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Core Deposits Needed: Build Branches Or Close Them?

In the face of rising expense pressure and the continued need for low-cost deposits in a ‘higher-for-longer’ rate environment, all banking institutions in 2024 will struggle with the question of what to do with their
branch networks.

The structural factors that have driven the industry to eliminate 15% of branch capacity over the last seven years continue unabated. Transaction volumes keep declining and branch-based acquisition of new customers has also been on the slide. Digital customer acquisition, envisioned as a savior, has not lived up to its promise, as relationship quality (even adjusted for demographics) is significantly lower and banks are in a never-ending game of cat and mouse with fraudsters.

In the face of these structural challenges, money-center banks continue to announce branch openings, like Wells Fargo’s expansion in Chicago and Chase’s multi-year push into all of the 48 contiguous U.S. states. At the same time, de novo builds by most regional banks have grown not nearly fast enough to justify the investment, and after two years of accelerated closures through the pandemic, most of the regionals hesitate to close more branches for risk of running off even the slightest amount of core low-cost deposits.

All of this said, standing still is not an option. The answer to “What do I do about my branch network?” is to take action market by market.

Let’s Bust A Couple Of Major Myths

While the biggest banks have unmatched resources – national brand awareness, exceptional digital capabilities, large capital budgets, etc. – it’s important to bust the myth that they’re growing their branch networks. In fact, the three nationwide banks are running at an annual net branch decline of 3% over the last five years (Figure 1). The reality is their de novo expansion is largely focused on markets where they have no or limited presence, while in markets where they have significant branch density, they continue to harvest the network.

Figure 1: Branch Count Trend, 2018–2023

While they announce new branches in thin markets, the national banks are reducing their branch count at a rate similar to the super-regionals and regionals
Source: Curinos BranchScape, FDIC; National includes Chase, Wells Fargo and BofA, Super Regional >300 Branches, Regional 75-300 Branches, Super Community 10-75 Branches, Community 2-10 Branches

Another myth is that it’s impossible for a de novo branch to hurdle the necessary growth rate. While this is more often true than false, it’s not always the case. The key for banking institutions is to recognize that the Field of Dreams model of “build it and they will come” has long passed. Running the same trade area-based play that worked in the past is unlikely to yield success today. Banks need to have a very clear view of how a de novo branch fits into their approach for winning in a particular market.

A market-based strategy for 2024 starts with a clear understanding of how each of how each of the five ingredients of a market strategy come together to drive success. These ingredients are: clear target segment(s), a compelling value proposition, and a mix of investments in pricing, marketing and distribution (Figure 2). Even within these investment domains, there are more granular investment decisions to be made like marketing channel/tactics and distribution assets including branches, ATMs and sales force.

Figure 2: Ingredients for a Market-Based Branch Strategy

Source: Curinos Analysis

For many regional banks in their “hometown” markets, there’s still the opportunity to reduce branch presence in line with customer behavioral shifts. Each branch closure, however, reduces the customer acquisition level the bank is able to achieve in the market. In order to grow the customer base, the institution must invest in marketing to drive increased levels of customer acquisition. If not, a bank risks shrinking the customer base. In fact, in many hometown markets, the bank has already consolidated branches to an extent that the households per branch are significantly higher than in other markets, yet acquisition performance is compared on the same basis across the network. In some cases, banks aren’t acquiring enough new customers to outpace the natural attrition from moving, marriage and mortality.

When attempting to win in markets with a “thinner” branch presence, it’s important to realize that you’re unlikely to win using the same play that you run in a hometown market. In thinly branched markets, it’s even more important to have clarity on the target segment(s), and a value proposition that will allow you to win with that segment. Top-performing thin-market plays have typically focused on a segment (e.g., Affluent/HNW or Business/Commercial).

Playing Offense In Some Markets,
Defense In Others

Alternatively, some institutions have leveraged their thinly branched networks as “funding” markets, gathering deposits through aggressive pricing while maintaining more defensive pricing in hometown markets to manage their aggregate cost of funds. While there is a temptation to build additional branches in thin markets, it would often require a significant number of builds to achieve the necessary scale to run a hometown play. Unless you already have a high-performing model working in your thin markets, additional de novos are unlikely to perform better. A bank would be better off leveraging marketing aimed at its target segment(s) to drive new customers into its existing branch network or to leverage price.

Entering new markets presents an interesting opportunity for de novo branching. As described above, some banks have used new-market entry as an alternative funding play to launching a direct bank. They’re opening one or two branches in a market to provide access (not necessarily convenience) combined with aggressive pricing to drive deposit growth. One challenge that banks have yet to overcome in this model is achieving core relationship growth.

Driving alignment of your strategy on a market-by-market basis in 2024 is the best way to optimize scarce resources across pricing, marketing and distribution. While often not considered so, all of them are just different forms of expense, albeit with varied accounting treatment. Too often banks “peanut butter” their investments across all markets, which leads to suboptimal results. In some cases, banks aren’t leveraging market-based pricing and in others, acquisition marketing campaigns are indifferent to the market situation.

Making tough decisions on where not to invest is as important as deciding where to invest. Aligning network decisions (consolidate, relocate, renovate and de novos) with other investment decisions and LOB priorities will increase the likelihood of strong financial outcomes in the coming year.

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