Banking Management

Unit- ELEVEN

Managing Bank Service Outlets

By
Arpan Paudel
The purpose of this chapter is to understand the importance of bank
branches, to determine what makes a good site for a new branch office,
to recognize how the role of branch offices is changing, and to explore
the evolution of new facilities & services in contemporary banking and
the expected bank facilities of the future.
Overall Financial Access Status of Nepali Banking Industry
(As on Baishak End 2078)

Source: NRB
Province/District wise Branch Distribution of Nepali Banking Industry
Province/District wise Branch Distribution of Nepali Banking Industry

Source: NRB
Overall Branch Distribution of Nepali Banking Industry

Source: NRB
Do Banks Need Branches in the Digital Age?
 *Although it was predicted that bank branches would quickly
become obsolete in a computerized society, the reality is that
many full‐service branches are not closing but rather evolving to
meet changing needs.(Luiz, et.al 2017)
 The future of banking lies in branches and technology – enabling
customers to bank(Paul Pester, CEO of TSB Bank)
• where they want,
• how they want and
• when they want.
 The importance of having a branch in a convenient location is as
important as ever for consumers.

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 Bricks or Clicks?
 Which banking channel do consumers want more?
• Although 24% of consumers say they would consider a branchless bank, nearly 90% of
them believe that they will continue to use their branches, and an increasing number of
consumers believe that the branch is the single most important channel (Adrien
Kirschfink, MD at Accenture Financial Services)

Paul Donofrio, CFO at Bank of America-“We still have one million people coming to
our branches every day, and they need that channel. Some need it to transact, but a lot of
them come in for advice & we want them to do that. So, we need a certain footprint of
financial centers”
Branches continue to be very important, especially for Seniors and even
a lot of Millennials with money.
• Even if they don’t go into them a lot, they want to know that they’re there.
Branches still matter

 Branches are incredibly important & they will continue to be.

 Connor Crawford, President of The Southern Bank in Birmingham-“There
are customer segments who value the customer experience associated with familiar
faces and working with people you know. While certain banking products lend
themselves to automation, other products such as those pertaining to commercial
banking and wealth management perform best with the deeper level of interaction
found in branch banking relationships.”
 Fact of the matter is that we can opine for everything digital, but there
is still a strong role for physical and always will be.
 Consumers continue to see the value of branches for the “human
factor.”
 The rapid adoption of virtual banking and self-service has led many to
question the role of the bank branch.
Establishing Bank Branches

 Important vehicle for market entry

 Usually much cheaper to establish than chartering whole new bank.
• No. of bank branches in the US has grown
• [10000 in 1960, 50000 in 1990, 77647 in 2018]

• No. of BFIs branches in Nepal [441 in 1990, 8970 in 2019]

 Location design & service offered by a bank branch depend on:
• Preference of bank customers
• Preference of bank management & employees
Desirable sites for new branches

1. Traffic count is heavy

2. Large no. of retail shops and stores
3. Local populations that are of above average age (age ≥ 45
yrs.)
4. Substantial no. of business owners, managers &
professionals
5. Less competition of other BFIs
6. Above average population growth
7. Above average population density (no. of persons/sq.km.)
8. Above average level of household income
9. Sufficiently larger no. of people per bank branch
• In USA, 4000 people per branch
• Japan ≥ 8000 people per branch
• Austria & Germany ≥ 10000 people per branch
Desirable sites for new branches

10. Capital budgeting decision

• require large initial cash outflow
• expected net cash inflow (NCF): should be large enough to guarantee the
acceptable return, E(r), on its invested capital
• expected return formula,
 E(r)=

• branch is economically viable if E(r), equals or exceed the min. acceptable return (k)
• eg. If new branch is exp. to cost $3m to establish & generate $0.6m in net annual cash
inflow for 10 years, then what will be the branch’s exp. return, E(r)?

branch’s exp. return, E(r) =

 E(r) = 15%
• If shareholder’s min. exp. return (k) is 10% then this branch appear to be
economically viable.
Structure and regulations of the US commercial banking industry

 There are around 4,909 FDIC insured commercial banks in the

USA as of 2017, for more than in any other country in the
world [5177 banks as of Dec, 2019]

 In Canada or UK usually five or six major banks dominates the

industry but in USA ten largest banks hold only 36% of the
assets in their industry

