The Hot News in Banking: Bricks and Mortar

Customers prefer branches, so banks are opening 'em like crazy

When Bank of America Corp. (BAC ) opened its first Chicago branch in January, in the heart of the city's financial district on tony La Salle Street, the mood was festive. The bank flew in Chief Executive Kenneth D. Lewis and had Mayor Richard M. Daley cut a ribbon made of $20 bills.

Behind the gaiety, this was the first salvo in a retail-banking battle that will see dozens of new branches open this year in and around the Windy City. Over the next two years, the Charlotte (N.C.)-based bank is set to open 50 branches. Seattle-based Washington Mutual Inc. (WM ) also is ready to invade. It plans to open 70 branches this year, starting in June. Meanwhile, the local market leader, Bank One Corp. (ONE ), isn't sitting still. After closing more branches than it opened since 1999, it added 7 in the second half of 2002, it's opening 13 this year, and it has 15 in the works for 2004. "One after another, banks are falling over themselves making announcements," says Linda Koch, an executive at Illinois Bankers Assn. "Consumers can walk across the street if they don't like their bank."

Chicago seems like the epicenter of the branch boom, but new branches are popping up on street corners and in strip malls across the country, especially in high-growth Sunbelt states. After nearly a decade of rarely adding a branch, Charlotte (N.C.)-based Wachovia Corp. plans to open 90 nationwide this year and next, including 10 in a major battleground, New York City. Chicago-based Bank One plans 65 this year and more than 100 next year. "We're buying land aggressively for sites we want to be in," says Liam E. McGee, president of BofA's consumer banking business, who expects to open at least 350 branches around the country by the end of next year.

What a reversal from the height of the Internet boom, when big banks had declared branch banking dead and were aggressively investing in technology instead. They hoped to herd customers to their new electronic systems and cut back on expensive bricks and mortar. So they spent heavily on call centers and Web sites and also opened less costly minibranches in grocery and discount stores.

For seven years, for example, Bank One discouraged customers from patronizing its branches by slapping a $3 fee on any transaction involving a teller. At the same time, it invested $150 million in, its separate, Internet-only bank. Bank of America had a large presence in Chicago until 1998, when it decided to sell its 76 branches inside grocery stores. And a rash of bank mergers put the focus on closing rather than opening branches. "In the mid-1990s, there was a question mark in the industry about even the need for branches in the future," says Ben Jenkins, head of retail and wholesale banking at Wachovia.

That isn't a question anymore. Despite a growing array of online options, customers continue to open 80% of new checking and savings accounts at branches. After a decade of slow, 3% annual growth in deposits, banks are now benefiting from the stock market slump as customers stash money at their banks, pushing deposits up by 6% in each of the past two years. That trend might reverse when the market picks up, but banks believe their branches will stay profitable because regulatory changes now let them pitch a variety of insurance and other financial-services products -- and that is usually done in person. Another case for full-service branches: Banks that had opted for minibranches saw lots of check-cashing and cash withdrawals but not much income. San Francisco-based Wells Fargo & Co. (WFC ), for one, has pulled back from that strategy. To top it off, big banks saw that smaller banks that were expanding rather than trimming their branch networks were gobbling up a greater share of deposit growth.

In Cherry Hill, N.J., Commerce Bancorp Inc. (CBH ), went from being a small bank to being a midsize bank over the past five years as it tripled its number of branches, to 224 -- and saw assets grow from $5.5 billion to $17 billion. Founder and Chairman Vernon W. Hill II says he started by thinking more like a retailer that wants to sell as many products as possible to each customer rather than a banker trying to cut costs. So Commerce Bank copied the best of what retailers do by emphasizing customer service, keeping branches open seven days a week, and making sure they had a welcoming, well-lit look. The result: Commerce's branches averaged 889 new checking accounts apiece last year, while BofA says it got 126.

Clearly, all these branches won't keep their tellers busy without stealing business from rivals. "Dominant banks are going to defend their turf," says Harold Pote, head of J.P. Morgan Chase & Co.'s Regional Banking Group. Bank One, girding for the Chicago onslaught, finally eliminated its $3 teller fee last fall. "In our new model, we want to talk to our customers, and it struck us that it doesn't make sense to charge them to come to our stores," says Charles W. Scharf, CEO for retail banking.

As banks rediscover the branch biz, they're spending more time on what they should look like. Washington Mutual, or WaMu, set the trend in 2000 when it opened 16 branches with a radically different look, sporting mannequins, like those in clothing stores, serving coffee in café-like settings, and providing play areas for kids. No ropes cut customers off from staff, and instead of desks, there are teller kiosks. In Las Vegas, these new branches had customers signing up for roughly five banking products apiece -- twice the industry average. And the Las Vegas branches became profitable in 18 months, the bank says, compared with the usual five years for a standard branch. WaMu opened 144 branches last year and is planning 230 this year.

New technology has traditionally put an end to branch binges -- first came automated teller machines in the early '80s, then the Internet in the late '90s. This time, the brakes could come for a simpler reason: Banks might just run out of street corners.

By Pallavi Gogoi in Chicago

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