Banking on fewer branches

Financial institutions look to ATMs, online transactions, and nontraditional locations to keep costs down and customers happy

By Todd Wallack
Globe Staff / December 6, 2009

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For generations, banks have relied on a simple way to grow: Build more branches.

But with the recession shrinking profits, banks are increasingly focusing on cheaper ways to serve more customers, and in the process are speeding along the evolution of finance from bricks to clicks. Banks are upgrading automated teller machines to handle more types of transactions, and their websites too are more robust.

Mobile banking? There’s an app for that. Citibank and other banks offer customers applications that will allow them to access their accounts and conduct transactions over cellphones, personal digital assistants, and other small screen devices. A few banks will even let customers scan their own checks at home or work and deposit them electronically from their computers.

Some are also rolling out kiosks in malls or other locations, at which customers will be able to talk to bank officers remotely through video conferencing terminals.

And bank branches themselves are changing. Smaller branches inside supermarkets have become so popular - and such an accepted part of the banking landscape - that institutions are looking for the next place to meet up with customers.

Citizens Bank, for example, opened its first branch inside a Dunkin’ Donuts in Bellingham.

“We want to be truly convenient for customers,’’ said Martin Bischoff, Citizens’ vice chairman of consumer and business banking.

Though the banking industry remains intensely competitive - small institutions throughout New England are continuing to expand into neighboring markets - the building boom in branches appears to be over.

Over the past year banks opened just 382 new offices in the United States, down from an average of 2,300 a year in the five previous years, according to the Federal Deposit Insurance Corp.

“It’s our feeling that branch-count decline is more than inevitable,’’ said Bob Meara, an analyst at Celent, a Boston research firm that focuses on the financial services industry.

The reason is that the explosive popularity of debit cards, ATMs, direct deposit, and electronic banking in general means customers rarely have to go inside a bank branch to do their normal business. One way to measure this is through the decline of traditional paper checks. According to the Federal Reserve, Americans wrote 18 percent fewer checks in 2006 than they did three years earlier.

Tough finances are also forcing banks to cut costs, with branches being an obvious big target. Bank of America chief executive Kenneth D. Lewis recently told analysts the bank is considering reducing its branches nationwide to become more efficient and boost profits. It has closed 11 of its 297 branches in Massachusetts over the past year. But it also plans to add new branches, said Bank of America executive Susan R. Faulkner, who estimated the overall number of branches would remain flat over the next few years.

But some in the industry like to paraphrase humorist Mark Twain and say the death of branches is greatly exaggerated. For one, bank executives said that branch locations remain the top factor customers use to decide where to bank. That makes it difficult for banks to close branches without losing customers.

Indeed, despite all the electronic tools available to customers, some bank executives say their branches are as busy as ever.

“We haven’t seen any declines,’’ Roy Lever, managing director of retail banking for Sovereign Bank, which has 230 of its 723 branches in Massachusetts. “As we start to grow various channels, it doesn’t necessarily lead to a dramatic drop in transactions in one channel versus another. What happens is that consumers just use you in more ways.’’

Lever said analysts have been predicting the demise of the bank branch since ATMs were invented decades ago, yet the number keeps growing. Indeed, Lever said he thinks the only reason the growth has stalled recently is because the poor economy has made it harder for banks to pay for new branches. He said a new branch can cost as much as $4.5 million to build, and hundreds of thousands of dollars a year to operate.

Still some banks don’t anticipate putting money into new branches as they expand. For example, Citibank intends to increase its presence in Massachusetts - where it has 31 branches - but is considering using online banking, ATMs, and kiosks to attract new customers instead of adding new branches, its chief executive, Vikram Pandit, told the Globe last month.

Already banks such as Danversbank help business customers with “remote deposits’’ by allowing them to scan checks and deposit them electronically. Generally banks require these customers to use special scanners that can process many checks quickly and have additional security measures. Banks sell them for anywhere from $100 to $1,000. Danversbank said one-third of its business customers use the technology to deposit checks.

USAA Federal Savings Bank, a San Antonio-based online bank with 4.5 million customers, has let all its customers scan checks with a conventional flat-bed scanner attached to home computers for three years. In August, it let customers with iPhones take pictures of their checks with the device’s built-in camera and deposit them electronically. And it plans to support more smartphones in coming months.

While institutions such as Danversbank are reluctant to open up scanning to all customers for fear of fraud, USAA Federal said 30 percent of its deposits are coming in via scanner and another 4 percent via iPhone.

“It’s far exceeded our expectations,’’ said Jeff Dennes, executive director at USAA. “We are utilizing technology rather than spending billions of dollars building branches.’’

Todd Wallack can be reached at twallack@globe.