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Curinos Perspective: Competitive Forces Are Driving Different Decisions About Networks

This article features a contribution by experts at Adrenaline, which has joined forces in a partnership with Curinos to bring industry insights and strategic counsel to banks and credit unions.

Economic news, almost daily, indicates the higher-for-longer rate cycle will persist and, with it, continuing competition for deposits, elevated cost of funds and compressed margins. As a result, financial institutions are under pressure not only to reduce expenses but also to grow core customers and the low-cost deposits that come with them. 

To respond, FIs are undertaking different approaches. Some are once again harvesting their branch networks to achieve needed expense reductions, while others are investing in branch builds to grow their customer base in new communities. 

While It may seem counterintuitive, banks are opening new locations in some markets even as they continue closing branches in others. At the same time, physical footprints are shrinking as many financial institutions reorient their branch focus toward advice and guidance, which influences consumer choice and drives deposit growth and wallet share.

It’s no surprise that since the pandemic the larger banks have reduced their networks the most. National and regional banks generally have more scale in individual markets and can therefore consolidate locations while still providing their customers with an adequate number of access points. Community banks and credit unions, on the other hand, don’t have the luxury of scale to allow them to reduce their already limited access points. Instead, many have expanded their networks modestly even as they’ve increased their pursuit of digital channels (Exhibit 1).

Exhibit 1: Retail Branch Count Change
(CAGR 2019-2023)

Source: Curinos BranchScape

More recently, strategies even among the larger national and regional banks have diverged. Most are continuing to focus on harvesting, but some are shifting to a blended approach of harvesting in densely branched markets while investing in new ones or those that are thinly branched. These new investments may seem at odds with current market trends – branch density is no longer the driver of customer acquisition that it used to be, having given way to marketing and brand. But the connection between branch density and unaided awareness is still a strong. Without enough bank branches in a market, FIs will find it difficult to have the brand presence they need for prospective customers or members to consider them for a new banking relationship. And without sufficient awareness, middle- and lower-funnel marketing tactics such as digital display and direct mail can be extremely inefficient.      

The combination of community banks and credit unions continuing to build branches and some of the larger banks investing in new markets is leading to a renaissance in branch design and construction – along with two-for-one consolidations and relocations. Despite the net reduction in bank branches overall, competition for the best sites remains high, and for good reason. Branches act as an extremely important “billboard” that shows that a bank or credit union is in the market. To drive the maximum number of impressions, branches need to be located where people are leading their day-to-day lives. And especially with the decline of the branch’s  functional needs, such as teller-  and other simple-service transactions, the importance of brand building and advice-centered discussions increases.  

For illustrating the difference in aggregate impressions between high- and low-visibility locations, the Philadelphia market is a representative case in point. Mobile geo-location data show that the top 20% of branches capture 55% of the mobile phone visits near their locations while the bottom 20% capture only 2% of the visits near theirs (Figure 2). And equally important are branch signage and lighting to ensure the maximum number of eyeballs notice the branch at any time of the day or night.

Figure 2: Branch Near Visits By Quintile - All Market Branches, Philadelphia

Source: Curinos NovaLocation

Well-considered interior design is also an important element of any bank expansion and needs to reflect the evolving needs of customers. With transaction volumes continuing to decline, teller windows and other areas for transactions, for example, can be reduced. At the same time, sufficient space needs to be set aside for private conversations focusing on advice and guidance, and with many banks operating branches at minimum staffing levels, space plans need to account for role flexibility.

Branch partners also need to be considered, whether they be business bankers, mortgage bankers or private bankers. While these roles are increasingly mobile, they also require space for private consultations. The challenge is to create space for this mobile sales force without having the branch look empty and forlorn.  

Despite the fact that the U.S. market remains over-branched relative to others, continued investment in new branch builds is likely, even as aggregate branch count continues to decline because of branch-density reductions of the large players and the impact of M&A. To serve the diverse needs of their customer base, these evolving networks will include fewer branches, but they’ll be much more visible and come with more cross-LOB and specialist representation.

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