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Chapter FourEstablishing New
Banks, Branches, ATMs,Telephone Services,and Web Sites
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McGraw-Hill/IrwinBank Management and Financial Services, 7/e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Key Topics
• Chartering New Financial ServicesInstitutions
• Performance of New Banks
• Establishing Full Service Branches and In-Store Branching
•
Establishing Limited Service Facilities• ATMs and Telephone Centers
• The Internet and Online Banking
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© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Responding to Changing Customer
Demand: Convenience
• Chartering New (De Novo) FinancialInstitutions
• Establishing New Full-Service Branch Offices
• Setting Up Limited Service Facilities
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© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Charters for New Banks
• Dual Banking System▫ Federal (National) Charter
Office of the Comptroller of the Currency
Office of Thrift Supervision
National Credit Union Administration
▫ State Banking Commissions in the 50
States for State Banks
▫ All Banks Obtain FDIC Deposit Insuranceas part of the chartering process
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Reasons for Oversight of Charters
• Financial Institutions Hold the Public’sSavings
• Financial Institutions are the Heart of thePayment System
• Financial Institutions Create Money
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Benefits of a National Charter
• Brings Added Prestige Due to Stricter StandardsWhich May Bring Larger Deposits
• In Times of Trouble, Technical Assistance MayBe Better
• Federal Rules Can Preempt State Laws
• National Banks Join the Fed – Regulated by OCC
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Benefits of a State Charter• May Be Easier and Less Costly to Obtain• Bank Does Not Need to Join the Federal Reserve
System
The Primary Federal Regulator of StateMember Banks is the Fed
The Primary Federal Regulator of Non-FedMember State Banks is the FDIC
• State May Allow Bank to Lend More of itsCapital to a Single Borrower and Offer OtherServices
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Quick Quiz
• Why is the creation (chartering) of newbanks closely regulated?
• Who charters new banks in the UnitedStates? New thrift institutions?
• What are the advantages of having anational vs. state bank charter?
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Questions/Considerations for Organizersof New Banks
• Population and Geographic Boundaries of Primary Service Area (PSA)
• Competing Financial Institutions in PSA• Number and Types of Businesses in PSA• Traffic Patterns in PSA• Population Growth in PSA• Banking History in PSA• Amount and Holders of Stock in New Bank• Business and Banking Experience of Organizers• Projections for New Bank in First 3 to 5 Years
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National Charter Seekers Must:
• Submit a Detailed Business Plan to OCC
▫ Description of the Proposed Bank
Market demand, customer base, economic and
competitive conditions, and risks
▫ Marketing Plan
▫ Management Plan
▫ Financial Plan
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External Factors that Affect Decision
for New Charter
• Level of Economic Activity
• Growth of Local Economic Activity
• The Need for a New Bank
• The Strength and Character of LocalCompetition in Supplying Financial Services
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Internal Factors that Affect Decision
for New Bank
• Qualifications and Contacts of Organizers
• Management Quality
• Capital Pledged
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Volume, Characteristics, and
Performance of De Novo Banks
• The Number of New Charters Has AveragedOver a 100 per Year
▫ see Historical Statistics on Banking, FDIC
• Normally Located in Relatively Large Urban
Areas with High Population Growth
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Desirable Sites for New Branches
• Heavy Traffic Count• Large Number of Retail Shops and Stores• Above Average Age of Local Populations•
Area Contains Substantial Number of Managers,Business Owners and Professionals• Steady or Declining Number of Service Facilities
Operated by Competitors• Above Average Population Growth• Above Average Population Density• Relatively High Target Population per Branch• Above Average Levels of Household Income
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Expected Rate of Return
The Decision of Whether to Establish aBranch Office is a Capital BudgetingDecision. The Present Value of the NetFuture Cash Flows Should Be Larger Than
the Initial Outlay
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Geographic Diversification
Reducing a Bank’s Overall Risk Exposure toits Total Return By Establishing ServiceFacilities in Different Market Areas WhoseIndividual Returns are Not Highly Correlatedwith the Returns from a Bank’s Existing
Market Locations
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Branch Regulation
• FDIC Improvement Act Requires Institutionsto Notify Their Regulatory Agency and
Customers 90 Days Prior to Closing aBranch
• Community Reinvestment Act of 1977Requires Them to Make an Effort to ReachAll Segments of Their Communities WithServices
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The Changing Role of Financial-
Service Branch Offices• Sales Oriented
• Offer Cross-Selling Opportunities
• In-Store Branching▫ Offices Set Up Inside Retail Stores or in
Malls in Order to Reduce Construction
Costs▫ What are the Advantages and
Disadvantages? (next slide)
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Advantages and Disadvantages of In-Store Branches
Advantages• Lest Costly to Build and
Maintain• Experience More Traffic
Flow than NormalBranches
• Deposit Volume May be
Heavier Because theyAttract Store’s OwnDeposits
Disadvantages• May Need More
Aggressive Marketing• Many Financial
Transactions Need MoreFinancial Expertise
•
No Drive-in Window
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Limited-Service Facilities
• Point of Sale (POS)Terminals
• Automated Teller Machines (ATMs)
• Home and Office Banking• Telephone Banking and Call Centers
• Internet-Banking
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ATMs
• Less Costly to Set Up ($70,000-$80,000) andOperate (about 36% compared to a humanteller per transaction)
• But Less Effective at Cross Selling, LessPersonal Service, and More Vulnerable toCriminal Activity
• Decision to Install ATM: The Bank Examines thePresent Value of the Stream of Cash Savingsfrom the New ATM Machine
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Common Call Center Services
• Current Balance of Loan, Deposit or InvestmentAccount
• Verification of Transactions Through
Customer’s Account • Amount of Interest Paid or Earned on Accounts
• How to Move Funds Among Accounts
• Fax or Downloadable Copies of Applications
and Account Statements• Details on Different Services Currently Available
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Services Provided Through theInternet
• Verify Real-Time Account Balance
• Move Funds Instantly Among Accounts
• Confirm Deposits Made, Checks Cleared
and Online Transactions Have Taken Place• View and Print Images of Checks
• Place Orders for New Checks
•
Submit Applications for Loans and CreditCards
• Carry Out On-Line Bill Paying
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The Internet and Customer Safety
• Especially Vulnerable to Fraud and IdentityTheft
• Authentication Factors▫ Something a Customer Knows▫ Something a Customer Has▫ Something a Customer is
• Move to Multi-Factor Authentication From
Single Factor Authentication Today
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Quick Quiz
• What factors are often considered inevaluating possible sites for new branchoffices?
• What laws and regulations affect thecreation of new bank and thrift branchesand the closing of existing branches?
• What services do ATMs provide? What are
the main advantages and disadvantages of ATMs as a service provider? Should ATMscarry fees?
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