Here's What's New in Latest Shared Branch Proposal
From: American Banker
Friday, September 26, 2003


To the Editor:

The shared bank branch proposal is revived every few years, each time being claimed as an original idea.

For example, Comptroller of the Currency John Hawke suggested the idea of a shared bank branch for inner-city areas in 1999. I made an identical proposal for a generic shared branch for inner cities in 1985.

Eric Rajendra, the author of the latest rendition, repackaged it as the "utility branch network" and described it as a "new paradigm" ["A Bold Plan for Cutting Overhead: Shared Network of Branches," Sept. 5, 2003]. An article earlier this year ["Shared Branches Helping Credit Unions Cut Costs," Feb. 12] quoted him discussing this same idea.

The shared branch is nothing new. Large New York City commercial banks in the mid-19th century routinely allowed small mutual savings banks, which weren't viewed as serious competitors, to operate out of their offices in exchange for compensating balances.

Many banks now share their proprietary branches with a wide range of financial and nonfinancial companies that are not directly competitive with their basic deposit and loan business.

The generic shared branch, first adopted by Detroit-area credit unions in 1975, were used mainly for suburban shopping center locations, since no one credit union could afford an expensive branch.

What is bold and new is Mr. Rajendra's proposal to eliminate 30%-50% of existing branches through shared branching. While this might mean savings of 50%-60%, as he claims, it would more than likely mean substantial losses of retail market share and profitability. Such radical and irreversible surgery probably would only be a feasible strategy for a bank planning to exit a significant geographic market or perhaps retail banking altogether.

Also, there would be public policy concerns over any large-scale shared bank branch network that would prohibit selling to other banks' customers, as he proposed. Any shared delivery vehicle, whether a branch or ATM, must preserve competition's invisible hand.

The fact that credit unions share generic branches does not imply that banks would do the same thing. Credit unions historically come from a less competitive culture, where their members traditionally were based on a common employment bond.

By comparison, banks, which have spent tremendous sums building and distinguishing their private brands, are traditionally much more competitive and therefore less likely to share.

One exception might be if there is a broader public policy benefit, such as in a nonbanked community, since banks, unlike credit unions, are covered by the Community Reinvestment Act.

Kenneth H. Thomas
Lecturer in finance
Wharton School
University of Pennsylvania

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