The Rundown

• Some insist that branches are strangling the industry'sprofitability.
• Others say that personalization is what makes credit unionsdifferent.
• Commercial real estate firms take a keen interest in thedebate.

The one clear fact in the raging debate about the role ofbranches for credit unions is that the voices are getting louder onboth sides, with some insisting that clinging to branches isstrangling the industry's profitability while others say that thepersonalization is what makes credit unions different.

Experts have been predicting the death of the branch at leastback to the recent economic downturn in 2008, but hard numbersprovided by Parth Kapoor, industry analyst at Callahan & Associates,show a drop of exactly 406 net credit union branches from 2008 to2012. That's around a 2% decline from 21,401 branches industrywidein 2008 to 20,995 in 2012.

And yet something is happening because from 2011 to 2012 therewas a net decline of 434 branches, which some experts point to as asign of growing impatience with branch networks.

Confused?

For good reason. Right now is a moment for pervasive uncertaintyabout the future of branches because good points are made on bothsides.

Also Read:

Brett King onthe Death of the Branch

On one side there is banking futurist and bestselling authorBrett King, who is adamant that a wholesale reduction inexpensive branches will be necessary for institutional survival asmore consumers abandon branches in favor of mobile banking. Heinsisted that “20% of branches are unprofitable; they will closewithin three years.”

He added that, by his numbers, in branch transaction activityhad dropped by 50% since 2000. “We will lose 30 to 50% of branchesby the early 2020s,” that is, within a decade, said King.

Then there is the other side, articulated by Aite analystRon Shevlin, who authors the blog, Snarketing 2.0. “This is just a plain stupid argument. There will be branchesas long as financial institutions make money from them,” hesaid.

In Shevlin's view, branches remain integral to the success ofmost financial institutions. “There are reasons financialinstitutions still invest in branches. Most of their consumers goin at least a few times a year.”

Yes, Shevlin acknowledged, a lot of transactional activity likedeposits and cash withdrawals can be easily switched to lower costchannels such as ATMs and mobile phones, but when consumers areexecuting trust documents or taking out a new mortgage or shufflingretirement accounts, most still like to do these complex choresface to face with a financial services professional.

Also, Shevlin said, “Having a branch in a community signals thatthe institution is committed to the area. That's important. Withoutbranches, the financial institution had to spend a tremendousamount on advertising, as ING did.” He is adamant that brancheswill be around for some years to come.

There's a lot of high stakes tea leaf reading about branches.And none more frantically than among the executives whose livingsrevolve around commercial real estate. They definitely haveopinions about branches.

JoeBrady, an executive with Jones Lang LaSalle's CorporateSolutions, a leader in commercial real estate, offered aperspective. “The death of the branch is exaggerated. But brancheswill change in size and what they do. This will be driven bytechnology.”

He firmly predicted that, very quickly, branches are shrinking,from a norm of 3,500 to 5,000 square feet to 1,500 square feet orsmaller. “Tellers,” he added, “are cost centers. The days of ateller line are over.”

“Banks need to think more like retailers,” said Brady. He alsourged financial institution leadership to pursue flexibility intheir real estate portfolio, eschewing long-term leases wherepossible and coming up with scenarios for disposing of locationsthat may no longer be needed as yet more banking shifts to DIYhigh-tech channels. These shifts may happen very rapidly and noinstitution wants to be saddled with high cost real estate it doesnot need but that it can't dispose of.

Will Weidman, a vice president with Applied PredictiveTechnologies, stressed that it is not just the rise of newtechnologies that is driving the flight from branches, it's alsothat the institutions themselves are faced with constrained marginsthat don't allow a lot of give to cover high operating expenses.This is pushing financial institutions to try to route more trafficto lower cost channels, such as mobile and online banking, and thatcost efficiency trend is unlikely to soften because, if anything,most experts see competition in financial markets toughening aspressures erode fee income without any significant growth ininterest income.

Even so, Weidman said: “Branches will not go away completely.That's been talked about since ATMs came out, and it hasn'thappened But there will be a lot of changes in branches over thenext 5 to 10 years.”

Yet another vote for the transformation but not extinction ofbranches came from Eduardo Alvarez, NewGround managing director of Brand andRetail Strategy. “Branches will exist in 10 years. But they will besmaller and perform different functions.”

That, not the imminent closing of most branches, may be the bigtakeaway and the related message is that savvy credit unionexecutives already are well along in their experimentation with newbranch formats.

A case in point is offered by Michael Poulos, CEO of Lathrup Village-based Michigan First, a$636 million institution that presently has nine branches. But,predicted Poulos, in 10 years that number will double. Yet, hesaid, “The futurists are right. We will serve more members throughelectronic channels.”

Poulos said he is committed to opening are new style branches.He is especially pleased with 800-square-foot mini brancheshe has been opening in supermarkets. “We are looking for morelocations,” he said. “They are profitable for us”. But he said theindustry has to ride a trend where the people who come intobranches are looking for advice, not to do transactions. “In thebranches, we can't just be a transaction provider. We have to offeradvice and information that improves people's lives. Do that andpeople will still come in.”

“You have to be careful whom you staff branches with,” he added.That is, not every transaction-oriented teller is suited to work ina counseling focused branch.

One reality that many are beginning is that branches will stillbe needed. They just will be different. But they will be part ofthe financial services landscape for some years to come.

“People will go to branches to hang out, to learn more abouttheir financial lives,” said Alvarez, who said that the desire todo this is “baked into the American psyche.”