Chapter FourEstablishing New Banks, Branches, ATMs, Telephone Services, and Web Sites

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Key Topics

•Chartering New Financial Services Institutions

•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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Responding to Changing Customer Demand: Convenience

•Chartering New (De Novo) Financial Institutions

•Establishing New Full-Service Branch Offices

•Setting Up Limited Service Facilities

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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 Insurance as part of the chartering process

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Reasons for Oversight of Charters

•Financial Institutions Hold the Public’s Savings

•Financial Institutions are the Heart of the Payment System

•Financial Institutions Create Money

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Benefits of a National Charter

•Brings Added Prestige Due to Stricter Standards Which May Bring Larger Deposits

• In Times of Trouble, Technical Assistance May Be 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 State Member Banks is the Fed

The Primary Federal Regulator of Non-Fed Member State Banks is the FDIC

•State May Allow Bank to Lend More of its Capital to a Single Borrower and Offer Other Services

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Quick Quiz

•Why is the creation (chartering) of new banks closely regulated?

•Who charters new banks in the United States? New thrift institutions?

•What are the advantages of having a national vs. state bank charter?

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Questions/Considerations for Organizers of 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 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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Volume, Characteristics, and Performance of De Novo Banks

•The Number of New Charters Has Averaged Over 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 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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Branch Regulation

•FDIC Improvement Act Requires Institutions to Notify Their Regulatory Agency and Customers 90 Days Prior to Closing a Branch

•Community Reinvestment Act of 1977 Requires Them to Make an Effort to Reach All Segments of Their Communities With Services

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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 Normal Branches

• Deposit Volume May be Heavier Because they Attract Store’s Own Deposits

Disadvantages• May Need More

Aggressive Marketing• Many Financial

Transactions Need More Financial 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) and Operate (about 36% compared to a human teller per transaction)

•But Less Effective at Cross Selling, Less Personal Service, and More Vulnerable to Criminal Activity

•Decision to Install ATM: The Bank Examines the Present Value of the Stream of Cash Savings from the New ATM Machine

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Common Call Center Services

•Current Balance of Loan, Deposit or Investment Account

•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 the Internet•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 Credit

Cards•Carry Out On-Line Bill Paying

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The Internet and Customer Safety

•Especially Vulnerable to Fraud and Identity Theft

•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 in

evaluating possible sites for new branch offices?

•What laws and regulations affect the creation of new bank and thrift branches and the closing of existing branches?

•What services do ATMs provide? What are the main advantages and disadvantages of ATMs as a service provider? Should ATMs carry fees?

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