As American banks wrestle over what to do with their brick-and-mortar branches, “migration to mobile” and “declining foot traffic” have become the new industry watchwords, and branch networks have begun to pull back for the first time in a generation.
But despite all the talk of modernization and the showy Branch of the Future concept locations in big cities, in many cases it’s the small towns and rural communities that are on the front lines of this impending sea change. And not in the positive sense that means more investment and better technology:
With a lower population and a smaller customer base to begin with, most of them already fit the “low foot traffic” profile that has doomed many a branch to forced closure in recent times.
Does it have to be that way? Are branches with smaller customer bases really “unsustainable?” As our company has begun doing more and more business globally, we’ve come to believe that the answer is a definitive “NO.”
From remote areas of Canada, to the Amazon Basin, to the Australian Outback, we’ve encountered examples of financial institutions operating in conditions that many American banks might consider impossible – and in fact, some of these overseas FIs may have even found answers to the Holy-Grail type questions that have eluded banking experts for decades.
We recently had the chance to catch up with the general manager of a credit union in Northern Canada with two branches that serve towns of about 300 and 700 population, respectively. While the manager requested to remain anonymous, he was kind enough to share some of the secrets that have kept his credit union in business for nearly 80 years.
It all comes down to what you classify as a viable branch.
It’s not that you can’t make money in a town of a few hundred people – just probably not as much money as you’d like if you have shareholders and analysts to answer to. On a balance sheet, there’s no question that a branch in rural Saskatchewan is going to look like it’s underperforming compared to high-margin, high-traffic branches in New York City or Montreal. But by no means will that branch actually lose money if it’s well-run.
Smaller banks and credit unions have a huge advantage because of their flexibility.
First, because they have the freedom to define success according to a different formula than simply the bottom line – but also because they can tailor their services to what the community needs. While the manager we talked to said that his customers are interested in “pretty standard banking, not a whole lot different from anywhere else,” the credit union operates more like a savings & loan, foregoing most of the high-end wealth-management options that are a mainstay of the charter banks.
Face-to-face interaction has a different, tangible value in smaller communities.
This is something that banks have been struggling with for years now as they seek to reinvent the brick-and-mortar branch. Listen to any discourse about the “branch of the future,” and one of the cornerstone arguments is the need to get tellers and other staff to engage the customer instead of merely executing transactions – and thereby, the theory goes, establish a personal relationship that leads to greater loyalty and opportunities to sell other services. Unfortunately, none of the experts have come up with a consistent way of doing that.
But banks in smaller communities have not only figured it out; they’ve been doing it for decades. “We find when they come in to see us, we get to know who they are, what they need” the credit union manager told us. As events unfold in customers’ lives, “We can let them know what’s coming,” he said.
It makes a lot of sense. A man comes in to make a deposit – if he’s a stranger, the encounter ends there, with a simple transaction. But if you know him, maybe you’ve heard that his wife is pregnant, so it might be a good time to talk about starting a new savings account or a college fund. Another customer comes in about her business account; you know she runs a farm and she’s been talking about needing new equipment, so maybe you talk about how to finance it for her.
And right there, we’ve discovered the white whale of the branch modernization movement – the quantifiable value of a face-to-face interaction. But there’s a catch: It doesn’t work in a big branch in a big town. You can’t get to know people the same way, so attempting it comes off as awkward and forced (not to mention producing inaccurate results).
However, the technique does provide the leverage that’s necessary to transform rural branches – and who knows, possibly even lower-traffic suburban branches – from a barely-viable slog, into something much better for both the bank and the customer.
Technology is good, but it doesn’t take the place of fundamentals
Smaller FIs have to keep up with new technology, but they don’t look at it as a primary means of customer interaction, so much as table stakes for an acceptable banking experience. The credit union we spoke with has ATMs in each town, and offers online and mobile banking, but both locations are fully staffed and continue to operate as traditional branches.
“We’ve seen things like micro branches and automation, but we don’t do it,” the general manager told us. “We have to do our best to keep up on technology, and we’ll look at how it can save us money, but we still value the face-to-face interaction.”
Working together with neighboring banks and credit unions is another key tactic for smaller institutions seeking to keep their costs under control. Whether it’s a new technology project, or even mundane administrative work like staff training or legal review of contracts, sharing the cost can keep the overhead manageable and allow for projects much bigger in scope than if each institution went it alone.
They’ll also band together to gain better buying power for major purchases of banking systems or hardware. That spirit of cooperation doesn’t exist among the big banks – but on the other hand, they enjoy a lot of the same economies of scale on their own, so the regional alliances are necessary for the smaller banks and credit unions to stay on equal footing.
Being part of the community really does matter
It may sound like a cliché, but in a smaller town, you’ll do much better if you aren’t a monolith. And the community appreciates what you provide, and pays you back in return.
“Our biggest strength is that our members are bought in. Our lending rates are a little higher than the charter banks, but our members want the service,” the credit union manager said. “Being a credit union is absolutely a big help – it was started locally, and people take pride in it. And we’re not focusing on just the bottom line; part of our model is being a big part of the community. So probably 75% of the people in our range are bought in.”
Remember the example of the customer with the pregnant wife a few paragraphs back? How do you think the banker knew about that? Maybe they got to know each other while simply chatting over transactions, but probably not. More likely they’d interacted outside of doing business, at the youth sports event, the Christmas craft sale, or the pumpkin carving contest put on by the credit union. THAT’S how being involved in the community pays off.
A branch closure in a major metro area might barely register as a blip on the radar, but in rural or isolated communities, it can create shockwaves that significantly alter the people’s way of life. But the message that our contact left us with was a positive one: Even if one bank has deemed your town non-viable, all is not lost. In fact, in all but the most extreme cases, it probably IS still viable, just maybe not for that one particular bank. So in the event of a closure, sometimes inviting another nearby local bank or credit union can get a town the help it needs.
“In today’s world, I don’t know if it’s still possible [to start a new credit union easily] – with all the regulations and paperwork, that’s not likely what people in a small town want. It would probably be an existing credit union opening another branch,” he said, noting that his own institution did exactly that 20 years ago in response to demand from a neighboring town. There is a definite difference in loyalty when a financial institution is perceived as the sole provider of a beneficial service to the community, versus merely one of multiple competing options. But when you go out of your way to take care of a community in need, that effort is usually rewarded.
Brad Kvederis is Manager of Marketing and Research at Digital Check, a Chicago-based maker of scanners and image software for the banking industry.