The Uncertain Future of Branch Banking

Steve Topper June 30th, 2011
Marketing Insights

Anyone who believes branch banking isn’t susceptible to obsolescence hasn’t been paying attention to the migration of renting movies from brick and mortar storefronts to kiosks and ultimately online only availability.

How long will it be before the last remaining Blockbuster store is closed – being replaced by the ubiquitous Red Box kiosks and ultimately Netflix?

While I’ll concur that there’s a big difference between renting movies and the need for financial products and services, Joseph Schumpeter’s creative destruction is blind to the type of business selected next.

The other day I read where Chase plans on opening 2,000 more brick and mortar branches over the next five years – with at least 1,000 happening in the next three.  I was shocked that Chase would think of spending any more money adding to its already expensive branch network.

On the other hand, I usually dismiss most of what I read about Chase and the other mega-banks as they don’t have to behave rationally.  They are on the government’s “too-big-to-fail” list which means they can do most anything they want with little regard for the financial consequences.  The unwitting taxpayers stand ready to bail them out should they over-build their branch networks.

But the bigger point is that just because Chase is going on a branch building binge over the next five years doesn’t mean it’s a savvy decision.  It’s possible they could be adding branches at a time when branches are becoming less important to the consumer.

Chase isn’t the only bank adding branches.  There are parts of the country where regional banks are also expanding their branch networks although most of them are opting for smaller branches.

It’s always dangerous predicting the demise of something as sacred as branch banking and providing an end point would be wildly speculative at best.  But as I continue focusing on this issue I realize from talking to people and reading countless studies and articles that a combination of new technologies and changing consumer behavior are resulting in fewer reasons to visit a local bank or credit union branch.

One might say the seeds are being sown for the creative destruction of branch banking.

As I see it, success for the future of branch banking depends on:

  • Consumers wanting a one-stop shopping experience for banking, insurance, investing, and financial advice.
  • A majority of consumers preferring to do all this business face-to-face versus the growing convenience of online and mobile.
  • Competitors being willing to cede all this business to banks and credit unions.
  • Revenue streams being created that are able to support expensive branch networks.
  • The federal government continuing its “too-big-to fail” approach to banking.

A major question you have to ask yourself is this:  Do consumers really prefer a one-stop shopping experience or do they prefer shopping at smaller specialty stores and boutiques that specialize in a narrow product line while providing exceptional, personalize service?

If the demise of many of the nation’s once great department stores are any indication, most consumers prefer spreading their business among a larger number of specialty stores.  Forget about bringing up the success of Walmart – apparently Walmart customers aren’t the target audience for one-stop banking as perceived by the bigger banks.

As for preferring face-to-face over the convenience of online and mobile, I think the success of USAA Bank, Ally Bank, Redneck Bank, and ING Direct has answered this question.  And I can throw in Amazon and Zappos for good measure.  By the way, a few years ago who would have thought that millions of people would buy shoes online?  And, more recently much of the doctor and patient interface has moved online.

As for the competition, I can’t imagine the myriad providers of insurance, financial advisory services, and brokerage services simply rolling over while the big banks and their followers take over this business with their expanding branch networks.

The issue of an adequate revenue stream to support an expensive branch network hinges on both the size of the potential target market and the willingness of consumers to choose a bank or credit union over a more specialized provider.  The future of branch banking depends largely on developing several streams of fee income.  And we already know consumers’ thoughts about more and higher fees.

Finally, I suspect the chances that the government will remove the mega-banks from the too-big-to fail category are about the same as me becoming head of the Fed.  This means the other banks and credit unions should not look to these mega-banks for direction.

If I’m right about the uncertain future of branch banking, at some point in time all these costly branches could become little more than multi-dimensional billboards dotting the American landscape as millions of American consumers prefer doing their banking online and via their mobile devices or by some new technology yet to be discovered and developed.

As for the future of the ubiquitous checking account, its survival is not dependent on expensive brick and mortar branches.  As such, it’s grossly unfair that bank and credit union checking customers are burdened with these branching costs.  Perhaps the future of checking depends on it being uncoupled from the rest of the financial services business that’s evolving and deemed branch-dependent.

Yes, I’m aware that others have been predicting the end of branch banking for years and have been wrong.  Actually, it’s just that their timing has been wrong.  If we’re honest with ourselves, we’ll acknowledge that we’ve entered a new era of rapid changes in both technology and consumer behavior that could mean the end of bank branching as we’ve known it all these years.

What’s important is that you keep an open mind about the possibility.

Just remember the comment made years ago by Upton Sinclair, “It is difficult to get a man to understand something when his salary depends on his not understanding it.”

This content is accurate at the time of publication and may not be updated.