Economics of brick and mortar banks

In my town - a reasonably well-to-do suburb of Chicago, it seems like every other new business opening is a bank branch. It has almost gotten to be a joke, that when a business goes vacant, odds are the new tenant will be a bank. One of our main intersections has banks on 3 of the 4 corners, and I don’t think the Arby’s is long for this world.
As a taxpayer, I sorta dislike that a new bank doesn’t generate sales tax for the community. And especially if they have drive-thrus, they don’t generate consumer foot traffic to the same extent as retail businesses might.
Further, as a saver/investor, I’m not sure I can remember the last time I physically set foot in a bank.
Knowing nothing about the banking business, I don’t understand how the expenses involved in building, staffing, and maintaining a physical entity are worth it. Am I wrong in viewing these as expensive propositions compared to the business they generate?
And who uses branch banks for what purpose?
In short - can anyone explain to me - or point me towards resources - how what impresses me as an incredible proliferation of bank branches makes economic sense?

Banks make their money primarily by lending out money deposited in the bank. So the main source of income for banks consists of loans. Mortgages, second mortgages, home equity loans, auto loans, college loans, debt consolidation loans, and business loans, lots and lots of types of business loans.

Most American households have several of these loans. So do most small businesses, manufacturers, franchises, professionals, vendors, import-export firms, etc. At any given time in America, there are probably several hundred million outstanding loans.

Remember that a bank receives payment plus interest on each of these loans, so that it’s never giving out all of its money at one time. The ratio I remember seeing is that a bank can lend out about five times as much money as it has on deposit. With loan interest rates rising, that’s a huge pot of money to be divvied up.

So divide several hundred million loans by the number of available bank branches. Even with the growth of the Internet, most people probably visit their bank in person to handle the paperwork. And with businesses, having a branch handy to make deposits and handle other daily business is a huge convenience. I know I’m annoyed that my branch moved twice as far from me as it used to be.

Business traffic is probably what drives most branch placement, anyway. I don’t think you realize that much or most of a bank’s business is with business, not individuals. They are much heavier users of bank services, too.

I agree completely that a concentration of banks has a negative effect on surrounding retail, but location is everything just as it is with a fast food franchise or a gas station.

Banks also make money on people using them for checking/saving accounts. Through volume. Say your average customer keeps $100-$500 in their accout at any given time. Sure, some will have $25 in there but others may have $2500.
Take all your customers and figure out how much money sits in the bank on a daily basis. $500 x 1000 customers = $500,000. And while your making zero or 2% on your money in the bank, they are investing it, loaning it out, and making 5 times that amount.

I only go to branch banks when I need to get money from a free ATM, which is only once every month or so. I only step inside a branch when I need to deposit my change, which is once a year or so (much cheaper than Coin$tar.)

Thanks, Exapno.

I guess my perception was skewed, viewing it as a private citizen.

It still seems to me that for many of the uses you describe - either personal loans or business purposes, the incredible proliferation of branches I perceive does not make sense. I mean, if I were to get a mortgage or car loan, I don’t think I would be swayed to go with the closest facility, but instead, with a reasonably convenient facility with the best rates. And once you have a loan(s) you don’t have to go to banks repeatedly to have them serviced. If you get a far better deal, it is no problem driving an extra mile or 2 the couple of times you actually need to apply and sign documents.

I recall refinancing my mortgage with my existing bank never seeing the guy face-to-face. We did the deal over the phone, and he mailed me the necessary documents to sign.

I also assume most commercial banking business would be handled by employees/owners while driving, so it wouldn’t make a monstrous difference if the bank were 2 blocks or a mile away. On my daily walk to and from the train, and if I make a 20 minute drive through my town running chores, I bet I would pass at least 3-4 branches each of Bank USA and 5th/3d, as well as at least 20 other entities. I didn’t realize that personal or commercial banking practices would be such that folks would value having a branches as common as convenience stores or fast food venues.

I just don’t readily perceive the benefit of so many local branches of so many different savings institutions. My personal finances are not so complex that I have any desire to comparison shop for every transaction. Probably just another example of how I am out of step with much of modern society!

Are there numbers showing how much bank revenues increase per new branch office? Figures showing that what I view as an expensive proposition in building and personnel, is really cheap compared to the revenue generated? Do new branches actually create new banking business, or merely cannibalize from competitors (or even the same bank’s more distant branches)?

I mean, if I need banking services, I’ll get them even if it takes a bit of effort. If a new Potbelly’s opens up nearby I might stop in for a sandwich. But just because a new bank branch opens down the street, I’m not going to go get a loan or open a new account!

For answers from a dozen bankers, try asking at -> Discussion Forums -> Ask a banker.
And when I asked them a similar question, they said the money is in loans, but they do make money on your deposit account… from fees.

You don’t, I do.
When I decided to leave my old bank, I opened an account at the bank with offices CLOSEST to my office.
That way, come payday, I can hit the bank, deposit my check, and withdraw odd quantities of money.
I need a live banker, because my “financial management” system involves putting $38 in an envelope for dining, $38 in an envelope for lunch at work, $80 in an envelope for gasoline purchases, $75 in an envelope for groceries, $50 in an envelope for household, etc etc etc.
I actually disburse more cash on payday than the bank will let me get out of an ATM in one day, so… the location and hours of a local branch DO matter. They didn’t matter back when I did everything with plastic, but… that doesn’t always work out too well for everyone.

When we chose a bank for our small business, we chose the one that was at the end of the street from where we worked. When choosing it we also factored in their online services…but also the availability of other branches.

When we moved the location of the business from City X and split up into working at home, we were thrilled that there was a branch in City A (where my partner lives), one near City B (where I live) and one in City C (where our secretary lives).

Now, all three of us have quick access to this bank. Comes in handy because we recieve about 12 checks a month from our customers that need to be deposited. And they’re building a new branch closer to me than the one we’d previously been using. Hurrah! This gives us a lot of leeway as a small business with our own “branches” across the state to always be close enough to the bank to make deposits.

You see, Dinsdale, you’ll be part of
Railways through Africa!
Dams across the Nile!
Fleets of ocean greyhounds!
Majestic, self-amortizing canals!
Plantations of ripening teaaaaaaa…

All for tuppence!

This bank branch expansion trend is going wild in New York City, and, frankly, I find it disgusting. These new cavernous spaces sit virtually empty all day long in what is probably the most expensive real estate market in the nation. Generally, the number of people in any given branch at peak hours could fit in a space that’s one-third the size or smaller. The money that is being wasted to maintain pretenses would probably boggle the mind.

Back before many banks went under, the practice was for banks to loan out almost all of the money they had of deposit. They didn’t have enough cash to cover even a small draw against deposits. After that crisis, the Federal Reserve requires the banks to deposit a certain per cent of their deposits with the Federal Reserve, so that those funds would be available in case there was a run on the bank. That seems straight forward enough, but the banks had another plan. If the required per cent was 10% and a bank had $100 million in deposits, it would sent that $100 million to the Federal Reserve and loan out $900 million. There most likely is a little small change in difference from my example, but in effect banks are paying very little out against an amount that’s on deposit and loaning out a much larger amount at a much larger interest rate. It doesn’t take a rocket scientist to figure out how to make money this way. That’s also why you might be offered a toaster here and there to open a new account with a bank and why your banker is such a friendly SOB.