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New bank branches are dotting the Massachusetts landscape. Expansion has played a major part of the battle for space, recognition, customers and market share in the banking industry. In the past five years, branching out has come to be considered a necessary component to remaining competitive, according to industry experts.
New data shows Massachusetts banks have been adding new branches at a faster pace than the national average and at a much faster rate than in any other New England state. Those branches are serving fewer customers than they have in the past, however, according to a report released last week by the Federal Deposit Insurance Corp. Bay State bank branches serve about 3,003 people each compared with a national average of 3,243 people. Industry experts say they believe it is the unique competitive landscape of banking in the Bay State that makes branch expansion a popular business decision despite that trend.
Over the last five years, bank branches have expanded a total of 8.1 percent in Massachusetts. The U.S. average is 7.7 percent and the average rate in New England is 4.6 percent. The FDIC attributes the fast growth in expansions to competitive pressure in the market place.
However, as more branches are created, competition for area consumers intensifies, with many banks vying for the same customers and, increasingly, seeking to differentiate themselves from the competition.
When Steven F. Young, senior vice president of Wainwright Bank, thinks about adding new branches he tries to come up with features that relay to the public what his bank is all about. He calls it a socially responsible bank. The new branches are green, or eco-friendly, banks with solar-power lighting and cabinets made out of compressed corn husks. The new branches, three of which have been created since 2002, also double as Internet cafes with plush, modern furniture, free coffee and free Internet access.
Aside from the design, Young thinks branch expansion is an endless venture for his bank. “I think it goes on. It just goes on and on,” he said. “Our goal is to keep opening branches.”
That philosophy is shared by any number of local banking institutions.
There is a lot of competition out there. Branches and the alternative distribution channels [such as Internet banking and ATMs] are likely to keep expanding because that’s what people want,” said Bruce Spitzer, spokesman for the Massachusetts Bankers Association.
However, the rapid pace of branching in the Bay State may not be practical in the long term, especially since the last two U.S. Census reports showed the state is losing population. The FDIC report notes the rate of branch expansion in Massachusetts is unlikely to continue at such high levels.
“With a very slow-growing population, and fewer people being served by each branch, the current pace of branch expansion is not likely to be sustainable,” according to the FDIC’s report.
But for now the trend shows no signs of abating. Massachusetts currently has 1,074 state-chartered bank branches, up from 1,063 in 2004, according to the Division of Banks.
David Cotney, senior deputy commissioner with the DOB, said 41 new branches were approved for state-chartered institutions in 2005 and 44 approvals were granted in 2004. But as some branches close and banks merge, those numbers provide more of an indication that there is quite a bit of interest in opening new branches than how many branches will be actually added to Massachusetts’ overall total.
“We get a good amount of [new branch applications] every year,” said Cotney.
“Branch growth nationwide has increased 30 percent over the past 20 years,” said Spitzer, adding that while there are more branches, the number of different institutions to which they belong is down 50 percent for the same time frame. “There are more branches today than there ever have been.”
Saturation Point
With its recent additions, Wainwright Bank now is up to 11 branches. But are the new branches attracting more business and will adding more branches continue to be a profitable investment? Young says he believes new branches will continue to be viable growth options, but the results can be difficult to quantify.
“We think it [branching] does [remain a sound strategy]. That is so hard to measure,” said Young.
Spitzer said banks are trying to provide better services to their customers in a variety of ways, including bringing new branches closer to where they live and work. “And it [branching] keeps the competitors on their toes. It’s all about convenience for customers,” he said.
Spitzer said not all banks looking to add more branches dream up elaborate facilities such as Wainwright, but there are a great number of institutions looking for new opportunities and new markets, including more rural areas.
“We have been looking at branch expansion seriously for the past five years,” said Charles O’Brien, president and CEO of South Adams Savings Bank in the Berkshires. “Many of our competitors have opened branches in [Berkshire] county and have been successful.”
South Adams Savings has three branches in Adams, Cheshire and Williamstown. But O’Brien said it also has customers in other parts of the county, and he would like to have locations closer to their neighborhoods. To help prepare for the bank’s expansion, O’Brien turned to a customer relationship management [CRM] package – a software program used to track customer demographics and trends.
“It’s excellent for planning [expansions],” O’Brien said, noting that the bank has discovered that many of its customers live in the northern region of Berkshire County. “It helps you better understand their banking needs.”
O’Brien said the bank will only be looking for new branch possibilities within Berkshire County.
Jim Jones, of First Wellesley Consulting, which assists banks with expansion strategies, said opening new branches requires strategic planning. He said banks often look toward up-and-coming communities when searching for new places to expand. If new commercial or residential developments are being created and new businesses are suddenly attracted to an area, banks should evaluate whether such growth will create a need for additional branches. However, simply identifying a high-growth community is no guarantee of success. In many cases more than one bank may target such and open new branches in close proximity to one another, according to the Wellesley-based consultant.
“Not all of them will succeed and remain open. Some of them will flourish and grow,” Jones said.
Jones said he does foresee an eventual slowing in the pace of branching in the Bay State, even if he can’t pinpoint exactly when it will happen. He said banks will have to rely on mergers to grow once Massachusetts becomes oversaturated with branches. Mergers, however sometimes reduce the number of branches in one area as the combined institution finds it now controls offices in close proximity and closes some, he said.
“At some point we will get branched out,” said Jones. “[But] the merger trend is going to continue. As banks acquire other banks, watch what happens to the branches.”
Bank of America has a broad representation in Massachusetts since acquiring Fleet Bank, said Ernesto Anguilla, spokesman for Bank of America. He said any new bank branches would be to fill specific gaps in areas where the bank does not have branches but does identify consumer demand. The largest bank in Massachusetts has 306 branches.
“We constantly review our distribution,” he said.
“Eventually the market could become saturated,’ said Joe Bartolotta, spokesman for Eastern Bank.
Bartolotta said there are two ways to grow, through mergers and by adding branches. The Boston-based bank has down both in the past five years.
Eastern Bank has 72 locations throughout the state. It has opened close to 10 new branches in the past five years, according to Bartolotta. And last year it merged with Plymouth Savings Bank, acquiring 18 new branches. Bartolotta said Eastern will open a Needham location later this year or the beginning of the next year.
“We want to grow our franchise so we can better serve our customers and attract new ones,” Bartolotta said.
According to Bartolotta, it is the customers who benefit as banks grow to make themselves better competitors in the marketplace.
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