Financial Update (January-March 1997)

Store Branching: A Part in Banking's Future?

by Lynn Woosley, research analyst

S tore branches are one of the fastest-growing delivery systems in the banking industry while traditional branches are losing business. Why are stores—particularly supermarkets—attracting bank branches in droves? In October 1996, the Federal Reserve Bank of Atlanta conducted telephone interviews with Sixth District bankers, grocers, and supermarket banking consultants to provide some impressions of the basis for supermarket branching's popularity and to examine some of the issues that are raised by those branches.

Why Store Branches?

Bankers have several reasons for placing branches in stores, especially in supermarkets. The most frequently cited reason for opening supermarket branches is lower costs.1 Whereas opening a freestanding bank branch typically costs over $1 million, a bank can open a full-service store branch for only 15 to 30 percent of that amount. In addition, the per transaction costs are slightly lower for store branches than for traditional branches because of lower overhead expenses. Supermarket branches can be strategically integrated with electronic delivery channels like ATMs to further reduce costs.2

Store branches also operate where a large pool of customers congregates. The average grocery store attracts 15,000 to 30,000 customers per week; most shoppers make at least two visits to the supermarket during this period. Few bank branches have that many customers in their lobbies each week. Nearly everyone shops at grocery stores. Banks can take advantage of these trips to make their services convenient, especially for people who want face-to-face contact. The convenience of banking at the grocery store helps attract and retain customers; so do the expanded hours offered by many supermarket branches. And some customers still demand face-to-face interaction, which is unavailable at ATMs or through call centers. In fact, in a recent survey by KPMG Peat Marwick (in American Banker, Nov. 11, 1996), 73 percent of consumers preferred branch banking to electronic banking. The availability of retail-oriented staff at store branches is also a plus for these customers.3

The combination of lower costs and high traffic makes store branching a useful vehicle for both growth and geographic expansion. Such branches are expected to assume even more importance as interstate branching becomes a reality. Along these lines, Bank of America plans to use its thrift charter to open store branches in all 50 states.4 National Commerce Bancorporation (NCB), a supermarket branching pioneer, is also using a thrift charter and store branches for geographic expansion. Under the name First Market Bank, NCB will use store branches (and the accompanying low-cost structure) to enter rural and small markets where the existing banks have not chosen to participate in store banking.5 First Market Bank will concentrate its expansion efforts on consumer and small business customers. The low cost of store branches also makes them an attractive vehicle for in-market expansion. The Bank of West Baton Rouge, for example, chose supermarket branches as its means of expanding its presence within the Baton Rouge, La., area.

Yield Retail Space to a Bank?

Like bankers, grocers have several reasons for locating bank branches in their stores. First, having an in-store branch enhances the "one-stop shopping" that the store offers its customers. Stores with bank branches experience increased customer traffic and improved customer loyalty, resulting in another major benefit, higher sales.6

In addition, bank branches pay rent to stores. For some retail outlets, the rent received from the branch is insignificant compared to the other benefits. For other outlets, however, the rental income is a strong secondary motivator.

Finally, depending on the nature of bank and store operations and on the degree of cooperation, the presence of an in-store bank can assist the store in several other functions. These synergies might include more efficient cash management by the store. If the in-store branch is also the bank with which the store does business, store branching may promote a closer working relationship; the possibility of negotiating reduced fees then arises.

Should I Bank Where I Shop?

Supermarket branching can also benefit the consumer. The most obvious benefit is greater convenience because of the availability of one-stop shopping and the longer hours offered by most supermarket branches. But there are other, less obvious, benefits. Because of their primary function, most successful store branch operations are staffed by bankers with a strong retail orientation. These bankers should be more knowledgeable about consumer banking products and services than their counterparts in a regular branch, where a variety of businesses and consumers are served.

Commercial customers, on the other hand, have not embraced store branches. Some do not like the relative lack of privacy for transactions or the retail orientation of the branch staff. Some need more complex services and products than those offered by many store branches. Others continue to use the branch where their familiar loan officer is based (typically a traditional facility); many are unaware that many commercial transactions can be handled by a grocery branch. According to John Garnett of International Banking Technologies, still other commercial customers are actively discouraged by their bankers from using store branches.

Some banks with store branches are exploring ways to attract business customers—particularly small business customers. Banks are beginning to train store branch staff in commercial lending and to operate commercial loan calling programs from store branches. Some banks are taking a boutique approach, with selected supermarket branches catering to business clientele. As with retail customers, banks are using the promise of increased convenience and extended hours to attract business customers to supermarket branches. Most of those interviewed by the Federal Reserve Bank of Atlanta believe that store branches will become more important as a commercial banking delivery system—at least for small businesses.

Regulatory and Policy Issues

Before pursuing in-store branching, the banking industry, its regulators, and its customers all need to consider several regulatory and policy questions arising from supermarket branching's popularity.

  • First, given the retail orientation of grocery branches, are bankers substituting store branches for freestanding branches in minority and low- and moderate-income neighborhoods and thereby possibly denying these neighborhoods some banking services?
  • Similarly, if store branches, like thrifts, concentrate in consumer lending, should they be considered full competitors for the purpose of reviewing competitive issues in merger applications?
  • Finally, does the convenience afforded by store branches increase the number of teller transactions per customer and thereby increase branch operating costs?

From results so far, it appears that supermarket branching is a win-win-win situation. Financial institutions and grocery stores benefit from increased traffic, from improved customer loyalty, and from the potential for cross-selling. Consumers benefit from more convenient locations and hours and from the retail perspective of store branch employees. For these reasons, nearly everyone surveyed believes supermarket branches will play an important role in the future of banking. However, the trend toward store branches raises Community Reinvestment Act (CRA) and competitive issues. In addition, the same convenience that makes grocery branches popular may increase the number of teller transactions, thereby increasing bank costs.

1 Lawrence J. Radecki, John Wenninger, and Daniel K. Onlow, "Bank Branches in Supermarkets," Current Issues in Economics and Finance 2, no. 13, Dec. 1996, Federal Reserve Bank of New York.
2 Daniel K. Onlow, Lawrence J. Radecki, and John Wenninger, "The Ongoing Restructuring of Retail Banking," Federal Reserve Bank of New York, Research Paper No. 9634.
3 Survey of 1,000 conducted in September 1996 by KPMG Peat Marwick and Yankelovich Partners Inc. Results reported in American Banker, Nov. 20, 1996.
4 "States Protest B of A's Plans for National Thrift Chain," American Banker, Dec. 4, 1995.
5 "Tennessee Bank Plans Nationwide In-Store Network," American Banker, Nov. 18, 1996.
6 National Commerce Bank Services Inc., press release, March 1996.
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