 Restrictions and regulations on branches had resulted in more

banks

 Two-third deposits are held by commercial banks, and

remaining by thrift institutions

 In the past, it had been a case that an American bank could

open a branch in foreign country easily than domestically

 The McFadden Act 1927, had effectively prohibited larger

banks to open branches across states
Contd..
 The McFadden Act and state branching regulates constituted strong
anticompetitive forces in the commercial banking industry
 But from late 1990s, situation has changed via modification by interstate
banking and branching efficiency act.
 Regulation on branches particularly are being eased
 The restriction on branches had resulted in three developments:
• Bank holding companies
• Nonbank banks
• Automated Teller Machines (ATM)
Bank holding companies
 A holding company is a corporation that owns several different
companies

 The growth of holding companies over the time had been dramatic to
avoid the branching restrictions
• The holding company can own a controlling interest in several banks
• These holding companies had been and can involve in investment
banking activities
• can purchase a failed bank in even other states and thus effectively
avoid the branching restriction
Nonbank banks
 Another way banks can avoid branching restrictions was due to loopholes
in the bank holding Act of 1956, which defined a bank as a financial
institution that accepts deposits and makes loans

• Once bank holding companies had recognized this loophole, they

opened branches with one function only (means offering loan facility
or taking deposits only)
• However, the Competitive Act passed in 1981 had effectively filled this
loophole
ATM
 The modern day facility of ATM was originally invented to avoid
branching restrictions in USA

• Banks recognized that even if they don’t had ATM machines by their
own but could use rented machines, they can easily avoid branching
restrictions
• A number of these shared facilities such as Cirrus and NYCE have
been established nationwide
• States also had encouraged these ATM machines rather than “brick and
mortar branches”
• These ATM machines had got popularity with the advent of cheap
computers
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E-banking in Nepal
 Automated delivery of new and traditional banking products and services
directly to customers through electronic interactive communication
channels.

 An umbrella term for the process by which a customer may perform

banking transactions electronically without visiting a brick and mortar
institution.

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E-Banking in Nepal

 Evolution of e-Banking and plastic cards:

 Introduction of Credit Cards in Nepal in early 1990 (by NABIL Bank)

 Automated Teller Machine (ATM) was first introduced by another JV

Bank, Himalayan Bank Ltd. In 1995.

 Himalayan Bank Limited was also the first bank to introduce Tele-
Banking (Telephone Banking, fax transfer) in Nepal.

 Internet-Banking was first introduced by Kumari Bank Limited in

2002.

 Laxmi Bank Limited was the first bank to introduce SMS-Banking (or
Mobile Banking) in Nepal in the year 2004.

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Branchless/ e-Banking in Nepal
Current Status of e-Banking
 Channels in e-Banking available in Nepal
Automated Teller Machines (ATM)
Point of Sales (PoS)
Telephone Banking (Tele Banking)
Internet Banking
Mobile Banking (SMS Banking)

 Mostly in remote areas, establishment of branchless banking

with the use of technology is increasing up.
 The total 3950 ATM of commercial banks and in overall 4300
ATMs are installed all over the country as of Baishak End 2078.
Branches are diversifying

 Of course it is, but potentially in a different guise to that of

the past, and even for different uses as banks still want to
play an important part in helping their customers access
services the way they choose to.

 For example, Amazon, has partnered with Barclays to use its

branches as collection points, showing how bank branches
are diversifying.
The Changing Role of Branches

 Branches today represent the bank’s “eyes and ears”.*

 Offer the greatest opportunity for Cross Selling.
 Stronger sales orientation. eg.
• Low-profit but heavily used teller stations now are used to place at the rear of
branch office lobbies.
• Drive-in windows today are often confronted with advertisement (loans and fee
generating products, backdrop of soft music)
• Branch office hours are being set to match local customers’ shopping and
recreational schedules [ Including Saturday & Public Holiday]
• One-window service system [All employees in each branch office are trained to
know about all services, taught to look for every opportunity to sell more]
The Changing Role of Branches

 More like other retail stores- sell as many products as possible

 Substitution of as much automation as possible

 In-Store Branching [Shopping Centers, Supermarkets,…]

• Less costly to build and maintain.

• Usually operate over longer hours (Including weekends and holidays)

 Limited-Service Facilities
• Rent-free branch; operating few hours [Senior citizen’s retirement home,
Apartment Complexes]

• POS terminals

• Self-service terminals

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Bank facilities of the future
 Design & function of most branches are likely to evolve into new configuration
 Use of ‘digital cash’ & ‘smart card’
 Automated facilities with broader self-service capabilities
 More service facilities in non-stand-alone locations in and adjacent to other stores
 Fewer full service
 No staff or low staff offices
 Performance measurement: in terms of ‘profit & cost per sq. ft.’
 Include much portable information-access equipment
• Portable briefcase office as designed by Bell Atlantic Corp., for Founders Bank in Philadelphia

 Bank facilities will be able to visit the customers rather than the other way around.

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