What is the business model for saturation retail banking?

August 22, 2008 7:39 AM

What is the business model for saturation retail banking?

I live in a smallish town (~20,000 people) there are two or three retail banks in each block of our retail district, and more are always under construction. Given the nontrivial costs of opening, staffing, insuring and maintaining a retail establishment, how can these banks make money? Who uses branch offices and why? I understand the business model of banking in general, but how can such a high density of banks be supported by my middle-class town? On the rare occasions I've been in these bank branches there are never any customers in them; customers are easily outnumbered by staff. What gives?

posted by workerant to work & money (11 comments total)

On the rare occasions I've been in these bank branches there are never any customers in them; customers are easily outnumbered by staff.

Unlike most other retail environments, an empty bank is not necessarily a bank that is not making money. Banks make most of their money off of loans and large long term deposits, neither of which are really affected by people physically entering the bank. Some of their most profitable (and therefore wealthiest) customers may do everything online or over the phone and never step foot inside the bank itself.

In my experience, working class people tend to physically go to the bank more often, because they are less likely to have things like direct deposit setup. Those kinds of people are much less profitable for banks, which is why they are much more likely to open a new branch within walking distance of several other banks in a wealthy downtown area rather than in a poorer neighborhood. Payday loans tend to fill that gap, and those kinds of lenders can only be profitable by charging exorbitant fees for their services.
posted by burnmp3s at 8:15 AM on August 22, 2008

My realtor said that banks buy propery and put up branch offices with parking lots as a form of real estate speculation. I don't know if this is true or not.
posted by bdc34 at 8:35 AM on August 22, 2008 [1 favorite]

I wondered this as well when I was in Ocean City, MD this May. There are PNC mini-branches without ATMs every other block that were only open on weekends during the off-season.
posted by djb at 8:42 AM on August 22, 2008

bdc34 - that's the most logical explanation I've heard. I know that an empty bank isn't necessarily unprofitable, but why build a bank that'll be empty?

Can anyone support the real estate speculation theory?
posted by workerant at 9:18 AM on August 22, 2008

In Canada -- where there are only a few major banks, each with many branches -- there was a substantial contraction in the number of branches after the introduction of ATMs and debit cards. Lately, however, the banks have been putting up new branches left and right. Friends of mine in the financial services industry say that these new locations are necessary in order to sell higher-margin banking products (loans and mortgages, sure, but also mutual funds and other investment products).
posted by onshi at 9:35 AM on August 22, 2008

As for real estate speculation, why bother putting up a branch? There must be some value to the bank of actually opening another branch, otherwise there's no need to develop land held for speculative purposes.
posted by onshi at 9:37 AM on August 22, 2008

Have you been to these banks on Friday afternoon? If it's full at the busiest time (cashing the week's paycheck), it may be justified even if it's empty every time you go in.
posted by smackfu at 9:40 AM on August 22, 2008

I know that an empty bank isn't necessarily unprofitable, but why build a bank that'll be empty?

Because most people, even people who do 99.99% of their banking online and never actually enter a branch, still choose which bank to open their checking account at based on what bank is closest to their home or work. I do almost everything online, have only visited the actual bank once in the two years I've been living in my apartment, and I still wouldn't open an account at a bank that didn't have a branch in my neighborhood. It sounds kind of stupid, but my thought process is that there may be some point where I need to visit an actual human to work something out, and since every bank offers pretty much the same deal (free checking is always available without jumping through too many hoops), why not hedge my bets by going with the bank with the closest branch?

Of course, once you have a checking account at a bank, it becomes much easier for them to sell you other, more profitable services. I have a credit card through my bank, since they offered it to me when I first opened the account and I'm lazy and there are worse set-ups than having all your accounts in one place online, so why not? I'm sure when I eventually scrape up enough money for a down payment on a house, I'll certainly look at that bank as one potential place to get a mortgage. And so on and so on.

Retail branches are kind of like spending money on television commercials for advertising: not necessarily profitable in and of itself, but it's a way to get a bunch of customers in the door for the first sale.
posted by iminurmefi at 9:50 AM on August 22, 2008 [1 favorite]

Deposits, deposits, deposits.

Deposits are incredibly profitable for banks. Better yet: not only do branches attract lots of local deposits (iminurmefi suggests), they also attract the most profitable deposits: people who value convenience more than interest rate or fees.

And your town has much, much more cash than you think. A town of 20,000 can easily amount to $1 billion in deposits; if it has a healthy business district and is the base of companies that provide services to the surrounding smaller towns and rural areas, $2 billion wouldn't be hard to reach. Get 5% of that volume, and given that branches have low operating costs, and you make $$$$.

Branches are becoming more important now, not less, because (a) the securitization markets and other sources of non-deposit funding are hard to come by for banks and (b) the upward spiral of out-of-network ATM fees has made people ever-more-interested in banking with the banks with the closest and most dense branch network.
posted by MattD at 12:43 PM on August 22, 2008

If you don't believe me about deposit volume, check out the FDIC site. Be sure to enter each of your town's zip codes if it has more than one.
posted by MattD at 12:51 PM on August 22, 2008 [1 favorite]

I'm seeing several new suburban shopping centers going up near me each with multiple bank branches. Some of the banks (looking at you, Chase) have two branches across the street from each other. Others (Chase again, and BofA) are building branches within a mile or two of existing branches.

I suspect that in addition to dealing with the Friday traffic jam, there is some logic in providing convenience for the merchants who make deposits into these banks. It's easier for them to take the day's "take" to a branch in the same shopping center instead of driving to one a mile or two away, especially through heavy suburban traffic. Competitive pressures lead to having four (or is it five?) competing banks in the same shopping center.
posted by Robert Angelo at 1:47 PM on August 22, 2008