on the other side argue that branch economics in the Online & Mobile Banking era is no longer viable.

FIS white paper entitled Shifting Investments in Legacy Branch Networks – Finally adds insight to the discussion, in addition to some of our own comments (see below).  We recommend a thorough reading by all Bank and Credit Union executives, but for the sake of brevity, we offer the following synopsis of the study.

Net New Number of Branches:
For the past several years the tide has changed with the net number of Bank branches declining since 2009.

FIS - Net Change in the Number Branches

Branch Utilization:
The reduction in the number of Branches is in part due to a response to the declining number of households served per branch (the bump in 2010 is likely a reflection of branch consolidation)

FIS - Households (HH) per Branch

FIS – Households (HH) per Branch

… and declining customer utilization of branches.  In fact, data shows a 40% reduction in the number of branch transactions in just the past 12 years, with a nearly 20% decline in the number of branch transactions in 2011.

FIS - Transactions per Branch

FIS – Transactions per Branch


Branch Segmentation:
There are more than 15,000 Branches (18% of total branches in the US) with less than $15 million in deposits (<2% of industry’s deposits).

FIS - Branch Stratification by Deposit Balance

FIS – Branch Stratification by Deposit Balance


Branch Costs:
It should be obvious that branches with fewer deposits will be more expensive than those with higher levels of deposits.  However, the absolute levels may be shocking – the cost of the smallest branches are more than 10x more expensive than the cost of the larger branches.  This begins to explain why larger bank (with larger deposit base) may opt to open new branches while Community Banks and Credit Unions struggle to support their existing branch network that, by and large, are made up of branches with smaller deposit base and thus are more expensive to support.

FIS - Branch Cost as Percent of Deposits

FIS – Branch Cost as Percent of Deposits


Branch Deposit Growth:
Community Bank and Credit Union executives are often heard justifying support of small branches based on the relative newness.  Yet, data suggests that branch growth slows down starting after the Branch’s 3rd anniversary and the average branch on its 5th anniversary had operating costs that are nearly 2x of the larger branches (1.05% vs 0.59% operating cost as percent of deposits).

FIS - First 5 years Branch Growth

FIS – First 5 years Branch Growth


New Branch Age and Performance:
Nearly 70% of small branches (those with less than $15 million in deposits) are at least 5 years old, suggesting that their high-growth period is well behind them and that these branches are most likely to continue to accrue high operating costs (as a percentage of deposits).  Community Bank and Credit Union executives should be actively engaged in reassessing the opportunities for these branches, and in most cases, consolidation or outright closure may likely be warranted.

FIS - Branches with Less Than $15 million in Deposits by Age

FIS – Branches with Less Than $15 million in Deposits by Age


Revenue and ROE generation by the Branch:
Deposit service charge income – one of the major sources of branch income – is under intense pressure that is expected to continue and accelerate.

FIS - Deposit Service Charges

FIS – Deposit Service Charges

Net Interest Margin (NIM) similarly has seen a meaningful decline and the competitive forced in the near future are likely to further erode performance.

FIS - Net Interest Margin (NIM)

FIS – Net Interest Margin (NIM)

Profit contribution and growth opportunities realistically available for Bank growth via Branches must be reassessed given the reality facing Community Bank and Credit Union executives.


FIS provides greater clarity of the problem through an illustration of an actual $10.2 million asset branch.  The below is a quarterly P&L statement showing $50k loss.  Most will agree that given the competitive pressures and increasing costs, it is hard to identify $200k in annual savings to return the Branch to a profitable position.

FIS - Branch Income Statement

FIS – Branch Income Statement


Our View:
Are Branches viable as distribution and support vehicles for Community Banks and Credit Unions?  We believe that evidence clearly indicates that Community Banks and Credit Unions must shift their resources to other channels given

  • Cost: The inability of the Branch network, at a minimum, to recoup its costs, much less meet the typical 10% ROE hurdle rate.
  • Customer Need: Competitive pressures demand that financial institutions service their customers wherever, whenever, however those customers desire.  Very clearly, a Branch is simply limited in this ability and frankly, is inadequate as a distribution, sales and service vehicle.
  • Competitive Forces: Community Banks and Credit Unions cannot upset the competition by deploying Branches.  Such strategy is not only foolhardy but also extremely expensive.  Community Banks and Credit Unions are much better positioned to compete with mega Banks, mega Credit Unions and non-traditional competitors (that are multiplying on a monthly basis and cannibalizing the most attractive parts of the business) online and via mobile channels.  Not only is this a preference for the vast majority of consumers, but these channels are one of the few options that truly even the playing field, allowing a small Financial Institution to appear quite large.  Utilization of these channels can enable Community Banks and Credit Unions to win customer relationships through service and offering that simply cannot be matched by the mega Banks.

Branches, at one time, were useful and profitable vehicles for meeting customer needs.   Sadly, that time has passed.  Customer preferences have changed; technology now enables capability that was not fathomed just 5 or 10 years ago; competition is multiplying and stealing wallet-share that rightfully belongs to Community Banks and Credit Unions.   Time is long overdue for action…

The following is a short list of articles that provides additional insights on the competitive value proposition of bank Branches:
–       Branchless Banking – Fantasy or Reality?
–       Branch or Technology?  What do Your Customers Want?
–       Is the Branch Dead?
–       Small Businesses Expect Banks to Provide Expertise and Technology
–       Who Needs Bank Branches?
–       The Branch is Dead! Zombie Lives


As always, we welcome your comments.


Serge Milman

Serge Milman is the Principal Partner of San Francisco, CA based SFO Consultants which provides Strategy, Finance and Operations Management Consulting services. He is also the Principal of Optirate – a blog dedicated to growth and profitability strategies for Banks and Credit Unions. Serge can be reached at info@SFOconsultants.com.

  One Response to “Will the bank Branch Ever Return to Profitability?”

  1. Serge,

    Some fantastic data here. Well done in compiling it.

    Brett King
    BANK 2.0

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