New Life for Branches: Pillars of Entrepreneurship & Financial Empowerment

Branches are expensive & unprofitable. It's time for bankers to think differently about branches, to reuse them as centers for entrepreneurship, financial empowerment and community investment

About a year ago, I got a letter from one of my banks that the branch 2 blocks away was closing. For my convenience, the letter said, I could go to the branch 2.5 miles away. Another branch I used for its ATM was also on the chopping block. The building that housed my branch 2 blocks away had been a bank long before the current financial institution that owns it now started doing business in the US. I know this because a former employer of mine used to own the physical branches and I’ve talked to various branch staff over the years. When our bank was acquired by a much larger institution, some of them were recruited by the acquiring bank. Even though they now worked for a much larger, non-local bank, the branch managers, customer services reps and tellers knew the people in their neighborhoods. As I wrote early in the pandemic, Philadelphia, like many if not most cities, is a city of neighborhoods.

What Says Trust & Pillar of the Community Like a Branch?

source: Photo by Bob Osias on Unsplash

The other reason I know that the branch had been a bank for a long time is because it looks like a bank. Huge brick and concrete with the Roman pillars that say - no announce: “trust” “security” and “pillar of the community.” One felt the importance of the bank from the minute you saw the building. Think “Pantheon” rather than “mid-century modern” (see above).

Since convenience to the ATM was my main driver for using this branch, I knew I wouldn’t be going out of my way to a branch in another neighborhood. All I need now is the motivation and desire to take the time to close the account.

I don’t want to debate the wisdom of this FI’s decision to close branches. I’m sure the executives had many fine and sound financial and operational reasons firmly based in logic, profit/loss and other data analysis that closing branches was a profitable direction to take. Theirs is not an outlier decision; it is a mainstream decision that financial institutions worldwide are making - and for good reason. As the result of - or spurred on by — the pandemic, many (most??) banks have closed hundreds, if not thousands of branches worldwide. If you’re reading this newsletter, I’m sure you’ve seen, scanned or read many more such articles.

Operating branches is expensive. As Guenther Hartfeil noted in 2018 in a Financial Brand column, well before the pandemic and current 20220 economic conditions:

For traditional locations, a branch typically costs between $600,000 and $800,000 a year to run, including overhead and back office support costs. In 2017, total loan income — less loss provision and interest expense, plus deposit-based fees — was equal to 2.85% of the deposit base. Not all loan income is attributable to branches, so it is reasonable to say that branch revenue is slightly lower — about 2.0% to 2.5% of deposits. (source: Are Your Bank’s Branches Too Small to Survive?)

And Hartfeil is specific about what branches need to be profitable:

For purposes of simplicity, we took the low end of costs ($600,000) and the higher end of revenue (2.5%). Based on those assumptions, a branch needs about $25 million in deposits to achieve breakeven. Branches are often counted on to generate double their cost in revenue. That leads us to a balance level of $50 million in deposits to reach the desired ROI target.

Close the unprofitable branches, of course. That makes all the business sense in the world. But I couldn’t help but wonder:

What if a financial institution made a different decision about unprofitable branches?

A Different Way to Close a Branch

Could this bank — or any financial institution - have made a different decision? A decision based on a more broad view of financial services, profitability, competitiveness, disruption — and most importantly opportunity.

As I drove by my old branch, now surrounded by knee-high weeds, not unlike other abandoned buildings in Philadelphia, I also looked at the neighborhood. The empty branch was surrounded by some empty storefronts for sure, but it’s also surrounded by small businesses, many small businesses. In fact, the only regional or national chain businesses are the car rental, and the Wawa and PA State Wine and Spirits stores further down the street. The former branch is surrounded by a coffee roaster/pastry business, a chiropractor, a notary/insurance company, a day care, a church, a pizza place, a few of small restaurants including one that only serves breakfast and 2 consignment clothing stores. A business that offers sewing and quilting classes, just opened this summer.

I drove by another branch that this FI closed and noticed the same situation. The branch was smack in the middle of a bunch of small, probably family-owned, businesses: a grocery, a deli, restaurants, lawyers, dentists.

