The
proliferation of branches of banks in most countries has become so epidemic
that it is hard not to notice the dominance of this kind of business on any
street corner in your town. In many
cases, a busy intersection which might be used for retail operations such as fast
food restaurants, cleaners, gas stations and quick stop stores has been taken
over by banks. In some cases you will
see three of the four corners of a popular intersection in town occupied by
different bank branches.
It makes you
wonder, just how many banks do we need in town and why are the banking
institutions spending so much money to put branches in virtually every location
that has open space? It is a business
trend that gets your attention and it makes you wonder what is driving this
bank explosion. After all, in many cases
there are not more customers for those banks.
You have to wonder how banks can cost justify such expansion when the
growth of bank branches is not even in step with population growth in a given
community.
The
phenomenon has become more profound in the last ten years than ever
before. And much of it has to do with
changes in how banks are regulated and the financial objectives that these
branches are targeting, financial objectives that bring big money to the
banking institutions spreading all over town.
· Regulatory
Changes. The rules for how many
branches a bank can own and where they can open them have changed significantly
in the last decade. Now banks can open
branches inside grocery stores and at a greater density than before in most
countries. And this has set off the
growth war of branch banking that we notice going on all over town.
· An
explosion of services. Along with a freeing up of the branch banking
laws, commercial banks can offer many more services than ever before. While we think of banks in terms of checking
and savings accounts only, if you walk into the bank, you will be buried with
offers for a huge variety of financial services including varieties of
investment services and different forms of credit arrangements. And these services are huge money makers for
your local banker.
· How
banks really make their money. Obviously banks don’t
make much money just keeping your checking account working correctly. But using checking as a loss leader, banks
can capture your business to offer credit services and investment vehicles that
yield them much higher returns on the use of your funds. Further, the fees that can be applied for
overdraft accounts and other fee based services are a pure profit mechanism for
banks.
· Visibility
counts. Each new customer a bank
lands takes revenue out of competitor’s banks.
And if they can capture your banking business, the money you store in
your accounts is available for loans and interest they can realize by using your
money while it is in their care. So they
want to be visible to assure you think of them first when it is time to open a
new account.
This trend
is not likely to change any time soon.
The competition in the banking industry is fierce and bankers are
aggressive business people. So we should
expect them to continue to work hard to capture the consumers business and make
themselves available to consumers to steal your business away from competing
banks. And while it might be troubling
to see every street corner filled with bank branches, its part of the market
system that makes our economy strong.
And that is a good thing.
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