By Robert McGarvey
Soon you will be faced with a tough question: do you want to buy a new branch on the cheap?
Credit unions, traditionally, have run lean when it comes to branches. Billion dollar institutions often have perhaps a dozen branches. The biggest credit union branch networks are under 300.
But now a temptation to expand looms: big banks are hurriedly pruning branches and, by some counts, 20% of bank branches will close by 2020.
That’s the temptation—it might even be satisfying to some credit union executives to snap up a failed bank branch for pennies. The question is: is this wise?
This is the other question: Hasn’t technology moved us beyond branches?
Not so fast.
Technology—particularly in online and mobile banking—has transformed how we conduct many kinds of transactions. But that does not mean good, old-fashioned analog, in-person banking is dead.
Listen to Levar Haffoney, a principal with Manhattan investment firm Fayohne Advisors: “Credit unions should take over abandoned bank branches. Many abandoned branches are in underbanked communities. Many of these communities have strong middle class demographics. There are numerous opportunities for credit unions to offer mortgages and other services to these communities.”
That’s right. Some say that branches—selling at today’s distressed prices—may be just the right bargain for credit unions that want to raise their visibility.
Nevertheless there are concerns to mull, a darker side of the balance sheet. Running a branch isn’t free. Ed O’Brien of Mercator Advisory Group has said it costs $200,000 to $400,000 to operate a branch.
Beat back the risks, and there are rewards. A profitable branch churns out money—a typical profit will be about $1 million annually but that will take 10 years to reach, Chase executives told Fortune.
And obviously—given the literally thousands of branch closings in recent years—many bankers have lost patience waiting to yield profits and have pulled the plug.
But then there are other, more positive statistics to mull. A late 2016 report issued by software company Timetrade disclosed tantalizing factoids such as that 62% of credit union members prefer to visit their credit union in person; 43% visit more than 10 times per year; and three-quarters of credit union members count as “frequent branch visitors,” per this research.
These numbers tell us a significant percentage of credit union members value the experience they have at their local branch.
Yet data also suggests that—increasingly—consumers know they do not have to visit a branch to accomplish the routine banking chores that used to bring them in. For instance: every deposit made by snapping a photo of a check with a Smartphone is one fewer trip to a branch.
The list goes on. Consumers have been switching into digital solutions for banking transactions and that has eroded branch visits.
That’s an undeniable push-pull.
But just maybe that debate about technology’s role is not in fact the decisive factor that is prompting so many branches to close.
Note, too, according to FMSI, the number of branches in the US increased by about 300% from 1070 to 2014. And yet the US population, said FMSI, increased about half that rate. That resulted in what FMSI called the over-branching of America, where many financial institutions – often for reasons due to marketing and egoism, more than genuine consumer need – spent aggressively to put up new branches.
So what does all this mean in terms of acquiring closed bank branches – very possibly on the cheap?
It depends, multiple experts insisted. Smart decisions will be made on the basis of in-depth analysis of local factors. The national trends matter but what really matters in deciding to add a branch are a lot of local data points.
When a new location represents a rational extension of a credit union’s marketing footprint, it just may be a sweet opportunity.
But when a new branch will cannibalize the dwindling traffic of an existing nearby branch, the acquisition makes no sense.
There is no surefire metric, no quick barometer that says stop or go. Real market research is required, along with proceeding with eyes wide open to the risks and possible rewards.
That’s the bedrock of a smart branch acquisition strategy.
But just maybe now is exactly the time to begin doing that analysis. There probably never again will be so many branches available on the cheap.