Banks Swap Branches for ATMs to Cut Costs

The pressure to reduce costs is forcing retail bankers to figure out how to get the most bang for their buck — and that may mean opening more ATMs and closing traditional bank branches.

With many branches becoming more like expensive billboards, banks are searching for lower-cost ways to maintain visibility in existing markets and raise their profiles in newer ones.

Huntington Bancshares, for example, is increasing its visibility in West Virginia not by adding to its 31 branches there, but by installing automated teller machines in 88 Go Mart convenience stores. PNC Financial Services Group is closing 200 branches this year but it is adding nearly 200 ATMs in the Southeast to support its branch network there following its acquisition of RBC Bank in Raleigh, N.C., last year. The Pittsburgh company also has been advertising more heavily in those markets.

"Banks don't have the money to spend," says Shereif M. Meleis, a partner at Novantas, a New York consulting firm. "They can get a presence with ATMs instead of branches, or use advertising for visibility instead of having branches on every corner."

As a line of business, retail banking — generally defined as consumer and small-business banking — is under severe pressure due to changing consumer buying habits and new laws that have sharply curtailed fee income.

Excluding mortgages, auto and credit cards, return on equity from retail banking plummeted to just 5% last year, from 36% in 2006, according to Novantas.

The staggering drop can be attributed largely to restrictions on overdraft fees and caps on debit interchange fees that, combined, have taken roughly $12 billion of revenue. Declining foot traffic has also led to branch closings and layoffs, and many banks are absorbing those costs as well.

The $56 billion-asset Huntington has not sworn off branches, but it is shrinking them; the Columbus, Ohio, company has opened dozens of branches in the last three years and all are in grocery stores. Though overall transactions at bank branches have fallen nationwide, Huntington says its transactions have increased slightly.

At the same time, though, Huntington is replacing half of its 800 ATMs with new ones that have image-capture technology that allows checks deposited by 11 p.m. to post the same day.

"There are benefits to getting transactions into a self-service, lower-cost channel," says Mike Bassani, Huntington's director of strategic distribution, responsible for branch planning and ATMs. "While we want to give customers reasons why they would use [an ATM] versus another channel, we really want to give customers the choice of where and when they transact. Our tactics are not going to be to force customers into any one channel, but to let them pick."

While Huntington is ramping up its in-store branches, the $131 billion-asset RBS Citizens Financial Group in Providence, R.I., is scaling back. Last year it sold 56 branches in New York to People's United Financial of Bridgeport, Conn., including 52 that were in Stop & Shop supermarkets.

"We've been a leader in branch closings," Maria P. Tedesco, group executive vice president of retail and business banking at Citizens, said at an industry conference last week. "We don't think branches are dead but we looked at where we can have ATMs to fill in, and we've increased ATMs by 20%."

Citizens has also used technology to make made inroads into microbusiness lending to companies with less than $2 million in revenue by adding video banking. The technology makes it easier for customers to have a face-to-face conversation with a bank specialist at a different location.

Tailoring products to very specific niches of customers is not new, though the $818 billion-asset TD Bank Group may take the concept to a new level. The Toronto bank "lives by a methodology" of comparing and ranking micromarkets, said James Popalis, vice president of Canadian retail real estate at TD Bank Group.

"We really think about dominating a market and taking out the competition," Popalis said at the same conference, which was hosted by American Banker. "You want to leverage the square footage that you have."

For example, when Popalis learned that 6,500 new condominiums were being built in a Toronto neighborhood, he immediately began looking at adding ATMs, billboard advertising and branches in the condo development.

Driving customers into a branch is a "paradigm that has completely flipped and changed," Popalis said.

William Demchak, the president and next chief executive of PNC Financial, said that, in the old days, banks wanted to have the No. 1, 2 or 3 deposit share in each market they were in. But at PNC, as profits from retail banking have shrunk, its priorities have shifted. "Retail used to be the engine, but you don't need to be 1, 2, or 3 in retail to do really well in corporate [lending] and wealth" management, Demchak said in an interview last week.