In Battle for Deposits, In-Store Branches Could Provide an Edge

In-store branches, which have a fair share of critics, could have a chance to prove their worth when rising interest rates and loan growth boost the allure of low-cost deposits.

Several banks, including Citizens Financial Group, BOK Financial and TCF Financial, have recently sold or closed in-store branches. And in recent years, the banking industry has largely taken deposits for granted.

What a difference a few months can make, as a growing number of banks are beginning to devote more resources to boost low-cost liquidity, relying on strategies such as acquisitions or employee incentives to add deposits. For some, their strategy will feature a commitment to in-store branches.

"When you're running those [branches] right and... you have the chance to get in front of everybody else's customer, it's an important opportunity," Jack Barnes, president and chief executive of People's United Financial in Bridgeport, Conn., said during a recent investor presentation.

Roughly 3.3 million people pass by People's United's in-store branches weekly, Barnes said, adding that such locations account for more than half of the $35.8 billion-asset company's new customer deposit accounts. "It should be a competitive advantage," he said.

Huntington Bancshares in Columbus, Ohio, and BSB Bancorp in Belmont, Mass., are also sold on the concept. Both banks have expanded their supermarket branch networks, buying into advocates' belief that such locations are a great way to lure new business by providing greater convenience. The key to success involves execution, executives at those banks said.

"It really isn't about just opening a branch and running it like a traditional branch," Hal Tovin, chief operating officer at BSB. "You need different people, different promotions. You have to be willing to execute that."

The $1.4 billion-asset BSB, which has opened three supermarket branches since 2012, ties those locations' promotions to the stores that house the offices, Tovin said. New accountholders get to spin a wheel to earn money off their groceries; existing customers also get a chance a spin when they use their debit card to pay for a purchase.

Huntington began opening in-store branches to offer convenience, only to find out that it, too, benefited from the strategy, said Mary Navarro, the $66.1 billion-asset company's director of retail and business banking. About 30% of Huntington's new customers come from in-store branches, even though those locations comprise just 17% of the company's branch network.

For Huntington, an important key involved opening full-service branches that provide the same offerings as traditional branches. The company is planning to open more than 40 branches in Meijer grocery stores in Michigan this year with an updated floor plan that includes more private meeting space to facilitate discussions of more complex customer issues.

Huntington is also pushing employees to be more visible beyond the branches, stressing the importance of socializing with potential customers shopping in the supermarket. The company's bankers are spending more time talking to customers in the aisles, helping them find items on their shopping list or offering to help with bagging, Navarro said.

"We become the friendly banker who is out in the store a lot," Navarro said. "That has made this successful for us. People are willing to give us a chance because they like the people and the convenience."

The model still has skeptics who argue that customers don't visit the grocery store with banking on the brain, while expressing concerns about the locations' profitability. Research shows that traditional branches can gather about three times the amount of deposits as in-store locations, said Ken Thomas, an independent bank consultant who runs the website branchlocation.com.

In-store branches have also struggled historically to originate loans, and many banks have to rely on fees and service charges to cover overhead, Thomas said.

"I've heard of some exceptions, but by and large grocery store branches aren't profitable," said David Powell, president of the consulting firm Vitex. "In some communities, in-store branches could be a convenience factor, but now there's so much flexibility with cards and mobile banking."

Community banks eager to generate more business and land deposits should get more creative with their product offerings and cross-selling, said Tim Scholten, founder of consulting firm Visible Progress. "Selling deep into the [customers] you already have makes the most sense and is the most economical choice," he said.

Banks looking to open in-store branches should be selective about locations and should look for spaces that have separate entrances from the retailer, Thomas said. In-store branches are a way for a bank to gain visibility, though "it is like an expensive billboard," Thomas cautioned.

Echoing the sentiment of executives at Huntington and BSB, Thomas stressed the need for a reworked business plan for in-store branches. Bankers must "approach it differently," he said.