If I looked harder, I’d probably find even more small businesses percolating under the surface or about to open offices or storefronts. During the last 2 years, the US Small Business Administration’s data shows the growth of small businesses:

During the first two quarters of 2020, employment by large businesses fell by 6.8 million. In the four quarters following the recession, employment by large businesses rose by 3.1 million, offsetting 46 percent of the decline. Despite the jobs lost during the recession, large businesses generated 6.7 million net new jobs over the past 25 years. During the same period, small businesses generated 12.9 million net new jobs, meaning small businesses have accounted for 66 percent of employment growth over the last 25 years. (source: Small Business Facts SMALL BUSINESS JOB CREATION April 2022 · By Daniel Wilmoth, PhD)

Despite this growth, since the pandemic started in 2020, Black-owned small businesses have been hit especially hard. A May 2022 SBA report on African-American Entrepreneurs cites a survey:

…of 22,102 clients of Small Business Development Centers (SBDCs) in California carried out in August 2020. They find that nearly 45 percent of African American-owned businesses had closed operations, compared to 30 percent of those owned by Whites, by the end of July 2020.11 Concerning government assistance, Dani et al. (forthcoming) report a lower rate of receiving assistance in minority-owned firms (65 percent versus 71 percent for all) and lower loan amounts for African-Americans compared to Whites in both the Paycheck Protection Program (PPP) and Economic Injury and Disaster Loan (EIDL) programs. For the PPP, the median loan amount for an African-American-owned employer firm is $15,700 and $33,000 for those that are White-owned. For the EIDL, the analogous figures are $18,900 and $48,900. Thus, at least in these survey data, African-American entrepreneurs are substantially disadvantaged in receiving assistance during the pandemic. Source: African-American Entrepreneurs: Contributions and Challenges by Kyung Min Lee, Mee Jung Kim, John S. Earle, Lokesh Dani, Eric Childress, and J. David Brown, Xopolis LLC, for Office of Advocacy U.S. Small Business Administration under contract number 73351019P0055 Release Date: May 24, 2022

Repurpose Branches to Support Local Neighborhood Entrepreneurs

The opportunity for unprofitable branches is this: to create space for local, neighborhood entrepreneurs who might not otherwise have space to expand their business from a small in-home operation to something larger, to move their idea into a business plan, to figure out how to raise funds to support their business’s growth. Former branches are already designed for this purpose: Branches tend to be large open spaces, designed for people to meet, talk and build.

For FIs, there’s the opportunity not only to create businesses and wealth (though not necessarily in the traditional sense of high net-worth individuals) but also to help people escape poverty, whether generational, pandemic-induced poverty or working poor poverty.

The former, repurposed branch can be used to bring together local entrepreneurs, mentors, and others who can support, advise and motivate business owners.

The FI doesn’t have to create all of this from scratch. The new branch can bring together ongoing efforts in social services, entrepreneurship, community reinvestment & development, and even public banking.

This idea can be applied to other neighborhoods, neighborhoods where people are not struggling to get out of poverty but where people have ideas and projects that need support. There may be co-working organizations in those neighborhoods, but they offer another opportunity: for partnership.

For those financial institutions that are inspired to go further: Offer child care and really open up the opportunities for women in the community to create and grow their own businesses.

Is this idealistic? Perhaps. Will it cost money to create? Yes. Collaboration, however, will go a long way to ease that pain and prevent the FI from attempting to reinvent many wheels.

Whether you are a small credit union or larger retail bank, your executive team is probably already or considering shuttering branches. I am not making the case for keeping an unprofitable branch open, but rather to view the branch as a strategic asset.

Takeaways for financial institutions

If your financial institution is evaluating branch closures, consider the opportunity for repurposing one branch in one neighborhood.

• Focus on the neighborhood, not customer/member acquisition. The purpose of repurposing your branch is not to sell your banking and payment services to people and startups that work in your re-purposed branch.

• Reuse your branch real estate to nurture startups — and not just tech startups - in the branch’s neighborhood.

• Identify local needs. What kinds of small businesses are growing, struggling, just starting? Are there a few neighborhood chefs or cooks who are working out of their homes who could use a commercial kitchen to grow their businesses?

• Look for startups everywhere — even high school and trade school students. Think as far outside the box as you can. For example, Is there a local culinary/carpentry/coding program - in a high school, community college - that you can partner with?

• Partner with local startup co-working spaces, mentor programs, community colleges, high schools and other organizations to create a space that founders, want-to-be-founders will want to use, be in. Your financial institution does not have to recreate a start up environment from scratch.

• Seek out those organizations that are already help people and small businesses in the branch neighborhood. For example, the Cities for Financial Empowerment Fund is already working with local governments across the US to place financial empowerment centers within social services. The renewed branch can extend those capabilities and services to small business owners who may not be aware of the CFE Fund.

