Regarding "Should Branches Be Added to the Endangered Species List" in the May 15 issue: Recently, trade publications have been awash with articles debating the future of the branch.
Some allege that the branch is over and done with. Remote delivery channels have rendered the branch irrelevant. Others say that the branch will remain but in a different form–smaller and with a greater focus on education, information and counseling. A few factors seem to be rarely mentioned in these articles, but these factors play an important role in determining the role of branches in the future of any credit union
The vast number of branches are owned by big banks and are the subject of most trade articles. Keep in mind that banks, particularly the big ones, operate with different motives than credit unions, so decisions made by big banks do not necessarily translate directly into the credit union world.
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There are plenty of articles paralleling the demise of branches with the demise of record stores, book stores and movie rental stores. Admittedly, financial transactions readily lend themselves to automated channels, and we now live in a world in which access to financial services is truly 24/7/365 from anywhere. But consider the differences as you make these comparisons. The relationship between the member and his credit union is unlike the relationship between the consumer and book, record or movie stores. The member-credit union relationship is based on fiduciary trust and confidence. The purchase of books, music or movies is impersonal. In contrast, the purchase of financial products is very personal and consumers still prefer knowing who they're dealing with when it comes to their personal finances.
Credit unions compete in the same arena as banks but often with a very different business model. Accordingly, the information, analyses and outcomes must be filtered by the credit union's business model to make proper decisions. It is imperative for credit union managers to be able to clearly articulate their business model so they can then understand and evaluate the implications of a changing delivery system mix.
A big point that seems often neglected is the mission of credit unions. Banks are compelled by the Community Reinvestment Act to provide some level of service to underserved areas. Credit unions are often chartered and designed for the very purpose of serving the underserved. This mission does not relieve the need to operate in a safe and sound manner, but it frames the credit union's purpose as fundamentally different from most banks. Accordingly, the decisions made by big, for-profit banks may differ greatly from the decisions made by credit unions.
The renewed focus on branching is quite understandable in the context of the financial services market. Transactions are migrating to remote channels, reducing the need for tellers. Net interest margins are compressed to historic lows with no relief anticipated for another couple of years. Noninterest income has been constrained by recent legislation, limiting its contribution to the bottom line. This leaves noninterest expense as the only lever available for managers to use to control financial outcomes. And, since the two biggest noninterest expenses are those for people and place, it seems a foregone conclusion that branches need to go. This reaction ignores the potential for increased sales activity, most of which occurs within the branch. A thorough and honest evaluation of sales culture needs to occur along with branch evaluations before making decisions about keeping or closing branches.
In summary, channel proliferation rather than channel migration abounds, as it has for the past 30 years (roughly since the advent of the ATM). Financial institution mangers, banks and credit unions alike, must evaluate and balance delivery channels with member preference and financial performance. It's as simple as juggling chainsaws. These managers are well-advised to consider the advice of the industry pundits but only within the specific context of their business model, members, and markets. Choices made by a megabank may not be appropriate or relevant for the local credit union. n
John W. Hyche
Principal/Strategic Consulting
Level 5
Atlanta
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