Over the past decade, the number of retail bank branch locations has been reducing across the nation. According to the FDIC Quarterly Banking Profile, in Q1 of 2021 there were 4,978 reporting institutions, down from 5,116 in 2020, and 5,606 in 2018. A study released mid-March 2021 predicted bank branches could be extinct by 2034 if current reduction trends continue. The question is whether the COVID- 19 pandemic will accelerate the bank closure trend.
The COVID-19 pandemic gave people of a variety of backgrounds a glimpse into the convenience of digital banking. It forced a global change and created an atmosphere where once-reluctant customers had to rely on online services to deposit checks, check balances, and complete their banking needs. One would predict this to mean branch closures would occur at an exponential rate.
Instead, it seems branch closures have occurred at consistent rates since the start of the pandemic, especially due to banks being considered an essential business. Although this has not spiked yet, we predict that due to the increase in digital banking, the long-term effects of the COVID-19 pandemic will be an exponential increase in branch closures. According to the Financial Brand, whether firms have planned and executed branch closures successfully will not fully be known until the June 2021 FDIC report is published. It could even take decades to see the real residual effects the pandemic has had on the banking industry.
As more customers adopt digital and online access to manage their money, there is still a segment of the customer base that prefers face-to-face contact at a branch. Branches will continue to be an important piece of banking to individuals in rural areas, the elderly, low income, and people with limited internet access. For those groups, the removal of physical bank branches could be seen as discriminatory. For example, one-third of Chicago branch closures were in low to moderate income areas. On top of the loss of customers to competitors, there may be regulatory implications for institutions if they eliminate branches in low to moderate income areas. With grassroots organizations actively combating this kind of activity, a complete shift to online banks is unlikely any time soon.
However, banks are positioned to argue that digital services are in place to continue serving those who may be disproportionately affected by branch closures, especially as they build out remote banking strategies. The new challenge will be ensuring digital services are widely accessible to all groups.
Due to the observed acceleration of digital adoption by banking customers, the type of transactions people utilize banks for has drastically changed. There has been a reduction in non-value adding transactions, such as check cashing and deposits, which allows banks to focus on high-yield transactions and gives clients to have a more tailored face-to-face experience. Megabanks found that driving routine transactions to digital provided the opportunity for more sales and a decrease in the branch traffic that was formerly driven by accepting deposits, taking payments, and cashing checks.
The transformation of branches appears to be the next step, and one that is gaining momentum. Branches may become more like stores selling products to wealthy clients, focusing on lending, commercial products, and services via hubs in major cities. In the future, they could resemble a modern meeting hub where bankers are mobile and greet and direct clients using tablets. The branch store experience would be comparable to one at a mobile phone store. The focus moves from executing transactions to financial planning, advice, and client assessment. Thus, banks may appeal to the customer’s emotions and needs versus being sales-oriented and transaction driven. With these transformations, banks will look to embody the key attributes consumers look for in a branch, such as a more human approach, extended hours, and increased functionality.
The need for the traditional bank branch that is transaction-based, inconvenient, and costly for both the bank and consumer is on the way out. A refreshed, more relaxed business model where customers meet and get financial advice is the future of branches. COVID-19 does not appear to have led to the demise of bank branches, but it has forced the adoption of digital banking at a faster pace and assisted in reimaging and repurposing their functionality.