Branch Bank Network Structure with Electronic Transactions Considerations

The paper applies an economic model of a competitive market for retail banking services to generate insights into the following relevant questions. Is the cost structure of electronic distribution systems sufficient to justify choosing the Kiosk/PC Banking distribution strategy? That is, is it reasonable that market pressures and technological advances will allow banks to virtually eliminate branches? How does competition from other banks and non-bank firms affect the choice of distribution strategy? We find that in a wide variety of experiments that banks will retain their branch networks, along with a PC Banking capability. 1. Retail Banking Choice of Distribution Strategy in a Competitive Market Over the past two decades the retail banking industry has gone through a major upheaval. Chief among the changes are increased competition both among banks and from non-bank competitors, an increased awareness of customer preferences, and technological advances in distribution systems. [1] Retail banking has shifted its historical reliance on branches to a stated desire to push transactions to lower-cost electronic channels. [2], [3] Further, the advent of all-electronic banks calls into question the importance of bank branches. Some people even predict that bank branches will some day be essentially eliminated from retail banking distribution. [4] 0-7695-0493-0/00 This paper examines a retail bank’s choice of distribution strategy in light of the major competitive and customer-related changes in the marketplace. For this paper, a distribution strategy consists of one or more distribution channels targeted to particular customer segments. The paper studies which technology will be used and which segments the retail banking sector will serve. The distribution channels considered in the model are three that involve serving the entire market and all segments: teller-staffed branches (with an automated teller machine on premises), ATM’s, and PC Banking. The strategies are discussed in section 3.3 below. The paper applies an economic model of a competitive market for retail banking services to generate insights into the following relevant questions. Is the cost structure of electronic distribution systems sufficient to justify choosing the Kiosk/PC Banking distribution strategy? That is, is it reasonable that market pressures and technological advances will allow banks to virtually eliminate branches? How does competition from other banks and non-bank firms affect the choice of distribution strategy? The model employed in this paper captures a rich variety of influential market parameters. Banks can choose between distribution strategies. Each distribution channel has a different cost structure. There are two customer segments in the market with differing preferences for transactions. Non-bank firms also compete in the market, affecting how retail banks serve their customers. In keeping with current industry experience, $10.00 (c) 2000 IEEE 1 Proceedings of the 33rd Hawaii International Conference on System Sciences 2000 customers are averse to travel which provides banks with an incentive to place more banking outlets in the market convenience. Additionally, the model includes a class of transactions that cannot be conducted through electronic channels. The results generated by the model also illustrate the effects of changing consumer preferences, specifically, customers growing more familiar and comfortable with innovative technology. Numerical experiments with the model generate results addressing the stated research questions. The model does not have a closed-form solution, but an easily implemented efficient numerical solution identifies the equilibrium for a given set of market parameters. The results show that, as expected, the low variable cost of electronic transactions tends to indicate all-electronic distribution strategies. However, it also shows that the Mixed distribution strategy is more efficient than branch and electronic strategies under a wide variety of adverse market conditions. Specifically, the Mixed strategy tends to result when non-bank competition is high, when the costs of teller transactions are high, or when most transactions are free to the customer and require a teller. These results suggest that the Mixed system is more robust than the other two distribution strategies.