by Tim Cook
The megabanks are making significant moves to consolidate their retail outlets, putting hundreds of their brick-and-mortar branches on the auction block. So with all of those branches for sale, it must be a buyer’s market, right?
Not necessarily, cautions Philip Smith, president of the legal and consulting firm of Gerrish McCreary Smith in Memphis, Tenn. Some of the variables of profitability calculations for branch purchases appear to be changing, he says. And as with almost everything in society today, technology appears to be a major reason.
Geographic and competitive factors within individual marketplaces still significantly determine whether purchasing a competitor’s particular branch makes strategic sense, Smith says. But traditional deposit-account retention rates involved with branch purchases—a major factor, of course, in how profitable a branch purchase becomes—have become less reliable, he adds.
Smith says banks could once reliably assume that they would retain about 85 to 90 percent of the new deposit-account relationships involved with a branch they purchased. However, that account-relationship retention rate, he says, appears to be dropping, at least in certain markets.
The likely reason: With various digital banking channels from which to choose, consumers appear to be less concerned about having a physical bank office near where they live or work. And no matter how effortless or automatic a bank relationship changeover might be for consumers, such events appear to be prompting more of them to make a move. Moreover, digital marketing and electronic account switch kits also make it easier for banks to lure back former customers who banked in the branches they sold.
In the past, before such technologies, branch purchase and deposit liability assumption agreements didn’t include clauses preventing banks that sold branches from marketing to former accountholders. However, new contract clauses preventing such communication might need to be considered in light of today’s digital environment, Smith says.
In short, fewer consumers affected by a branch sale aren’t necessarily going along for the easy new relationship ride. Famously immobile banking customers are increasingly mobile and not cling to convenient branches as they once did. The profitability calculations of branch purchases should consider the trend, Smith says.