By Roy Urrico
Branches are experiencing a resurgence. Certain larger banks and credit unions see them as essential brick-and-mortar presences in local communities; and younger generations (i.e., millennials and Gen Z) increasingly want to use branches to get financial advice. Those are among the topics Bill Handel, vice president, general manager and chief economist at Raddon, a Fiserv company based in Milwaukee, covered in a conversation with Finopotamus.
Handel also shared some insights on additional topics he covered in his presentation at the Fiserv Forum 2024, held Sept. 29-Oct. 1 in Las Vegas, including what is happening economically and the challenges presented by the shifting demographic patterns in the United States.
“We talked about millennials for years,” said Handel. “Now we are talking about Gen Zs and even the beginning of conversation around Gen Alpha (the first cohort born entirely in the 21st century), delivery strategies, and what does 2025 look like for the industry?”
Branches as Marketing Billboards
“If you look at 12 years of data, what you would find is that the banking industry has contracted their branch counts by about 20% in the last 12 years. If you look at (Bank of America or Wells Fargo), it is closer to 30%. For Chase it is 10%,” said Handel. “Every time (Chase) moves into new markets they build branches because branches really serve as kind of a marketing billboard. It is something that really lets that market know you are truly there in that market – and that you are a presence.”
Some of the large credit unions also are expanding branch networks, noted Handel. “The credit union as an industry is essentially flat, maybe slightly positive in the last 12 years in terms of branch counts. But when you look at the large credit unions, those with over $2 billion in assets 12 years ago, they have grown their branch counts by 30% plus.” Handel acknowledged some of that credit union branch growth came through merger and acquisitions. “But as they move in to new markets, they're building locations.”
While many financial institutions look for ways to reduce expense footprints, Handel suggests not viewing purging branches to reduce expenses. “Because that actually makes you less relevant. You need to grow your revenue streams relative to your expense. The way you are going to grow your revenue is not so much through things like non-interest income. It is more through building relationships and building balances, which will drive more margin income for you.”
Generational Branch Use Differences
While certain people assume younger generations view branches as irrelevant. In fact, Handel explained Raddon research suggests otherwise. “They're actually in branches on a monthly basis at a higher frequency than are the older population, which is a really interesting thing. I do not think anybody would have anticipated that.”
Millennials use branches more than other generations, explained Handel. Older banking consumers primarily use branches to conduct basic transactions. In contrast, Gen Z and millennials increasingly want to use branches to get financial advice.
“That is the evolving role of the branch. In the longer haul, branches will really be more of a place for sales, advice, and things like that, and much less of a transactional hub overall. We see that as a major trend,” Handel noted.
Tech -Savvy Younger Generations
Younger generations view technology as “extraordinarily important to them,” according to Raddon’s national research, Handel said. “Their perception is very clearly that the big banks have better technology solutions than do credit unions or community banks. In fact, in their view, community banks rank the poorest in terms of the technology solutions overall. This is all perception,” noted Handel. “But Chase seems to be making the biggest inroads in the younger part of the population.”
Handel recommended that credit unions and community banks must pay attention to technology, too. For example, younger generations are far more open to AI-generated financial advice than older consumers.
“It is not just enough to have it, but you need to communicate around it and talk about your strength on the technology side, (and) how you make financial life easier for consumers because of your technology,” said Handel.
Economic Perceptions and Opportunities
“We had a lot of conversation around just what are the prospects for the economy and what does that look like in 2025?” said Handel.
Handel pointed out much of the focus relates to inflation. “We did a national research study (What Is Old Is New Again! in April 2024) and we found that 57% of consumers in the United States actually think we are in a recession right now. What they classify as a recession and what an economist classifies as a recession are two different things. Consumers, especially at the younger end, and especially consumers who are lower income, or who have not saved much, are feeling a lot of pain.”
In addition, Handel elucidated that the changing interest rate environment continues as a major focus for many credit unions and banks. “With lowered rates here is an opportunity in the short term, especially, on the lending side, in recapturing automobile financing. The challenge is that many of those loans a credit union may look to rewrite and loans that were done with competitors, many of those loans will be underwater (the amount owed is greater than the current value of the asset).”
He continued, “Best guesses about a quarter will probably be underwater. You are going to have to really be judicious in terms of your credit underwriting standards. You are going to have to be pretty smart about making sure you are not looking just at collateral but at the quality of the borrower.”
Handel also sees home equity as a good opportunity again. “We do not think mortgage refinance is going to resurface anytime in the near future in any significant way, because rates will not drop enough to make it a worthwhile transaction for most people who might have purchased a house in the last couple of years. People will still be house locked with a very low mortgage rates that they got in 2021 and 2022,” he continued. “When people are house locked, they want to do things like home improvement, then they have to find a way to do this. And home equity lines become a really good opportunity.”
Savings and Credit Cards
Figuring out why credit union deposits have steadily risen since the first quarter of 2020 – though the personal savings rate has plummeted from 15.2% in 2020 to 4% today, presents a conundrum, explained Handel. “The personal savings rate (in 2020), was artificially high because of COVID.”
Handel pointed out while the stimulus package boosted income, spending was down because nothing was open. “The government did a lot of stimulus work and put a lot of money into the hands of a lot of people. As we started coming out of COVID, it is almost like the pressure valve released and people started spending money.”
However, when those stimulus funds started running out people continued to spend using credit cards. “What we have seen since about (2021) or (2022) was the most rapid increase in credit card balances in the United States. And so, there is some risk there as well.”
Handel emphasized, “We have also seen a very rapid rise in terms of delinquency rates on credit cards. Now, they are still not extraordinarily high by historical (standards) but by COVID era standards, they are high. But it is the trend line which is concerning and how rapidly that is changing.”
Probably about half to 60% of the population is really feeling “a lot of financial pain,” according to Raddon’s national research, according to Handel. “The other half or 40% is actually feeling quite good when your (talk about) stock market people who have accumulated assets. And the wealth effect is a very real thing. But there is a whole other part of the population that is really struggling.”