Rise of the Branchlet

Despite the hyperbole, the future of the bank branch is far from bleak.

It’s actually in a rapid state of mutation, evolving into two distinct species. The first, and most familiar, is located in vibrant, upscale geographies. It’s reaching higher, both physically with its shimmering glass walls, as well as economically, with its mortgage and lending services.

The newer, lesser known offshoot is reaching into narrow crevices of society’s side streets, leveraging smaller footprints and robust self-service and teller-assist technology, enabling cash-based populations to conduct their lifeline transactions, such as check-cashing, money transfer, bill pay, etc.

There are a variety of factors driving this evolution, but the two lynchpins are 1.) compressing fee revenue on established products and 2.) increasing regulatory pressure. Lower revenues and higher expenses do not make for business as usual. Further, a re-elected Democratic administration means that regulatory pressures will continue through at least 2016, and the GOP, still regrouping from recent elections, is fearing Hillary Clinton in 2016. The message is clear: regulatory pressures will not ease any time soon. Banks must increase their products and corresponding revenue while appeasing their regulatory masters. They must evolve.

This evolution is the classic one-two problem comprising product and distribution. To expand the revenue base, banks must offer quality relevant products at competitive prices and be able to reach the appropriate consumers in such a way as to generate a reasonable return. Conventional banking products can’t do it. They’re centered on the venerable direct deposit account (DDA). Compliance costs associated with the Know Your Customer (KYC) requirements and the basic costs of pushing paper checks around render this model’s suitability for the long term challenged at best and doomed at worst. Further, the regulatory pressures, particularly those surrounding the tightening requirements around overdraft fees, are a tightening noose.

Now, consider the increasing number of cash-based, yes, an INCREASING NUMBER OF CASH-BASED CONSUMERS in the USA and you’ve now got a need for a new kind of bank, or at least new banking products. New product centricity is required. Behold, the rise of general purpose reloadable pre-paid debit (GPR) cards: the low-cost, high-utility DDA for cash-based consumers.

Now that the GPR card has vaulted onto the financial services stage, supporting product distribution is required. Users of GPR cards primarily live in cash-based worlds. Cash needs to get from the consumer’s wallet to his GPR card. Without a checking account, how does that happen? Today, it’s largely an over the counter transaction, conducted across several systems provided by several companies. The complexity of the transaction, both for the consumer and the clerk, makes for significant expense and risk.

Self-service technology removes the human clerk from the cash transaction, and does it in just a few square feet of space. This is a story we’ve seen many times over the last 50 years. ATM’s. Gas stations. Vending machines. Airline check in counters. Coinstar. Redbox. Nexxo. Significantly lower costs, combined with dramatically improved utility, create fast, expedient transactions, lowering their costs and increasing their utility for the benefit of all. Self-service financial kiosks do for the GPR card what the ATM did for the DDA account. Humans are out of the low-touch transaction, free to focus on other tasks that require high-touch attention. Costs go down, transactions go up. As with virtually all other forms of technological advancement, increasing power and decreasing expenses allow for broader distribution and an increasing availability of service to all, most notably, to those who were previously out of reach.

Enhanced teller-assist technologies enable relatively unskilled clerks to deliver fully compliant financial services akin to the quality inside a full service credit union or bank branch, in a single application. With a small footprint and fully integrated service stack, all financial services required by the underbanked can be delivered at a small counter – no branch infrastructure required, just a branchlet.

In 2009, Tower Group estimated that it cost about $2.7MM to build a 3500 SF branch, and required $40MM of deposits in the first 5 years to cover the initial build and ongoing expenses. In that same period, the average deposits across all branches was $30MM. This is challenging math.

The cost for the creation and deployment of a self-service branchlet could be well under $50K. A teller-assist solution could be in the single-digit thousands. This is compelling math.

Whether future deployments are fully self-service or teller-assisted, branchlets are a big part of the future picture of financial services delivery, particularly to the lower end of the economic spectrum.

Is real money going through these branchlets, or is it a nice idea whose time is yet to come? Nexxo Financial has previously publicly stated that well over a billion dollars has been inserted by consumers into its kiosks, supporting international remittance, GPR loads, money orders, etc.

When “small” players report numbers at 10+ digits, the big players sit up and take notice. Major players are now exploring and deploying branchlets. Whether your interest is in banking or financial services access to underserved communities, or you just like to see a massive industry undergo rapid, vibrant change, the rise of the branchlet is going to make for great theater and future case studies.

About the Author
Mitchell A. Shapiro is a serial entrepreneur who has been integral to the creation and growth of companies at the intersection of financial services and technology for over 20 years. He is currently Co-Founder of Nexxo Financial Corporation, which delivers the complete stack of financial services required by America’s ~60 million underbanked residents, both directly under Nexxo’s own label, as well as via white-labeled solutions to banks, credit unions, retailers, and other fortune 500 consumer-facing service providers.