The one clear fact in the raging debate about the role of branches for credit unions is that the voices are getting louder on both sides, with some insisting that clinging to branches is strangling the industry’s profitability while others say that the personalization is what makes credit unions different.
Experts have been predicting the death of the branch at least back to the recent economic downturn in 2008, but hard numbers provided by Parth Kapoor, industry analyst at Callahan & Associates, show a drop of exactly 406 net credit union branches from 2008 to 2012. That’s around a 2% decline from 21,401 branches industrywide in 2008 to 20,995 in 2012.
And yet something is happening because from 2011 to 2012 there was a net decline of 434 branches, which some experts point to as a sign of growing impatience with branch networks.
For good reason. Right now is a moment for pervasive uncertainty about the future of branches because good points are made on both sides.
On one side there is banking futurist and bestselling author Brett King, who is adamant that a wholesale reduction in expensive branches will be necessary for institutional survival as more consumers abandon branches in favor of mobile banking. He insisted that “20% of branches are unprofitable; they will close within three years.”
He added that, by his numbers, in branch transaction activity had dropped by 50% since 2000. “We will lose 30 to 50% of branches by the early 2020s,” that is, within a decade, said King.
Then there is the other side, articulated by Aite analyst Ron Shevlin, who authors the blog, Snarketing 2.0. “This is just a plain stupid argument. There will be branches as long as financial institutions make money from them,” he said.
In Shevlin’s view, branches remain integral to the success of most financial institutions. “There are reasons financial institutions still invest in branches. Most of their consumers go in at least a few times a year.”
Yes, Shevlin acknowledged, a lot of transactional activity like deposits and cash withdrawals can be easily switched to lower cost channels such as ATMs and mobile phones, but when consumers are executing trust documents or taking out a new mortgage or shuffling retirement accounts, most still like to do these complex chores face to face with a financial services professional.
Also, Shevlin said, “Having a branch in a community signals that the institution is committed to the area. That’s important. Without branches, the financial institution had to spend a tremendous amount on advertising, as ING did.” He is adamant that branches will 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 livings revolve around commercial real estate. They definitely have opinions about branches.
Joe Brady, an executive with Jones Lang LaSalle’s Corporate Solutions, a leader in commercial real estate, offered a perspective. “The death of the branch is exaggerated. But branches will change in size and what they do. This will be driven by technology.”
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 or smaller. “Tellers,” he added, “are cost centers. The days of a teller line are over.”
w“Banks need to think more like retailers,” said Brady. He also urged financial institution leadership to pursue flexibility in their real estate portfolio, eschewing long-term leases where possible and coming up with scenarios for disposing of locations that may no longer be needed as yet more banking shifts to DIY high-tech channels. These shifts may happen very rapidly and no institution wants to be saddled with high cost real estate it does not need but that it can’t dispose of.
Will Weidman, a vice president with Applied Predictive Technologies, stressed that it is not just the rise of new technologies that is driving the flight from branches, it’s also that the institutions themselves are faced with constrained margins that don’t allow a lot of give to cover high operating expenses. This is pushing financial institutions to try to route more traffic to lower cost channels, such as mobile and online banking, and that cost efficiency trend is unlikely to soften because, if anything, most experts see competition in financial markets toughening as pressures erode fee income without any significant growth in interest income.
Even so, Weidman said: “Branches will not go away completely. That’s been talked about since ATMs came out, and it hasn’t happened But there will be a lot of changes in branches over the next 5 to 10 years.”
Yet another vote for the transformation but not extinction of branches came from Eduardo Alvarez, NewGround managing director of Brand and Retail Strategy. “Branches will exist in 10 years. But they will be smaller and perform different functions.”
That, not the imminent closing of most branches, may be the big takeaway and the related message is that savvy credit union executives already are well along in their experimentation with new branch 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, he said, “The futurists are right. We will serve more members through electronic channels.”
Poulos said he is committed to opening are new style branches. He is especially pleased with 800-square-foot mini branches he has been opening in supermarkets. “We are looking for more locations,” he said. “They are profitable for us”. But he said the industry has to ride a trend where the people who come into branches are looking for advice, not to do transactions. “In the branches, we can’t just be a transaction provider. We have to offer advice and information that improves people’s lives. Do that and people 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 in a counseling focused branch.
One reality that many are beginning is that branches will still be needed. They just will be different. But they will be part of the financial services landscape for some years to come.
“People will go to branches to hang out, to learn more about their financial lives,” said Alvarez, who said that the desire to do this is “baked into the American psyche.”