Long live the bank branch!
By Greg McBride, CFA • Bankrate.com

Despite the growth of online banking and the pervasiveness of ATMs, branches remain vital to bank growth. Rumors of the branch's demise have been greatly exaggerated, and they still figure prominently into bank growth plans.

According to the Federal Deposit Insurance Corporation, the number of bank branches has grown every year since 1994, and according to TowerGroup Research, the number of branch visits has grown each year since 2001. While new branches are popping up on street corners and in shopping centers across the country, industry consolidation has also been fueled by banks' desires to expand into new markets, and acquiring another bank's network of branches has been the method of choice.

When was the last time you walked into a branch and didn't see banners advertising checking accounts? The checking account is at the core of bank efforts to recruit and retain customers, as the loss of checking accounts is highly correlated with the loss of customers. Free checking accounts bring in more than low-cost deposits. They also bring in new customers. Those new customers bring other accounts, additional balances and new financial needs, such as the need for a mortgage or an auto loan. The branch also serves as a sales floor to uncover those current and future sales opportunities.

Of course, banks have sought to increase noninterest income as it provides a more predictable flow of bank profits. While the branch is still important to loan growth, it is also integral in the growth of noninterest income for things such as service fees or interchange income, which is generated when customers use the bank's debit or credit card.

Branch growth isn't aimed solely at attracting consumer households. It's a means of attracting small businesses as well. According to NBW Consulting Group, small businesses do the bulk of their banking via the branch, so convenient access is certainly a prerequisite to growing small-business banking. The goal of growing small-business banking is twofold: to provide banking services and establish a long-standing banking relationship with both the small business and the small-business owner. Small-business owners provide the quality banking households institutions seek, they tend to stay with institutions longer, and purchase more of the bank's products than other households.

Branches no longer consist solely of staid, brick-and-mortar buildings. Innovative branch locations -- such as those found in supermarkets, Wal-Mart and even Starbucks -- are becoming more widespread. The idea is that to reach the public, you have to go where the public goes. Branch specialties -- such as investments, small-business banking or loan production -- can vary according to community dynamics. A branch located in an upscale area is more likely to specialize in investment products, while a branch located near an industrial complex would target small businesses. Bilingual branch personnel are available in areas where customers speak a language other than English.

The layout of the branch has grown to reflect customer traffic patterns inside the branch, including self-service banking kiosks similar to those found in retail outlets and airports nationwide. Sit-down service areas are being used in branches located in areas with many retirees. Reading centers and televisions mounted within the branch pass the time customers spend waiting for a teller or other bank personnel. Some branches even have a play area for kids.

Expanded hours of operation are making the term "banker's hours" a relic of the past, as branches are open in the evenings, on weekends, and some as early as 6 a.m.

Other bank distribution channels -- such as the ATM, call center and touch-tone phone system, and the Internet -- have grown and will continue to grow. But these channels must support the branch and together form a network of customer interaction that is convenient to the customer and a competitive advantage to the institution.

While the growth of branches will inevitably slow, their importance to bank growth and profitability remains firmly entrenched. Continued industry consolidation illustrates the value placed on bank branches and the customers those branches serve.

Greg McBride is a financial analyst for Bankrate.com.

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