• Align the repurposed branch with your FI’s goals of increasing support for minorities, those poorly and underserved by financial institutions, under and unbanked people, and small businesses by offering them banking and payment services. Yes, I know that I said that this former branch space isn’t about banking and payments. But I am not necessarily talking about offering your FI’s products and services. I recently discovered that Philadelphia residents can open bank accounts through retail banks. These accounts use Bank On, a platform developed by the CFE. A redeveloped branch, a location residents already know and trust, can give these accounts a bigger profile — whether digital or in-person - to neighborhood residents. Your bank may already offer these accounts to people!

• Patience and focus. At some point, entrepreneurs and small businesses will need small business bank accounts, loans, payment services and more. The natural progression of small businesses is to need these services - to help them do the jobs they have — to ship their own goods to customers in Germany or send payments to contractors in another state, buy another food truck or supplies ahead of a big electrical project. But it’s still important to remember that opening accounts and cross-selling is not the focus or goal. The goal is to use the branch to support the neighborhood and the people, families living in that neighborhood.

Takeaways for Digital Banking Vendors

Both digital banking and core banking vendors have opportunities in a re-developed branch.

• Open capabilities to allow banks to create consumer and SMB products and services, and banking and payment services “sized” for very small businesses and underbanked people.

• Use embedded banking and payments capabilities to ”wire” a digital banking platform and core banking to collaborate with other activities within the re-developed branch.

• Identify new partnerships your digital banking platform or core banking solution will need to facilitate a re-developed branch environment. Like FIs, vendors must think outside-the-box to identify new partners who may be outside the traditional financial services supply chain.

By re-purposing - or re-developing - your branches, your financial institution will not only support local economic growth, but you will also improve your relationships in that community. A repurposed branch that is helping people and small businesses grow their businesses is an opportunity to build trust - for the future when your products and services are the right fit to help them achieve their personal and business goals.

Me, Elsewhere

• I moderated a great panel of folks for a conversation on innovation. We cut through the hype and share practical advice for making your digital transformation efforts pay off. We definitely talked about the importance of small innovations.

• How can banks be truly low friction? They must address friction everywhere. Otherwise innovation & digital transformation will elude them. In this report I identified the characteristic of a low friction bank and why legacy core banking and architectures don’t support it.

• What can the Kardashians teach your financial institution about partnerships and innovation? How can working with empathic fintechs help you identify niche groups (aka hidden tribes) and innovate. All this and more in this this ebook that you can download at Praxent or Nymbus.

• Adopt an Agile Digital Banking Platform: How bankers must have an agile digital banking platform to support both global and local trends and requirements to help them identify new niche markets that will drive innovation, create new value and increase profitability. In this report I identified a set of capabilities that a digital banking platform must have that will help take banks into a competitive future and urges banks to select a digital banking partner who shares their innovation, vision and support for new value creation.

• How Your Financial Institution Can Leverage Niche Markets for Next-Level Growth: The old rules that influenced how mid-sized financial institutions acquired technology and the tradeoffs they had to make no longer apply. Why? Because new thinking on old models brings new ways for banks and credit unions to deliver new products and services to new niche customer markets. I moderated a vibrant discussion about this & more with Jeffery Kendall, Chairman and CEO, Nymbus and Tim Hamilton, CEO of Praxent.

• Think like a Challenger: How banks and credit unions can compete and win - I recently moderated this conversation on challenger banks with Bryan Clagett of Moven and Ted Brown of Digital Onboarding.

• Digital banking transformation’s surprising secret for success in Entersekt’s ebook New Directions in Authentication

• Does It Fit Me? Tailored Banking - The Next Step in Digital Transformation.

Yes, I worked with clients on these ebooks and webinars. They may ask you for information before you can download or watch them. If you’re interested in collaborating with me on a similar project or something else completely different, please contact me at stessa@pivotassets.co or via LinkedIn.

Who writes PivotAssets?

I’m an independent analyst & consultant & a former Gartner analyst. I’ve worked in and covered the banking industry for over 2 decades. I write about digital banking in this newsletter - not to confirm what you know (and you are plenty smart!) but to give you a fresh perspective & analysis on the transformation that is —and isn’t happening - in the industry.

This newsletter is for people and companies who are trying to differentiate their banking software in an increasingly competitive market. It’s also for bankers and investors who want to know more about digital banking transformation strategies & the technologies that power them.