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BRANCHING OUT

DEFYING PREDICTIONS THAT THEY WOULD DIE OUT, BANK BRANCHES CONTINUE TO MULTIPLY

By Rodger Brown

These days, retail bankers do more than just count stacks of money. They juggle branding, marketing and real estate, and, increasingly, grind coffee, bag groceries and even mow lawns — all to hold onto the customer as banks and branches proliferate.

“They have to be all things,” said Faith Hope Consolo, chairman of the retail leasing and sales division of Prudential Douglas Elliman Real Estate, New York City. “They're your stock broker, your insurance guy; they sell you mortgages, mutual funds. Some banks are even putting in a Starbucks, a little post office, all this cutesy stuff. Next they'll be running dating services!”

Employees at one of the cutesiest, the 144-branch, Portland, Ore.–based Umpqua Bank, have delivered ice cream and cut grass to promote their new, service-oriented branches, which also sponsor movie nights and yoga classes. Richmond, Va.–based First Market Bank, most of whose 35 branches are located in Ukrop's grocery stores, will cash a customer's check and carry the groceries out to the car.

“Our branches are there to serve our customers,” said Katie S. Gilstrap, First Market's senior vice president and director of marketing. “Banks are trying to differentiate themselves any way they can in what really is a commodity market. For us, it's really about providing an exceptional customer experience.”

Surely, the growth of bank branches over the past five years has changed the way bankers do business. Though slowed by recent turmoil in the industry, the trend's persistence has taken observers by surprise.

In the 1990s brick-and-mortar bank branches were declared dead. ATMs and the Internet were supposed to turn human tellers and over-the-counter transactions into relics. A speaker at a 1996 conference on electronic banking shocked no one when he declared: “Banking is essential to a modern economy; banks are not.”

Customers disagreed, however. The numbers tell the story. In 2003 there were some 70,000 bank branches in the U.S., according to the Federal Deposit Insurance Corp. When the FDIC counted again last June, there were 88,137 stand-alone, brick-and-mortar branches, with an additional 5,137 “full-service retail offices,” that is, branches located inside such retail businesses as supermarkets and department stores.

The steady pace at which branches are being built continues to defy industry watchers. In 2006 The New York Times asked: “Too many bank branches?” Vernon Hill, then-chairman of Commerce Bank, told the paper, “I just think the building frenzy in branch banking is probably nearing its peak.” One year later it was still raging. Taking its turn at the trend-spotting post, The Houston Chronicle last May quoted Paul Murphy, CEO of Houston-based Amegy Bank, who said of the branch spreading: “It's crazy. It's overheated.” Nonetheless, Murphy acknowledged that his own bank planned to add three branches to the 75 they already had. And as recently as last December, The Philadelphia Inquirer reported the same thing in its own market. Last year 58 branches opened there, and 72 more are in the planning for this year. “They are sprouting like mushrooms,” an overwhelmed resident told the paper. “It's just kind of baffling to me.”

Bankers and analysts, though, say the trend makes a certain amount of business sense. Deregulation, mergers and acquisitions, and the proliferation of financial “products” — funds, trusts and investment services — have been factors driving banks to increase their outreach. These changes have transformed the role of the bank branch.

“The branch is becoming much less of a vehicle for transactions and much more a vehicle for selling products and giving advice,” wrote Stephen Timewell, editor in chief of The Banker, a London-based magazine.

The result is that bankers now have to think like retailers. “Their business is now coming from these retail products, these financial instruments,” said Howard Davidowitz, chairman of Davidowitz & Associates, a retail consulting and investment banking firm in New York City. “So now they have to start marketing themselves like retailers. They're on every block, they're competing head-to-head, and they're now trying to find ways to differentiate themselves. They're all competing for footsteps, just like any other retailer. And in order to do that, they have to think through what kind of image they want to project, what message they want to send, and they have to put their stores where the right people are.”

The most important factor in a customer's choice of bank is branch location, according to the Federal Reserve Board. Consolo agrees. “Sometimes, a lot of it has to do with being a billboard,” she said. “Every branch can't be so profitable. There are other things going on, and visibility has a lot to do with it.”

For the sake of this visibility, banks have been paying the highest rents to get the best locations. “My retailers are saying that they can't compete with what these banks will pay,” said Davidowitz. “The banks have been able to pay that rent and still make money. The banks are in a little different position right now. They're going through a major restructuring, but up until now they've been the people paying most for space.”

Ironically, the fallout from the subprime mortgage crisis could further spotlight the role of the retail bank branch. “They're on all these expensive leases,” Davidowitz said. “Now they've got to think about how to maximize the productivity of the spaces they've got.”

Even with all the headlines about write-downs and layoffs at Citigroup, Merrill Lynch and the like, it still seems premature to predict an end to the expansion of bank branches. “We have five branches slated to open this year,” said First Market's Gilstrap. “As far as the banking environment goes, I would say that First Market Bank is strong [and] has ambitious growth plans.”

Even at Charlotte, N.C.–based Bank of America, which in January announced that it would lay off 3,000 employees in its global corporate investment banking unit, the growth of the humble bank branch continues.

“We plan to open 80 to 160 branches this year,” said Diane Wagner, Bank of America's senior vice president of media relations. Wagner points out that Bank of America already has the largest network of stores (5,700) and ATMs (17,000) in the U.S., and she is optimistic about future expansion. “Over the last five years, Bank of America has built about 560 new stores across the country,” Wagner said. “We see significant opportunity to continue to build out in high-growth areas.”

From her office in New York City, Consolo sees the expansion slowing, but not stopping. “I'm sitting here with a dozen offers for a dozen different properties,” Consolo said. “Twelve properties, 12 proposals, each one a bank. My prediction for 2008 is banks, banks and more banks.”