Here Is Some Insight If Your Bank Should Open Or Close Branches?

There are approximately 94.5 thousand branches in the United States, which on a per capita basis, puts us in the middle of the global pack. China and India, of course, are very underbanked by that measuring stick, while Spain and Italy are extremely overbanked. When it comes to states, Puerto Rico is underbanked with more than nine thousand people per branch, while Iowa is the most overbanked state at basically one branch for every thousand persons.

In 2014, we lost 1.5% of our branches, with Pennsylvania losing the most. In fact, Rhode Island was the only state to actually gain net branches. Most all other states lost branches, with the biggest percentage drop occurring in Puerto Rico followed by D.C. (yes, we realize neither of these are states, but we are simplifying here). You can see on the accompanying table the breakdown for each state.

So what can be gained from this popular metric in banking? Our answer is very little. Because there are so many other factors in banking, there is very little correlation to the number of branches per population and bank profitability. If you are looking for predictive factors, net population growth, immigration, net household wealth, business formation, number of companies with over 50 employees per branch and a host of other metrics all have much more predictive power when it comes to where you should put (or close) your next branch.

Of course, it gets more complicated, as it also matters what products you carry and what the openness is for a particular area to use said products. While we will cover this more in depth in the coming weeks, banks want to not only have profitable products, but match them to the demographics of an area. San Francisco or Salt Lake City, for example, are the most profitable places to open a branch if you plan on carrying cash management, wealth management and ACH. However, both areas are not that good if you just plan on offering deposit and mortgage products (at least not in 2015).

All this said, we do have a simple rule of thumb. If you are thinking about opening up more branches our most likely advice is don’t. The calculus of banking has changed when it comes to branching and your electronic delivery channels are now much more important to where you put your next branch. Investing in a good website, mobile/wearable application or multi-state business line will likely be multiple times more profitable than going the de novo branch route. We are speculating here, but our guess is that the breakeven of a new branch is now likely greater than 10 years and a sufficient return above a branch’s cost of capital is likely greater than 20 years. We will go one more step and say that it is highly possible that absent of a branch consolidation/talent acquisition, a new branch (as we know it today) may never be profitable in the future – ever. That is a big statement, but by the time you think you can build sufficient loans and deposits, more business will move online, so a physical full service branch will be too costly a channel to maintain.

The paradigm of branches per capita is no longer applicable and will be less so in the future. A popular branch services maybe 4,000 customers while a good mobile platform handles 20,000 plus for a fraction of the cost. This makes the cost of service multiple times more expensive in the branch at a time when items (checks, presentments, etc.) are dropping.