CHAPTER EIGHTEENCreating And Managing

Service Outlets: New Charters, Branches, And

Electronic FacilitiesThe purpose of this chapter is to learn how new banks are chartered by state and federal authorities in the United States, to determine what makes a good site for a new branch office, to recognize how the role of branch offices is changing, and to explore the advantages and disadvantages of automated banking facilities.

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Responding to Changing Customer Demand

Chartering Completely New Banks

Establishing New Full-Service Branches

Setting Up Limited Service Facilities

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Charters for New Banks

Office of the Comptroller of the Currency for National Banks

State Banking Commissions in the 50 States for State Banks

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Benefits of a National Charter

Brings Added Prestige Due to Stricter Standards

In Times of Trouble, Technical Assistance May Be Better

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Benefits of a State Charter

May Be Easier and Less Costly to Secure a State CharterBank Does Not Need to Join the Federal Reserve SystemState May Allow Bank to Lend More of its Capital to a Single BorrowerMay Be Able to Offer Wider Range of Loans and Other Services

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Questions for Organizers of New Banks

Population and Geographic Boundaries of Primary Service Area (PSA)Competing Financial Institutions in PSANumber and Types of Businesses in PSATraffic Patterns in PSAPopulation Growth in PSABanking History in PSAAmount and Holders of Stock in New BankBusiness and Banking Experience of OrganizersProjections for New Bank in First 3 to 5 Years

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Public Need

Organizers of New Banks Demonstrate Public Need for the New Bank By Showing That Local Banks Are Not Conveniently Located or That Existing Banks Fail to Offer Some Key Services

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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 Local Competition 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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Desirable Sites for New Branches

Heavy Traffic CountLarge Number of Retail Shops and Stores Above Average Age of Local PopulationsArea Contains Substantial Number of Managers, Business Owners and ProfessionalsOther Financial Institutions Not Increasing RapidlyAbove Average Population GrowthAbove Average Population DensitySufficiently Large Number of People in Service AreaAbove Average Levels of Household Income

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Expected Rate of Return

The Decision of Whether to Establish a Branch Office is a Capital Budgeting Decision. The Present Value of the Net Future Cash Flows Should Be Larger Than the Initial Outlay

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Geographic Diversification

Reducing a Bank’s Overall Risk Exposure to its Total Return By Establishing Service Facilities in Different Market Areas Whose Individual Returns are Not Highly Correlated with the Returns from a Bank’s Existing Market Locations

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In-Store Branching

Banking Offices Set Up Inside Retail Stores in Malls in Order to Reduce Construction Costs

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Limited-Service Facilities

Point of Sale (POS)Terminals

Automated Teller Machines (ATMs)

Automated Loan Machines (ALMs)

Self-Service Terminals

Home and Office Online Banking

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Decision to Add ATMs

The Bank Examines the Present Value of the Stream of Cash Savings from the New ATM Machine

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Advantages of Using the Internet to Deliver Services

Low Cost Source of Information and Service Delivery

Customer Use is Measurable

Easier to Get Customer Feedback on Service Quality, Pricing and Problems

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Disadvantages of Using the Internet to Deliver Services

Customer Privacy

Existence of Crime Problems

Bank May Not Get to Know Customers

Customers May Not Have Compatible Electronic Systems

Cost May Be Prohibitive for Some Customers

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Ways to Promote Bank Customer Internet Use

Emphasize SafetyPromote Web Services Whenever PossibleRevise the Site Often to Retain Customer InterestShould Survey Customers Often About Quality, Satisfaction and Availability of ServicesCan Be Used to Promote Customer Dialogue with the Bank