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4-1 EXHIBIT 4–1 Number of Insured Commercial Bank and Branch Offices, 1935-2009 (as of Year-End) Copyright © 2013 The McGraw-Hill Companies, Inc. Permission.

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Presentation on theme: "4-1 EXHIBIT 4–1 Number of Insured Commercial Bank and Branch Offices, 1935-2009 (as of Year-End) Copyright © 2013 The McGraw-Hill Companies, Inc. Permission."— Presentation transcript:

1 4-1 EXHIBIT 4–1 Number of Insured Commercial Bank and Branch Offices, (as of Year-End) Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

2 4-2 Establishing Full-Service Branch Offices: Choosing Locations and Designing New Branches (continued) Desirable sites for full-service branch offices possess some of the following characteristics Heavy traffic count Large numbers of retail stores Populations that are of above-average age A surrounding area that encompasses substantial numbers of business owners, managers, and professional men and women at work or in residence A steady or declining number of service facilities operated by financial-service competitors Above-average population growth Above-average population density A relatively high target ratio of population per branch Above-average levels of household income Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

3 4-3 Establishing Full-Service Branch Offices: Choosing Locations and Designing New Branches (continued) To measure the target ratio of population per branch, the following equation is used The larger the population served by each office, the more financial services are likely to be purchased, expanding revenues and enhancing operating efficiency Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

4 4-4 Establishing Full-Service Branch Offices: Choosing Locations and Designing New Branches (continued) The decision of whether or not to establish a branch office is a capital-budgeting decision Requires a large initial cash outflow to fund the purchase or lease of property and to begin operations Branches are usually created with the expectation that future net cash inflows (NCF) will be large enough to guarantee the financial firm an acceptable return (E(r)) on its invested capital Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

5 4-5 Establishing Full-Service Branch Offices: Choosing Locations and Designing New Branches (continued) Other considerations when considering possible locations for new branches: The variance around that expected return, which is due mainly to fluctuations in economic conditions in the area served by the branch The covariance of expected returns from the proposed new branch, existing branches, and other assets previously acquired by the offering institution The impact of a new branch’s expected return (RB) on the offering institution’s total return (RT) from its existing branches and other assets (ROA) can be found from W is the proportion of total resources to be invested in new branch B (1–W) is the proportion of the offering institution’s resources invested in all of its other assets (OA) Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

6 4-6 Establishing Full-Service Branch Offices: Choosing Locations and Designing New Branches (continued) The marginal impact of a new branch on overall risk measured by the variance of total return (RT): where ρB,OA represents the correlation coefficient between the expected return from the proposed new branch and the returns from other assets of the offering institution σB represents the standard deviation of the proposed new branch’s expected return σOA represents the standard deviation of return from other assets held by the financial firm Geographic diversification can reduce overall risk exposure Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

7 4-7 Establishing Full-Service Branch Offices: Choosing Locations and Designing New Branches (continued) Regulation in the United States recently has made it more difficult to close full-service branch offices of depository institutions The FDIC Improvement Act of 1991 The Community Reinvestment Act of 1977 Many analysts see the roles played by branch offices evolving in new directions today Sales orientation Cross-selling Branches are coming to be viewed today less as mere deposit gatherers and more as sources of fee-generating service sales and for booking profitable assets Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

8 4-8 Establishing Full-Service Branch Offices: Choosing Locations and Designing New Branches (continued) In-Store Branching A significant portion of financial-service branches today are located inside supermarkets, shopping centers, and other retail establishments These retail-oriented service facilities have only a few employees Highly sales oriented In-store branches typically are much less costly to build and maintain and tend to become profitable about 12 months earlier than stand-alone facilities Operate for longer hours Can experience more traffic flow than conventional branches Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

9 4-9 Establishing and Monitoring Automated Limited-Service Facilities (“Branchless Banking”) There has been a recent spike in branchless banking due to the high cost of chartering new financial firms and setting up full-service branch offices Point-of-sale (POS) terminals Automated teller machines (ATMs) Telephone banking Internet-supplied services Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

10 4-10 Establishing and Monitoring Automated Limited-Service Facilities (“Branchless Banking”) (continued) The Decision to Install a New ATM Suppose ATMs cost $50,000 each and require $30,000 to install A bank estimates that it will save $1.00 for each check that is not written because customers will use the machine instead Life expectancy is 10 years and it will handle 30,000 cash transactions/year Cost of capital to finance the ATM’s purchase is 14% Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

11 Banking in Homes, Offices, Stores, and on the Street
4-11 Banking in Homes, Offices, Stores, and on the Street Telephone Banking and Call Centers The telephone remains among the most popular channels for putting customers in touch with financial-service providers today Internet Banking Features include Verify in real time account balances at any time and from any location Move funds instantly from one account to another Confirm that deposits of funds have been received, checks have cleared, and online transactions have been completed View and print images of checks that have passed through a customer’s account Submit an application for loans and credit cards Carry out online bill paying Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

12 Financial-Service Facilities of the Future
4-12 Financial-Service Facilities of the Future Despite continually advancing technology, most experts seem to agree that the total number of financial-service outlets industry wide may not decline significantly for a time The use of “digital cash” will permit customers to be their own financial-service branches for certain transactions Service providers are likely to evaluate the success of their branch offices and limited-service facilities in terms of profits and costs per square foot Outsourcing of financial service delivery is likely to grow Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

13 4-13 Quick Quiz Why is the physical presence of a bank still important to many customers despite recent advances in long-distance communications technology? Who charters new banks in the United States? What are the advantages of having a national bank charter? A state bank charter? What kinds of information must the organizers of new national banks provide the Comptroller of the Currency in order to get a charter? Why might this required information be important? What are the key factors the organizers of a new financial firm should consider before deciding to seek a charter? What are POS terminals, and where are they usually located? What services do ATMs provide? What are the principal limitations of ATMs as a service provider? Should ATMs carry fees? Why? Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

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