MARK PRIMEAU
Nearing saturation point

Part One of a Two-Part Series

The days of having one or two bank branches in a community are gone. Despite the Internet banking craze and predictions that branches would become obsolete, banks are building additional locations at a rapid pace and consumers are reaping the benefits.

According to the Massachusetts Bankers Association, the number of banking institutions in Massachusetts has decreased by 43.6 percent since 1985. However, the number of bank branch locations has increased by 10.8 percent in the same period.

In 1985, Massachusetts housed 390 institutions. Today, there are 220. In 1985, there were 1,886 bank branches in the commonwealth; now there are 2,090.

Synergistics Research Corp., a Georgia-based provider of multi-client consumer and small-business marketing research for the financial services industry, found in one of its studies that in 1995 consumers averaged about 4.4 branch visits per month. In 2003, visits dropped to 2.9 per month mostly due to the use of the Internet and telephone banking.

So why have banks continued to build branch locations despite less frequent consumer visits and a shrinking number of banks against which they must compete? Industry experts offer different explanations.

Some industry watchers say banks need more branches in order to make a profit.

According to a 2004 Federal Deposit Insurance Corp. report titled “Bank Branching Trends and Prospects of Key Banking Sectors,” adding bank branches can improve performance.

“Banking organizations with larger branch networks generally have much higher non-interest revenue, and as a result, have better efficiency ratios,” the report reads. “Improved efficiencies are reflected in higher overall profitability for multi-branch banking organizations.”

Other industry insiders say what goes on inside a branch differs from typical activity in past years, creating a need for more locations.

“The function of a branch has changed substantially,” said Langdon Andrews, marketing director for Semaphore, a retail consulting and merchandising design firm based in Holliston. Semaphore offers products to help banks overcome challenges associated with managing extensive branch networks.

Andrews said that banks used to be one long wall of tellers whose job was to cash checks and make deposits into customer accounts. But the wider range of products that banks now sell has driven branch expansions, he said.

“The branch is a selling zone,” said Andrews.

Banks have cut out the ancillary functions and now provide only what customers need face-to-face.

Mark Primeau, executive vice president of consumer banking at Eastern Bank in Boston, said there is a strategy to building branch after branch. It gives a bank the appearance of being ubiquitous. Primeau notes that more branches improve the likelihood of a consumer choosing that specific bank.

Andrews said banks that get their name out there are most successful, and branching is, in effect, an extension of branding.

“I’ve never heard anyone say ‘we are building a branch to have the brand out there,’ but some of the best banks out there have used branches very, very well as ways to reinforce and communicate their brand,” said Andrews.

However, banks that have utilized their branches as sales platforms are profitable, while those that build branches simply for transactions are not as successful, Andrews said.

Christopher Bramley, president of Banknorth Massachusetts, said building additional branches is not a branding strategy.

“There are other ways to brand,” said Bramley.

He noted that properties where branches could be located are too expensive to purchase simply to augment branding.

In From the Outside

William McCracken, chief executive officer of Synergistics Research, said profitability is driven by a branch’s ability to market itself effectively. McCracken said there could be two branches on the same corner, but if one fails to have a good product mix and a good reason to draw consumers in, they see less activity and profitability.

Banks each have different methodologies to determine where a branch will be located. Primeau said Eastern looks at economic activity and the density of population in a community.

Andrews said that Greater Boston’s MetroWest area, although affluent and rife with plumb residential and commercial areas, is not where bank branches will continue to be built. He predicts that the area around Interstate 495 will eventually become a haven for bank branches because more homes are being built in this outer suburban ring around the metro Boston area and banks will flock to areas with population growth.

A similar trend has happened throughout the country. According to the American Bankers Association, places like Wyoming, New York, Arizona and Texas have seen stronger increases in branches due to population growth.

McCracken said banks are simply following the customers.

“We see branches being built in areas of large groups of underbanked [populations],” said McCracken.

Branch locations may also offer products targeting a specific population.

“In an affluent ZIP code, you have an investment center [at the branch],” said McCracken.

Bramley said the Springfield area and Northern Worcester County are two places banks will look to expand in order to fill in empty pockets.

Most banks follow a forecasting model to determine which locations will best suit them. Generally, banks hope to have a deposit base that can grow profitable in three years. Bramley said most of today’s existing branches, despite growing competition, are making a profit. As long as that is true, banks will continue to branch out.

“Branches are growing, they are very busy,” said Bramley. “There is a lot of action going through the branches.”

Primeau notes that, currently, the number of branches and customer demand is balanced. However, if too many banks follow the same strategy – for example, heading out to the I-495 area – the chance for overcapacity is there.

“We are getting near that point,” said Primeau.

However, Primeau said a bank that might find success in one location may not find a branch to be economically feasible elsewhere.

Bramley said that while part of many banks branch expansions are driven by population growth, much of it also is due to aggressive banks looking to increase market share.

With competition fiercer than ever, Primeau said consumers are much better off than they were 10 years ago.

Primeau predicts that the Massachusetts banking industry will see a handful of national banks emerge, along with some regional banks. The smaller banks, which have built up their capital base, will try to keep up, but Primeau said it will be difficult with advances in technology and the growing costs of staying on the cutting edge.

Bramley described many of the Boston area’s local banks as “awfully good” and predicts they will try to expand through more branch locations.

It also was predicted in the FDIC report that community banks throughout the nation will begin to enter the midsized bank sector via internal growth and mergers. The need for efficiencies of scale may drive that transition.

Massachusetts is unique, Primeau said, because there is still a large base of community banks. However, the Bay State is catching up with the rest of the country in terms of larger, national banks moving in, most notably with Bank of America’s acquisition of FleetBoston Financial.

The FDIC report states that in 1994, out-of-state institutions had 12 branches in the state. In 2003, out-of-state institutions increased to 637 branches in Massachusetts.

McCracken said most of the larger banks, which are based in out-of-state locations, no longer feel the bias that once existed and are able to successfully compete for customer loyalty with home-grown institutions.

Bramley said it is unlikely there will be many more new entries from out-of-state banks.

“I don’t see [JPMorgan] Chase building a lot of branches in Massachusetts,” said Bramley.

Next week: A look at branching trends in Massachusetts communities.