Jul 06 2007

Explaining the Credit Union Branch Entry Decision, and Implications for Performance

Report  
Number  
135

How do credit unions decide where to locate a new branch, and what impact do new branches have on financial performance? This report aims to answer these questions.

Robert M. Feinberg, PhD
Professor of Economics
American University
Report Number 135

Executive Summary

A recent edition of American Banker reported, “The total number of bank branches has not declined since 1992 . . . in the decade from 1996 through 2005, banks added an average of 1,484 branches a year.” Looking at the credit union world, a similar trend was in play during the same decade- long time frame. Credit unions increased their number of branches by nearly 25% despite a marked decrease in the actual number of credit unions.

These numbers clearly indicate that branching is an important (and growing) delivery channel for all types of financial institutions. So how do credit unions decide where to locate a new branch, and what impact do new branches have on financial performance? This research study examines these and other questions in great detail.

What is the research about?

Robert Feinberg, a professor of economics at American University in Washington, D.C., previously examined how commercial banks go about making a branch entry decision; in this study, Feinberg replicates that research methodology for credit unions. Specifically, Feinberg examines and explains credit union branch entry into rural markets and determines how the new branch impacts financial performance. Why rural markets? According to Feinberg, these markets are smaller and credit unions are therefore more likely to be major players in the local financial services market.

What are the credit union implications?

First, credit unions seem to be followers in the world of branching. The data from this research suggest we tend to wait for a signal from our larger competitors to determine the viability of a new branch location. This situation can certainly have great benefits, since competitors are essentially doing the market research for you. Alternatively, this branch clustering strategy may prompt you to question conventional wisdom and ask whether entering a “red ocean” marketplace is the best marginal use of credit union capital.

Second, since this research suggests that more liberal banking regulations lead to greater branching activity, credit unions can leverage this information to promote the notion of regulatory relief as a consumer- friendly initiative. This conclusion, coupled with previous Filene studies, can help you empirically make the case for CURIA-like legislation.