Conventional wisdom for over a decade has predicted all but the complete evaporation of the traditional bank branch as a delivery method for financial services.
Indeed, the evidence seems to point in that direction with the number of bank branches declining significantly over the last 10 years. This is further compounded by consolidation in the industry with the number of banking institutions also shrinking significantly. And, indications are there is likely another wave of merger and acquisition activity which has the potential to continue and possibly accelerate the contraction of traditional branches.
A recent analysis by the FDIC Division of Insurance and Research (authors Nathan L. Hinton, Derek K. Thieme, Angela N. Woodhead) highlights this trend. The number of branches reached a high of nearly 100,000 in June of 2009 and stands at 89,847 as of 2017. The industry had a net loss of 7,484 total branches just in the last five years. This is a change of 7.7% and obviously significant.
The report points out, however, that this change was driven by a subset of banks. Roughly 18% of banks had a reduction in the number of offices during the 2012 – 2017 time period while roughly 22% actually had increases in the number of offices. The remaining banks had no net change in branch locations.
There are some other interesting points to note from the report, although none are surprising. First, the net loss in branches is higher in metropolitan markets as opposed to rural markets with rural markets having the highest office density. This is likely related to shifts in population in metro markets coupled with differences in lifestyles, particularly in the larger urban markets. There is also greater mobility in the more rural markets due to lower population density, therefore, it is easier to access a physical branch.
Physical locations in rural markets also have lower carrying costs making them more efficient to operate. Part of the higher rate of decline in the more urban markets is also likely attributable to a pullback after the “over-banked” phenomena of the peak times during 2000 – 2007 where banks were expanding into the denser population centers across the nation. Many institutions found these new locations unprofitable after the downturn and, subsequently, shed locations. We should also not forget the potential impact of interstate banking that occurred in the mid 90’s.
There are multiplicities of factors that explain the declines in brick-and-mortar facilities and suggest that the trend will continue. One of the primary reasons is an emerging consumer market that is less interested in personal interaction and instead opts for the convenience that mobile and online technologies provide. This is evidenced by the Fintech revolution that is now crossing over into the “Holy Grail” of small business lending which traditionally has been a space dominated by community banks. And, we have not even mentioned the rise of cryptocurrencies and the implications that may hold.
In addition, operating costs have significantly increased for commercial banks due to a dramatic increase in both direct and indirect compliance costs caused by both a mountain of new regulations and intensified scrutiny. At the same time, margins are also shrinking putting additional pressures on the bottom line.
Staff may be the largest non-interest expense banks face, but it is difficult to reduce staff when there is the need for personnel to meet growing compliance demands. and again, all of this is coupled with shrinking yields, increased competition, and weak loan demand. Physical locations and the associated operating costs are the next biggest expense so it makes sense we have seen a decline in branch locations.
What Does This Mean for Traditional Branches?
The indications are that we will continue to see attrition in the number of physical locations – correct? There will be reductions in branches with traditional brick-and-mortar gradually replaced by virtual banking. The commercial bank as we know it will become obsolete as Fintech expands. Well…not so fast.
First, the decline of banking locations has been the greatest at non-community banks as community banks reflected a smaller change in the number of locations. In fact, community banks actually had an increase in the number of branches in 2017. Community banks are an integral part of the fiber of rural communities, and many have branches in small markets where many non-community banks do not.
Although possibly not a significantly contributing factor, community banks in rural markets may perceive greater reputational risk of closing a branch where there are only a handful of locations as opposed to urban areas where there are a substantial number of both banks and branches.
Further bucking the conventional wisdom, the nation’s largest bank, JP Morgan Chase recently announced that it will be adding 400 new branches in the next five years in 15- 20 markets within the U.S. Although the bank notes that 80% of its customer do their transactions online or at an ATM, bank executives cite the importance of physical locations to both obtaining and retaining customers.
Internal data indicates that 75% of their deposit growth comes from branch locations and that even though customers may prefer to do transactions online, the location of physical branches still influences their decision as where to bank. Branches also serve an important role in generating loan volume and serving local businesses.
Survey research we conducted several years ago noted similar preferences among consumers. Our study indicated that many customers within local markets chose to do their banking business at a branch by either using the drive-thru or inside the branch. And, even though internet and mobile banking was on the rise at the time, convenience of locations was a critical facet of their decision as to which bank they chose. We also found that business customers were less concerned about where in a market the branches were but preferred to do business at a local branch.
A more recent study released by the FDIC in 2015 (authors Eric C. Brietenstein and John M. McGee) had similar findings. This report chronicles the historical changes in the number of branch locations and usage as well as online transactions and electronic payments. As an example, Federal Reserve data indicates that paper checks accounted for only 15% of noncash payments in 2012, down from 46% 10 years prior. Customers are doing fewer transactions at local branches and instead relying on the convenience of internet and mobile banking.
The report concludes, however, that while new technologies have provided consumers with speed and convenient ways to bank, physical branches and technologies serve as complements to one another as opposed to substitutes. This is especially true for the community bank space, the largest segment of FDIC insured institutions. The authors note as follows:
This analysis shows that physical offices remain a vital channel through which FDIC-insured institutions deliver financial services to their customers. New technologies have certainly created convenient new ways for bank customers to conduct business, yet there is little evidence that these new channels have done much to replace traditional brick-and-mortar offices where banking relationships are built. Convenient, online services are here to stay, but as long as personal service and relationships remain important, bankers and their customers will likely continue to do business face-to-face.
Wrapping It Up
Has the “demise of the brick-n-mortar branch been greatly exaggerated?” Only time will tell. The traditional model, especially the community bank has been successful for over 100 years. It is a model that hinges on personal service, face-to-face interaction, the strength of community ties, and personal relationships. Hopefully, with respect to business and otherwise, these will never go out of style.
How to cite this blog post (APA Style):
Premier Insights. (2018, February 22).The Future of Traditional Brick-and-Mortar Bank Branches Remains a Contradiction [Blog post]. Retrieved from http://www.premierinsights.com/the-future-of-traditional-brick-and-mortar-bank-branches-remains-a-contradiction.