Cornering the Market

It wasn’t too long ago that financial analysts were predicting a serious decline in the number of bank branches nationwide. But electronic banking, while popular, has done little to deter banks from sprouting branches on seemingly every thoroughfare in Western Mass. It’s a national trend, and one that shows little signs of slowing — although some argue that it’s more difficult than ever for a new branch to become profitable.

Drive down any well-traveled, retail-heavy road in the Pioneer Valley, and chances are you’ll have plenty of opportunities to grab some cash at an ATM. Picking up some groceries at Stop & Shop or a pair of pants at Wal-Mart? You can bank there, too.

If ribbon cuttings are starting to feel, well, a little less newsworthy, you’re not imagining it. According to the Mass. Bankers Assoc. (MBA), the number of bank branches in the Bay State has increased 20% over the past 20 years, to more than 2,200 — and rising. The group says banks are the second-leading employer in Massachusetts, behind only health care.

“Some may think, ‘there’s a lot of banks here,’” Bruce Spitzer, a spokesman for the MBA, told the Boston Globe recently. “That’s because there’s a demand.”

Easthampton Savings Bank President William Hogan, whose institution has seven branches in eight communities, said that, from a physical standpoint, Western Mass. has seemingly become overbanked over the last three or four years. “And there are plans for additional branching that have been announced, including the new startup bank in Springfield, Nuvo. On the face of it, you’d have to come to the conclusion that the region has a sufficient number of banks.”

However, he was quick to add, “from a banker’s perspective, there’s a necessity of having a certain number of bricks-and-mortar branches that your customers can find, through which they can do business with you.”

There has definitely been a proliferation of bank branches, nationally and in this region, said David Glidden, regional president of TD Banknorth, which boasts some 30 branches in Western Mass. “And it does affect the competitive landscape and makes it more difficult to differentiate yourself. We all try to do it through extended hours of service, those types of things.”

Some bank presidents have said they sometimes feel pressure to expand their footprint just to keep up with their competitors, but Glidden said there’s always a risk in expansion, because a new branch in such a densely packed field is not the slam-dunk moneymaker it was 20 years ago.

“The real issue is, how do you find profitability? It’s increasingly elusive when you open up a branch, and these branches now opening do not achieve the level of deposits they used to,” he told BusinessWest. “You don’t just build a branch and expect that it’ll quickly turn profitable, when you look across the street and see five other branches.”

That’s why it’s important, he continued, that banks have a strategy for branching out that extends beyond simply having a presence in a new location.

“People don’t change banks easily, and market share shifts more slowly today,” he continued. “You have to offer products and rates on deposits and loans that are maybe more aggressive than other banks, to eat into already-established markets.”

In other words, to think outside the box — while bumping into all the other new boxes. In this issue, BusinessWest examines the overbranching situation, what banks are looking for when they expand, and where the trend might go from here.

National News

It’s not just Massachusetts seeing this increased density. Chicago has witnessed a staggering 50% increase in branches over the past five years, while Manhattan has seen a 41% rise, Washington, D.C. a 20% jump, and Los Angeles a comparatively modest 10% climb. The Washington Post reported that one Chicago alderman became so alarmed by the proliferation that she drafted a law requiring that banks obtain permits to open within 600 feet of one another.

In fact, virtually every major city in the U.S. reports at least some increase in the number of branches, contributing to a total rise of 13% nationally since 2002. It’s not a trend that pleases everyone.

“There’s really nothing less fun or interesting that could populate your retail corridor than a bank branch,” wrote Matthew Yglesias, a popular D.C.-based blogger and Atlantic Monthly staff writer, who added that the underlying dynamics of the branch boom — and particularly reports that customers crave face-to-face contact — escape him, particularly given the expense involved in opening a branch.

“What is the personal contact that people are looking for?” he wrote. “I go into a bank about once a month to deposit rent checks that my roommates write me. Were I not the designated writer of the check that goes to the landlord every month, or had I no roommates, I don’t think I would ever go. My intuition is that the real story here has something to do with the semi-mysterious fact that one almost never sees a bank-affiliated ATM without it being co-located with an actual branch of the bank.”

