Why branch building (sometimes) makes sense

Why branch building (sometimes) makes sense. Image by Vectorpocket,
Written by Bob Meara

Are plans for bank branch building nonsense? As usual, the reality is more complex, says Bob Meara.

The Italian cruise ship Costa Concordia capsized and sank after striking an underwater rock off Tuscany in January 2012, resulting in 32 deaths. The ship, carrying 4,252 people, was on the first leg of a cruise around the Mediterranean Sea when the disaster struck. Did the captain of the Costa Concordia care about the average depth of the ocean when he ran his ship aground? Probably not. What he should have been more aware of was the depth under his keel while deviating from his planned route.

Industry reports (including many of Celent’s) make lots of ‘average depth of the ocean’ observations. They are relevant and important … sometimes. In retail, for example, there have been an abundance of headlines trumpeting the growth of digital commerce alongside struggling same-store sales at brick-and-mortar locations, hence the store closings, many say. But alongside these overall trends are localised bright spots. Dick’s Sporting Goods, for example, announced strong sales growth and plans to add 43 new stores this year.

Considering the growth in digital commerce (average depth of the ocean), the move is nonsense. A more surgical analysis considering market-specific shopping trends tells a different story, and justifies the build.

In retail banking, everyone knows branch footfall has been in decline, along with teller transaction volumes, and everyone knows why. Considering these (average depth of the ocean) observations, plans for new branch building is nonsense. More than one analyst and futurist has repeatedly taken this position, but as is usually the case, reality is more complex.

The branch boom in the US has been at the hands of large banks. A historic look at the number of bank branches by asset tier makes this clear. Celent published a report on the topic in 2013 that predicted a steep decline in branch density – something that’s now under way.

Bank branches by asset tier. Source: FDIC, Celent analysis.

Source: FDIC, Celent analysis.

But, the decline will not be uniformly felt across the asset tiers. In a May 2017 survey of Celent’s Branch Transformation Research Panel, we found that a significant majority of smaller institutions (those with assets less than $10bn) are planning to increase the number of operational branches over the next two years – just the opposite among larger banks.

Expected branch count in two years. Source: Celent Branch Transformation Research panel, May 2017, n=39.

Source: Celent Branch Transformation Research panel, May 2017, n=39.

Still not convinced that branch building sometimes makes sense? Kronos published its 2017 FMSI Teller Line Study. FMSI, acquired by Kronos in 2016, provides cloud-based workforce management (WFM) solutions to small banks and credit unions. One aspect of the value it provides clients is monthly benchmarking (since it hosts all the data for its clients). One noteworthy item in its 2017 study is the continuous measured decline in average monthly teller transaction volume from 1992-2012. More recently, however, transaction volume trends have reversed. In community banks and credit unions, the trends have been modestly upward over the past several years.

Average branch monthly volume, teller transactions. Source: 2017 FMSI Teller Line Study

Source: 2017 FMSI Teller Line Study.

Never mind average ocean depth, many US community banks are navigating very different waters than the big banks, and they’re planning to build branches.

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– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Image by Vectorpocket,

About the author

Bob Meara

Bob Meara is a senior analyst with Celent's banking practice. His research focuses on branch and ATM delivery channels, customer analytics, and check and cash payment processing technologies.

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