News

Banks on branch bandwagon

After years of playing second fiddle to newer delivery channels like call centers and the Internet, the branch is again a primary focus for banks. What will this mean for the ATM?

July 31, 2003

With large financial institutions like Bank of America announcing plans for hundreds of new branches in the next few years and mainstream publications like USA Today taking note, the message seems to be: "the branch is back."

Actually, it never went away.

(See related stories Industry watchers predict bank branch boom and Poll shows Americans favor bank branches)

Data from the Federal Deposit Insurance Corp. indicates that the number of U.S. bank branches grew 29 percent in the past decade, to 87,209 by the end of 2002.

Jerry Silva, a senior analyst in Tower Group's Retail Banking practice, said that even as banks focused on ATMs in the 1970s, call centers in the '80s and Internet banking in the '90s, customers kept going to the branch.

Ninety-three percent of 4,500 consumers queried by the consulting firm in 2002 had visited a branch in the previous 30 days, Silva said. Even among those who identified the Internet as their primary banking channel, 85 percent had visited a branch in the previous month.

Seventy percent of consumers use two or more banking channels, said Peter Kulik, managing director of Accelera Research. Most popular is a branch/ATM combination, he said.

In addition to adding new branches, financial institutions are expected to step up their investments in existing ones. According to a Celent Communications report, spending on branch technology will reach $3.7 million in 2003 and may grow to $4.4 billion by 2006.

In with the new

Banks are pouring more bucks into existing branches to replace technology that is so outdated it is "virtually obsolete," said Anjalee Davis, an analyst in Celent's Banking Group. "It's very expensive to maintain."

"Technology at some branches is 20 or 30 years old, with some teller stations essentially PCs on OS/2 running 3270 emulation to a mainframe," agreed Silva. "They've reached the point where something must be done."

The renewed emphasis on branches, both old and new, marks a return to banks' retail roots, Kulik said. "Banks are building more business on fee income rather than interest. Most new accounts are opened at branches, so a branch presence helps them open accounts."

Noting that no bank has a truly nationwide presence, Davis said that a few banks -- most notably Bank of America, -- are making bids to establish a national footprint. To claim a national presence, it's particularly important for banks to be in populous, high-profile areas such as New York and Chicago -- two of the cities targeted by BofA.

Until recently, many banks entered new markets through acquisitions. Because the current economy does not favor affordable deals, Silva said that some banks are opting to build new branches instead -- even at Tower Group's estimated cost of $500,000 or more for a five-teller branch.

An advantage to building branches rather than acquiring them is the ability to establish a more consistent technology strategy. It's often tough for banks to integrate the disparate technical systems gained in acquisitions, Davis said.

The ATM effect

So what will this mean for ATMs?

Every new branch will need at least one ATM, and some sites in busy urban centers will get several, said Tony Hayes, director of Dove Consulting's Financial Services group. "As branch expansion goes, so goes ATM sales," he said, noting that Diebold mentioned branch growth as a sales driver in its recent quarterly earnings call.

Some banks are experimenting with branches where ATMs are used for simple services and tellers for more complex transactions. A particularly interesting example of this approach, Davis said, is BofA's Express branches, which allow customers to choose from ATMs, online stations or the telephone to conduct their transactions -- with bank employees on hand to direct customers and answer questions about the different options.

While branches offer the best opportunity for cross-selling, Kulik said that ATMs are also a logical channel for sales because of their high transaction volumes. Noting that 37 percent of all banking transactions occur at ATMs, he said, "Because you have so many transactions, ATMs can be a profitable channel for banks even with a very low take rate."

ATMs can also provide an effective lead-in for a more personal interaction, Kulik said. "You can show the consumer an ad at the ATM, then offer them the option of asking the bank to contact them with more information."

That kind of strategy, Kulik said, would leverage the "symbiotic relationship" between the branch and the ATM.