How Many Bank Branches do we Need in the US?

Finextra published an article yesterday that was also picked up by American Banker and others. The news was twofold: 1. Bank of America announced it enjoys 10 million mobile banking customers, up about 3 million from a year ago - about 43,000 new active mobile customers per week. 2. Concurrent with its swelling ranks of active mobile banking customer, the bank is closing branches and unplugging ATMs. The bank closed 154 branches and eliminated 631 ATMs in Q1, citing the move to online and mobile channels as a contributory factor according to the Finextra article. Celent is not surprized by the branch closure news. As explained in a recent Oliver Wyman report, Branch Flexing: An Agile Approach to Cost Management, April 2012, “to maintain profit levels in the face of a post-crisis and regulatory-reform decline in net revenue of about 32%, US banks would need to increase revenues by 12% a year for the next three years or cut costs by 18% a year, or a combination of the two.” Cost cutting isn’t optional, particularly among larger US banks. Making material cost reductions will require a re-examination of branch networks, which typically contribute between 40% and 60% of a modern retail bank’s costs. Branch flexing refers to a strategic realignment of branch resources (and cost) with customer profitability. Ultimately, branch flexing involves investments in technology, training, culture and compensation. Celent has advocated departure from traditional, teller centric retail operating models for some time. But what about the total number of branches. Is there an argument that the industry has built an unsustainable number of branches, flexing or not? We think so. The argument begins with a simple observation that the US branch density (branches per million inhabitants) has nearly tripled since 1970. Thus, before consumers enjoyed the ATM, telephone banking, internet banking or mobile banking, the industry served consumer’s collective needs with less than 22,000 FDIC insured branches. Do we really need 90, 000 now? We think not. But it’s not so much if they’re needed (The Economist had a great debate about that topic earlier this week), but will they remain profitable? If indeed we’re in a “new normal” of sharply reduced retail banking profitability, than the answer – to one degree or another – is “no”. Celent is developing a more detailed perspective on how many bank branches the US is likely to support over the next ten years. Stay tuned.