What it means
A branch network is a distribution system. The bank's product, essentially the ability to take in deposits cheaply and lend them out more expensively, is sold through offices placed where customers live and work.
The economics are simple to describe and hard to manage. Each branch carries fixed costs for premises, staff and security, and it earns its keep only if the deposits and loans it generates produce enough margin to cover them.
Branches matter because they are expensive and because the deposits they gather are cheap and sticky. Retail current account balances typically cost a bank far less than wholesale funding and are much less likely to disappear overnight, which is a large part of why banks kept networks long after online channels arrived.
The model has been shrinking for two decades as routine transactions moved to apps and cash use fell. Most large banks have responded by closing or merging small branches while keeping fewer, larger sites focused on advice, mortgages and small business relationships rather than counter service.
Regulation shapes the picture too. Some countries historically restricted banks to a single state or even a single office, and the gradual removal of those limits is what allowed nationwide branch networks and the consolidation that followed.
In practice
Real-world examples.
Example
A regional bank reviews its 140 branches and finds that 22 sit below the deposit level needed to cover their costs. It merges eighteen of them into neighbouring sites and converts four into advice-only offices with no cash handling.
Example
A building society opens a branch in a fast-growing commuter town where two rivals have recently closed. Within eighteen months it has gathered $41,000,000 in deposits, largely from customers who wanted somewhere local to discuss a mortgage.
Example
A small business owner uses her branch chiefly to pay in takings and to talk to a manager who knows her trade. When the bank proposes closing it, her main objection is losing the relationship rather than the counter.
Formula
Calculation
Break-even deposits for a branch = (annual operating cost - other income) / net interest margin, where net interest margin is the spread the bank earns on the balances the branch gathers.
A high street branch costs $850,000 a year to run, covering six staff, rent, security, compliance and an allocated share of central technology. The bank earns a net interest margin of 2.5% on the deposits the branch brings in. Ignoring fee income, the branch needs $850,000 / 0.025 = $34,000,000 of deposits simply to break even.
Now add $120,000 a year of fee income from insurance referrals, foreign exchange and account charges. The margin needs to cover only $850,000 - $120,000 = $730,000, so break-even deposits fall to $730,000 / 0.025 = $29,200,000. A branch holding $22,000,000 of deposits is therefore losing money and is a candidate for merger with a nearby site.Case study
Seen in the real world.
Meridian Mutual Bank is an invented institution used for this illustrative example. It ran 96 branches inherited from three separate mergers, and roughly a quarter of them were within a mile of another Meridian office.
Rather than announce closures by branch size alone, the fictional bank measured each site against its break-even deposit level and against how many customers used no other channel. That second measure changed several decisions: two small rural branches stayed open because a high share of their customers had no realistic alternative, while a larger city site closed because almost every customer already banked on the app.
The illustrative outcome was a network of 71 branches with lower total costs and slightly higher deposits, because the released budget funded longer opening hours and mortgage advisers at the sites that remained. The lesson Meridian drew was that a branch is worth keeping for the relationships it holds, not for the transactions it processes.
Watch out
Common mistakes.
- Judging a branch by footfall alone. What pays the bills is the value of deposits and lending it holds, not the number of people who walk through the door.
- Assuming digital banking makes branches worthless. Complex products such as mortgages and business lending still convert far better face to face in most markets.
- Forgetting that closing a branch can move deposits to a competitor rather than to your own app. Some customers follow the office, not the brand.
Questions
People also ask.
What is unit banking?
It is the opposite model, historically enforced by law in parts of the United States, where a bank operates from a single office with no branches.
Do branches still make money?
Many do, especially larger sites serving small businesses, but the break-even deposit level has risen as costs have grown and margins have tightened.
How do banks decide which branches to close?
Typically by combining profitability against a break-even threshold with distance to the nearest alternative site and the proportion of customers who use no other channel.
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