The Transformation of Small Town Branches

Financial institutions of all sizes are facing challenges to their retail branch system. Technological innovation, starting with the introduction of ATMs, then internet banking, and most recently mobile banking, has resulted in declining branch usage. Consumers and businesses don’t need to go to the bank as frequently as they did in the past now that routine monetary and service transactions can be easily handled on a personal computer or smartphone.

While these broad trends impact all financial institutions, community banks, which tend to be the primary provider of banking services in non-metropolitan markets, face special challenges. For one, their communities are, for the most part, not growing. Since the 1930s, young adults have fled small towns for better job opportunities in larger metropolitan areas. Over 50% of rural counties lost population between 1980 and 2010, with a typical decline of 14.8%. The impact was greatest in the Midwest, where 86% of all rural counties lost population. The eroding size of rural and small town markets, combined with changes in branch usage, makes it harder to raise deposits and attract loans.

One side effect of this phenomenon is that community banks in small markets often face less pressure to change their branch systems than their metropolitan brethren. As younger adults leave, the customer base of these banks ages, encouraging managers to assume that remaining more branch-centric continues to be an appropriate strategy. Executives also face less competitive pressure to embrace new technology, since many of the largest banks are pulling back from small markets. Bank of America, for example, has refocused on larger growth markets and sold or closed branches in smaller communities. As one community bank CEO told me, “I don’t have Chase or Wells or BofA in my market promoting their new technology; I just have other small banks like me.”

Unsustainable Expenses

But here’s the rub: maintaining an expensive branch network in the face of decreasing branch usage – even if the decline in transactions may be slightly slower in small markets – combined with low or negative population growth is an unsustainable economic formula in the long term. PCSB (Page County State Bank) in Clarinda, Iowa, is one institution that recognized the problem; managers saw that they would have to improve branch efficiency or else ultimately be forced to exit the small markets that had been their heritage. Communities with a small population, and therefore low branch traffic, cannot generate enough revenue to support traditional, fully-staffed bank branches. 

In response, PCSB adopted a video teller platform in which all teller transactions could be accomplished from one central location via video link, scanning technology and other digital tools. Teller stations in the branch and drive up became self-service kiosks with video assist. While this technology is usually associated with high traffic urban branches, such as the Bank of America video-assist facilities in Boston and New York, and the Wells Fargo express branch in Washington, D.C., we believe it may be even better suited to the challenges of small town community banking. PCSB’s chief operating officer, James Johnson, expressed it this way: “As rural populations decline, it becomes more and more difficult to maintain a traditional brick-and-mortar facility in them, but it’s very possible with this technology. This is our solution to the problem.”

Kleberg Bank took a different approach. Located in Kingsville, Texas, the home of the storied King Ranch, Kleberg’s market is decidedly rural, leaving the bank with two challenges. First, they had to change their distribution mix to be lower cost and more effective. Second, they needed to reach younger adults who represented their future.

So, executives at Kleberg restructured their distribution network by partnering with the largest grocery store chain in the area to build an in-store branch network. This allowed them to reduce cost, leverage the grocery chain’s store traffic and use their store partnership to bridge to nearby growth markets in an affordable way. The bank also embraced social media to attract younger customers, with an active presence on Facebook and a strong mobile banking offer. Furthermore, managers built a marketing strategy around sponsorship of community events that would appeal to a younger demographic.

The examples of PCSB and Kleberg suggest four strategies that can be helpful to all community banks:

Find the opportunities. Make a detailed assessment of the market potential in your existing and expansion markets. Every market has pockets of growth or segments that are underserved. Some communities are experiencing positive in-migration of young families looking for a less hectic lifestyle while others are finding new groups attracted by job opportunities in agriculture or in oil and gas development. Once you peel back the onion to take a deeper, data-driven, look at your markets, you can make a more informed decision on strategy.

Dominate the growth segments. Once you’ve identified the segments of potential growth, put a strategy in place to dominate them. Kleberg Bank recognized that they had to find a way to attract a younger market, even if the overall market demographics skews older. They focused where they could achieve growth.

Embrace technology. We believe it is a myth that rural and small town markets won’t accept self-service and digital technology. Farmers, for example, are sophisticated users of weather prediction technology, using GPS to manage planting and harvesting and other high-tech predictors of crop futures. PCSB has demonstrated that when consumers see the advantages in using new technology – longer banking hours, improved access to service and the ability to keep a local community bank presence in their community – they will accept it.

Expand into nearby metropolitan growth markets, albeit with caution. Some banks have felt the answer is to branch into metro areas where the economy is stronger, in essence following the same pattern that younger adults have taken by leaving their rural roots. This can be appealing, but it brings with it the challenges of managing a branch in a new geography and in a market that often features different lending characteristics and, therefore, different risks. During the recession, rural community banks with metropolitan branches had a higher failure rate than their peers who stayed in the markets they best understood. Searching for growth in other geographies is possible, but requires particularly close attention to risk and expense.

Although there’s no silver bullet solution to the perfect storm scenario currently underway in small and rural markets, there is a way forward, as demonstrated by the examples of PCSB and Kleberg Bank.

Mr. Kerstein is president of Austin, Texas-based Peak Performance Consulting Group, which specializes in retail, community, and small business banking. He can be reached at [email protected].