By Manja Holter
Large national banks made recent announcements they will close a significant number of branches as well as drive-through lanes in the near future, citing a shift in consumer behavior toward online and mobile banking. Community banks offer those services as well, so will they follow suit?
Wells Fargo, which pulled the plug on 250 branches last year announced in 2018 it would shut down 800 more branches by 2020. The bank’s billion dollar legal costs in the wake of numerous misconduct allegations might be at the core of this development, but the behemoth is hardly alone.
JPMorgan Chase closed 9 percent of its branches between 2012 and 2016, while Bank of America shuttered 15 percent, according to research conducted by financial market analyst CLSA.
The driving force behind these closures is a general decline in transactions conducted in brick-and-mortar bank branches.
As national banks are closing rural branches, community banks are picking up the slack.
Noah W. Wilcox, president and CEO of Grand Rapids State Bank, offered the following statistic: “One in five counties in the United States are only serviced by a community bank.”
So, how do community bankers assess their future? Are community bank branches and drive-ups becoming obsolete?
Brian Nicklason is the president of Itasca County-headquartered Woodland Bank, a family owned business first chartered in 1920. It currently has four branch offices located in Grand Rapids, Cohasset, Deer River and Hill City.
“We are seeing a significant change in volume related to the internet banking. Our web-based banking is up from last year. We have over 9,000 more visitors per month and our mobile banking is up almost 500 transactions per month,” said Nicklason.
But even with this development, Nicklason said he is far from considering closing any of his branches.
In fact, he makes one key distinction: “The big banks are referred to as transactional banks because they focus on the amount of transactions. Community banks on the other hand are more relationship based.”
He said the expectation of his customers is to have a physical location. “If you want to open an account or need a loan, it is still nice to talk to a person.”
Wilcox views the impact of online and mobile banking on his business rather favorably. “It is another delivery channel for a different segment of our customer base that prefers to interact with us remotely,” he said. “Certain demographics like to do things differently and it is not always the younger generation that wants mobile services. We have a significant customer base between early 40s and 60s that are heavy mobile banking users.”
While in-store transactions are declining for both banks, drive-up transactions remain strong.
“Last Friday we had 120 drive-ups at our Grand Rapids office alone,” said Nicklason. He stated that if expansions are on the horizon, drive-up windows will be part of those plans. “We will always have a drive-up. We believe it is very valuable,” he said.
Wilcox echoed this sentiment. “We have not had any decline in our drive-through transactions, in fact, it is pretty steady.”
Will we see fewer tellers?
Nicklason said he was able to tweak branch office hours, according to the data he collected. His bank tracks transactions by the hour, by branch and by session.
“This allows us to extend our hours and still serve our customers efficiently,” he said.
Nicklason added there is still a customer base that values the personal service. “We have to offer a little bit of everything to everybody.” Personal service means maintaining a physical branch as well as experienced staff. “It is a little more expensive way, but I believe it’s the way it has to be.”
Wilcox on the other hand, estimates he employs fewer tellers now than he did 10 or 15 years ago. When Grand Rapids State Bank remodeled one of its offices in 2008, the number of teller windows was reduced by half.
Are vaults and safety deposit boxes a thing of the past?
Just until a few decades ago banks protected their money with gigantic vaults housed in formidable buildings. “Those shiny vaults have since been replaced by security systems,” said Nicklason.
What’s more, the stuff that was stored in the vaults, paper money, is becoming less as well. There is simply less need to have large amounts of cash on hand in each office, since the population is moving away from using it. “We’ve seen our debit card activity increase significantly. People just don’t use cash as much,” said Nicklason.
Surprisingly, demand for safe deposit boxes is still strong.
“We’ve been in the storage business forever,” said Nicklason, likening his bank to a self-storage business. He said all his branches are at maximum capacity.
Although safe deposit boxes are not very profitable for banks when taking the liability into account, both Nicklason and Wilcox feel the product is part of customer service. “We still see an element of our customer base that wants this service,” Nicklason said. He said demand for the bigger boxes is on the rise, while the smaller units are falling out of favor.
Wilcox said they witnessed no decline in safe deposit box usage. “The majority of our boxes are rented and remain that way,” he said. “There are customers that value the peace of mind of having their cherished items protected in that way and kept safe.”
Are paper checks going away?
Generally speaking, banks are discouraging the use of paper checks because their processing is more expensive than check image processing. However, banks make a small percentage when customers order check blanks. And while paper check usage is steadily on the decline, Nicklason is still surprised how much revenue continues to be generated through this channel.
Even though debit card use is at an all-time high, Nicklason doesn’t believe there will be a cashless society any time soon, and until then he thinks the paper check will have a niche.
“There is a place for paper checks. A segment of our population still likes to pay that way,” agreed Wilcox.
How does FinTech impact community banks?
Banks in general keep a watchful eye on so-called FinTech start-ups that peel off one profitable service after another.
FinTech, a portmanteau of financial technology, is the term used to describe any technological innovation and automation regarding the financial sector.
Business models include online financial planning services, online lending and borrowing, online retail banking, online fundraising, online money transfers and payments, online investment management and more.
Wilcox believes the services can be complementary to the banking industry.
“There are as many business models as there are community banks. It all comes down to leadership. If I can bring on a product that helps me serve our customers more efficiently and robustly, then I am all about that,” he said.
Nicklason agreed. “As a bank you have to understand the trends that come with the changing world. Even as a small community bank with limited resources you have to invest or get out of the way and let someone else do it. I hope we don’t ever lose the human element of banking but FinTechs are changing everything and community banks will struggle to compete in that arena.”
Nicklason believes this is one of the reasons why mergers and acquisitions are on the rise in the world of community banks.
“We have 4,000 less community banks than we did 15 years ago in this country. In Minnesota alone we lose three to four each quarter. Most of it is not due to closing, like it was during the recession, but due to merging. There are just as many branches but they belong to fewer banks.”