Next Bank, 100 Miles

Lawrence Bullock always liked Bank of America's presence in Mendocino. The giant San Francisco-based institution long maintained a branch in the tiny California town where Bullock manages Out of This World, a boutique that sells telescopes and other science and nature paraphernalia. But in January, BofA shut down its Mendocino cash machine--the only one in town--and its branch, and Bullock wasn't pleased. "In Mendocino, they not only inconvenienced people, they inconvenienced a lot of merchants," he says. What's more, the absence of a cash machine makes it harder for shoppers there to make impulse purchases. Bullock used to know who had visited BofA's ATM by the crisp twenties they paid with, he says, but "you don't find many crisp twenties anymore."

Bullock's experience is hardly unique. Cost-conscious banks have closed thousands of branches in the past three years. Increasingly, they're trying to get customers to bank by phone and use cash machines. But that can leave customers with fewer, often less convenient, bank offices. And it could also make it harder for elderly customers to visit their bank for some basic social interaction as well as for bank business.

"Older people are used to depositing their Social Security check or their pension check," says New York State Senator Franz S. Leichter (D-Manhattan-Bronx), a member of the Senate Banks Committee. He has elderly constituents who faced a half-mile walk to the nearest branch when one New York bank was closing a midtown Manhattan office.

HUMAN ATMs? The decline in branches is pronounced. Some 4,000 bank and thrift branches closed from 1990 to 1992. The pruning has been most dramatic on the two coasts. BofA, flush from its acquisition of Security Pacific Corp., has already trimmed 568 branches from its network and plans to close more. In New York, Chemical Banking Corp. plans to close 80 branches as a result of its merger with the former Manufacturers Hanover Corp. Seamus P. McMahon, a vice-president at Booz, Allen & Hamilton Inc., predicts that there will be as many as 15,000 fewer branches by the end of the decade. "If tellers are basically ATMs that have internal organs and have to take coffee breaks, why have them?" he says.

Why, indeed. Bank customers, particularly younger ones, are increasingly comfortable using ATMs and conducting bank business by phone. What's more, in-market mergers and acquisitions are making many branches redundant. And branch operating expenses are rising as personnel costs, rents, and federal deposit-insurance premiums increase. As a result, a growing number of bankers are concluding that it doesn't make sense to maintain a large number of branches.

What does make sense to many bankers are branch networks composed of a smaller number of larger offices. Today, says consultant Edward E. Furash, the optimal branch has $40 million to $50 million in deposits, up sharply from the $15 million to $20 million that would have been considered satisfactory just 10 years ago. Bank branches are being used to sell more products, such as mutual funds and annuities. Bankers are now going after what they call the greatest possible "share of wallet"--the largest proportion of a customer's investable assets. "The original goal of a branch was to gather deposits," says Furash. "The new role is to foster a total relationship with the customer."

Despite these advantages, the branch closings could have a downside for banks. Branches help banks appear more personal and accessible than mutual-fund companies and securities brokers who rely on toll-free telephone numbers to sell their products. Shifting to fewer, larger branches will erode this competitive edge.

GOOD CUSTOMERS. Some banks recognize that closing branches can erode their valuable franchise among the elderly. A few are taking steps to remedy that. Even while it has pared 337 branches from its Florida network, First Union Corp. is adding minibranches in retirement communities.

Senior citizens "like getting to the bank," says James P. Robertson Jr., director of marketing for First Union's Florida subsidiary. "It's a social event as much as a business venture, and having a bank nearby is very important because as age increases, mobility decreases." And older people make good bank customers: They tend to like the safety of a sizable savings account. Even if a bank pays low interest, they generally remain loyal.

But other banks are adding to their offerings of electronic banking outlets and new bank products. Citibank, for one, has an outpost in New York City's Grand Central Station that houses 20 ATMs but no tellers. If more banks follow Citi's lead, old-fashioned bank branches might become as rare as ATMs in Mendocino.

Before it's here, it's on the Bloomberg Terminal.