Credit Unions Weigh Branch, Digital Investments
For most credit union executives, seeing a member cry is usually a bad thing. But for Kathy Ward, senior vice president of branch operations at Navy Federal Credit Union in Vienna, Va., it was a pleasant part of a recent trip to San Diego – and part of a much bigger picture.
“She was carrying a box of Kleenex, and she was quivering,” Ward told CU Times. “She saw me in a suit; she figured I was somebody from headquarters. She wanted to thank me because the member service representatives in the branch helped her get through a tremendously rough time in her life. She didn't think she could make it through without them. She was tearful, and it was a very moving experience. It was a reminder to me that mobile apps can do a lot, they provide a lot of convenience, but there's still that face-to-face interaction that the mobile devices don't have.”
Scenes like that are more than just gratifying encounters. They’re a major factor in the increasingly tough decisions credit unions make about spending capital on branches in an era when branch transaction activity is roughly half what it was in 1992, according to the FDIC, and check use is barely a third of what it was in 2003.
Digital assets – things like mobile apps, cardless ATMs or bill pay products, for example – are by many accounts the more urgent, much sexier use of capital. But according to an August study by SNL Financial, credit unions keep plowing dollars into branch construction anyway. In fact, the total number of credit union branches rose for a second consecutive year; as of July 30, there were 27 more branches opened than closed in the United States. That may seem like a small number, but it's a big difference from the 241 net branches the industry lost in 2012 and 2013.
Navy Fed, which ranked first in SNL's list of 2015 net openings, has added 13 new branches so far in 2015 and expects to open seven more by the end of the year, Ward said.
One factor may be that digital still doesn't have the critical mass to usurp the power of the $70 billion credit union's branches. Its average traffic today is as strong as it was in 2012, and new branches still attract more members than digital assets do, she said.
“Our decision model in terms of growth, branch network growth and where do we put branches has not changed,” she said. “Our growth strategy is very consistent with where it was three years ago. We believe that the branches complement our digital channel, they don't compete with it.”
Why members are walking into branches has changed, though.
“Like the woman I met in San Diego, they’re coming in for guidance, assistance or education for new products, more on the platform side,” Ward noted.
Fewer transactions and more advisory traffic is forcing some credit unions to reevaluate branch footprints and in turn their capital outlays for construction, however. Both Ward and Tim Gray, CFO for United Federal Credit Union, whose six net branch openings to date this year ranked it second on SNL's list, said new branches will likely be smaller. Vystar Credit Union, a $5.5 billion, 493,000-member credit union headquartered in Jacksonville, Fla., is also cutting teller space. The change will knock about 500 square feet off its typical branch, taking it down to around 4,000 square feet, CEO Terry West said.
But smaller branches don't necessarily save much, Gray noted.
“You may cut down a little bit on your space, but you have to have your mortgage lending officers, you have to have your business lending officers, you have to have what we call member service advisors who kind of run everything else, all of the consumer-type products on the deposit side. They’re all there, so you’re really not saving a ton,” he explained.
Digital assets aren't doing much to reduce costs in other areas either. Bill pay, for example, has become a necessary expense for most credit unions; members expect it – usually for free, making it hard to calculate an ROI on that investment. Many borrowers start their loan application processes digitally, too, Gray added, but many eventually come to a branch because they just want to talk to someone.
“From a transactional standpoint, we’ve seen a slight decrease in the branch, but not significant enough to where we would say, ‘Wow, it's really shifting,’” Gray said. “We’re actually handling more transactions because we’re handling the same level of branch transactions and adding the digital focus on top of it, and so it's a little bit of both. I think the best way to describe it is the digital experience is going to supplement the branch necessity. I really don't think, at least in the short-term future, that one or the other is going to go away.”
United FCU's ratio of brick and mortar spending to digital spending is about 60/40, Gray said.
For Terry West, branch construction costs are akin to marketing costs. Vystar CU has opened 13 new branches since 2012, and West said the credit union's branches still attract more members than its digital offerings do.
“We wanted to bring credit union services to more people,” West said. “To do that, the way you attract them is a branch, frankly, and we find that over and over. We found that once we started opening branches people would see it; our marketing was, ‘I see you, I know you exist.’ It's a marketing presence, in reality, and I’m not sure branches get credit for that all the time.”
The credit union recently opened two branches near its deepest footprint, West said.
“Immediately they were busy,” he noted. “They bring in more members. They do bring some members from existing branches, but then more members, more new people, join at the existing branches. So it's like we keep wondering: Is there a saturation point? We haven't seen that.”
Nonetheless, digital is getting the lion's share of Vystar CU's capital budget.
“If you took the land dollar amount out of it, we probably are investing far more in digital than we are in the building and equipment for a branch,” West explained.
And that's not including cybersecurity – among other things, the credit union has an eight-person information security staff.
“So while digital is wonderful and it's more convenient, I frankly don't look at it as a cost reduction,” he said. “I look at it as an alternative distribution, an access point.”
That's another reason incidents like the one in San Diego may make it harder for credit unions to get off the branch-investment treadmill when the pressure to allocate more and more capital to digital expansion is only getting bigger.
“That voice is always there,” Gray said. “We hear it all the time, but we have to resist that knee-jerk reaction to what the future is going to be. I definitely believe that digital is absolutely going to be a very important part in financial services moving forward. But exactly what it looks like, as much as they want to tell you that everything's going to move 100% there, I’m not buying that.”