Bank Branch Buildup Headed for a Slowdown

Customer service is likely to suffer, giving community banks an opportunity to shine.

By Renuka Rayasam, Associate Editor, The Kiplinger Letter

January 23, 2009

For years, even as the number of U.S. banks shrank, bank branches proliferated. Not anymore. With banks facing uncertain futures, both their numbers along with their neighborhood outlets will dwindle. "Economic conditions have created a retrenchment in building new branches," says Jane Crossan, vice president in the financial services group at Nielsen Claritas, an outfit that tracks bank statistics.

That makes getting face time with your banker tough. "In the near term you are going to see customer service go downhill," says Charles Wendel, who heads Financial Institutions Consulting. "The larger banks are more focused on selling products, so if you do have a trusted relationship with an adviser, that may be gone or stressed because they have to do more."

Banks will increasingly turn to technology, substituting services offered via the Internet and telephone for personal contact. And they'll be automating more functions. Most business owners will no longer be assigned a personal banker. Instead, they'll get an 800 toll-free number to reach a banker that deals with hundreds of clients. "Bankers will be less responsive in terms of getting questions answers and issues resolved," says Wendel. Some banks are sending check scanners to small business customers, allowing them to skip a visit to a branch office. Teller machines are being made more sophisticated to accept foreign currencies and checks in bulk.

A growing population created a run-up of branches over the past few years, Crossan says. At the end of 2008, there were 106,041 branches of all types of deposit-taking institutions -- credit unions, community banks and major financial companies -- up from 103,039 in 2007 and 102,101 in 2006. "As late as the fourth quarter 2007, banks had concrete plans to keep building branches," says Bob Meara, senior analyst at Celent, a bank-consulting firm.

But banks under financial strain are cutting workforces, closing poorly performing branches and shifting personnel. Because branches take two to three years to break even financially, adding outlets drains limited resources. And a younger generation of bank customers isn't relying on physical locations, says Meara. By 2010, branches will see 150 transactions per day, down from 350 in 2002, he says.

Banks aren't signing branch leases at as a fast clip after years of robust expansion, and they're getting rid of many of their existing ones. Areas most affected will be those hit hardest by economic woes, joblessness and bank mergers. "Branches will continue to follow populations and markets are declining because people are leaving certain areas for others," says Crossan.

Businesses in rust belt areas like Michigan, Ohio and western Pennsylvania will see personal service suffer. Plus bankers and branches in merger-affected areas will be downsized. PNC is selling 61 branches in Pennsylvania as part of its deal to buy National City. Similar deals between Washington Mutual and JP Morgan, Wachovia and Wells Fargo and other big mergers on the horizon are creating overlapping networks.

The situation is an opportunity for community banks to distinguish themselves, playing up the personal touch rather than emphasizing the absolute best bargain. With an average of five branches, they will be more likely to stick with existing operations. "They are located in small towns and rural areas and don't need alternative delivery systems," says Camden Fine, who heads the Independent Community Bankers Association. "Kiosks and mobile banking -- that's just too impersonal."

For weekly updates on topics to improve your business decisionmaking, click here.