The rate of growth in the American banking trade has been so rapid that it appears almost as if the industry has exploded. It’s not uncommon now to see three of the four corners of a popular intersection in town being occupied by different bank branches, a strategy made popular with fast food firms and gasoline retailers.
It makes you wonder, just how many banks do we need and why are the institutions spending so much money to put branches in virtually every location that has open space? The trend doesn’t appear to make financial sense; after all, population growth hasn’t provided the number of additional customers one would think is necessary to fuel such an expansion.
The race among banks to outnumber their competitors has become more intense in the last ten years, and has much to with changes in bank regulations and industry trends as described in detail below.
- Regulatory Changes: The rules for how many branches a bank can own and where they can open have changed significantly in the last decade. Banks can now open branches inside grocery stores and are permitted to place their storefronts at a greater density than before. The deregulation has set off the growth war that we notice going on all over town.
- An Eruption in Services: Along with deregulation, commercial banks can now offer many more services than ever before. While banks still offer traditional checking and savings accounts, they have expanded to include a variety of investment services and credit options. If you walk into the bank, you will be buried with offers for these types of services, which are all huge money makers.
- Upselling the Customer: As mentioned above, banks still offer checking accounts, but what most people don’t’ know is that this type of account is a loss leader used to capture your business. Once they’ve gained your trust, they will work hard to convince you to add their investment and loan products to your portfolio, which provide them a much higher return on the use of your funds than your checking account. Further, the overdraft fees that most now apply to basic accounts are a pure profit mechanism.
- Visibility Counts: Each new customer banks land takes revenue away from their competitors. If they can capture your banking business, they can use your money to lend to others in the form of loans. 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. And while it might be troubling to see every street corner filled with bank branches, it’s part of the market system that makes our economy strong, and that is a good thing.