This tendency toward more locations represents a significant shift in banking. During the 1990s, most larger players were shedding branches, encouraging more use of ATMs and telephone banking, and laying the groundwork for Internet banking, which many analysts felt would ring the death knell on many more branches.

Wade Francis, president of Unicon Financial Services, a Long Beach, Calif.-based banking consultancy, recently told the Los Angeles Business Journal that theories were rife only 10 years ago that electronic banking would contribute to a serious decline in physical branches. “But people still want to go to their local branch, and if you want to be a successful retail banking operation, you’ve got to focus on the branch,” he said.

Part of what has happened is banks recognizing the value of providing one-stop financial services for customers. While checking accounts generate significant fee revenues, banks are prodding their retail customers toward other services, from car and home loans to a range of investment services — all of which is easier to accomplish through a face-to-face relationship.

Plugged In

Still, said Hogan, banks are continuing to develop their electronic-banking services, “because the pace of growth in that arena is far exceeding that in the traditional bank building.”

Hogan said virtually all banks are coming to recognize the increasing importance that customers, particularly younger ones, place on electronic banking. In fact, those with direct deposit of their paychecks and a full range of bill-paying options online might rarely need any services at a physical location beyond an ATM for cash withdrawals, a trend that gives institutions a way to reach customers who might not live or work near an actual branch.

“A lot of what we’re doing is focusing on the alternative opportunities and means by which customers can contact and stay in touch with banks,” he explained. “That’s an area where we’ve seen tremendous growth over the past three years.”

Alice Babcock, vice president of marketing for Westfield Bank, which has 11 branches in seven area communities, concurred. “We’ve found that our customers want both options, and you have to be in a position to offer both,” she said, adding that those in the 18-to-30 age group tend to be most comfortable conducting transactions and paying bills at their computer screens.

Yet, Westfield Bank’s most innovative change recently has also been one of the lowest-tech shifts: Sunday hours at its newest branch on East Main Street in Westfield. James Hagan, the bank’s president, said the change was so successful that the branch wound up opening its doors an hour earlier in the day.

“Young people have become accustomed to doing things in the electronic format, and you have to have that convenience available, but we still have to provide a certain level of service in the bricks-and-mortar branches,” said Babcock. “In both cases, we’re trying to determine what our customers expect in a community bank, and provide that for them.”

Glidden said Banknorth has seen steadily increasing use of electronic banking, “which we’re very pleased about, because it’s been a conscious strategy.” But he pointed to users of Apple products, asking, “who’s more techie than that?” Yet, the computer giant now boasts 180 retail locations that generate $1 billion in revenue per year.

“Although some people think members of Generation Y will never walk into a branch bank, we still find that the branches play a critical role,” he continued. “When the need arises to go into a branch, people will still gravitate toward a convenient, well-placed branch they feel comfortable with, not far from their residence or place of work.”

Past Is Prologue

Unlike a decade ago, hardly anyone today is pointing to the imminent demise of the traditional bank branch.

“These electronic platforms — electronic bill paying, image presentation for checking accounts, all these things beginning to be seen in our market, are very important for the future,” Easthampton’s Hogan said. “But we need a certain amount of that physical presence out there.”

“Convenience is still important to the retail customer,” Westfield’s Hagan added, “and the branch plays a huge part of that.”

But with so little prime territory unmarked by some institution, Glidden reiterated, it’s critical that banks make the right moves, not just any move.

“When you’re opening a branch, you have to ask, what’s my strategy?” he said. “Do you have integrated delivery channels and an effective sales process to make the branch as profitable as possible? A lot of banks have recently converted to mutual banks, to public charter, and have gone out and raised a lot of capital, and this is one way they’re looking to deploy that capital. But the challenge becomes taking what is, on day one, a non-earning asset and turning it into a profitable location for the company.”

Again, Glidden said, a new storefront is “great for the ribbon cutting, but how are you going to make that a profitable asset, with the money it costs in bricks and mortar and human capital? That will ultimately be the great test. The banks that find a unique way to differentiate themselves and distribute their services in a profitable manner will be the survivors of this proliferation.”

Those are words, many agree, you can take to the bank. If only you could decide which one.

Joseph Bednar can be reached at[email protected]