Will Branches Disappear As Mergers, Digital Activity, Pandemic Change Banking Industry?

The COVID-19 pandemic has accelerated the pace of the closure of bank branches – a trend that was well underway long before the virus emerged in the U.S. economy.

Mergers, rapid consolidation, the rising popularity of digital banking have all contributed to a gradual reduction of physical branches.

James R. Barth, the Lowder eminent scholar in finance at Auburn University in Auburn, Alabama, told International Business Times that in the first half of 2020, there were 150 branch closings.

The number of branches reached a peak of 91,365 in 2009 and declined thereafter to 81,054 by 2019. Meanwhile, the total number of banks plunged from 9,613 in 2001 to 5,177 in 2019, he noted.

Rob Cavallaro, chief investment officer and chief product officer at RobustWealth, a digital advice platform for advisors and institutions, told IB Times that according to the World Bank, in 2008, there were close to 36 branches per 100,000 adults in the U.S. In 2018, that number declined to approximately 31 branches per 100,000 adults.

Greg McBride, chief financial analyst at Bankrate.com, told IB Times that as more and more people bank digitally, routine transactions are moving out of the branches and foot traffic is down considerably.

“Some branches also close because they don’t generate enough deposits and loans to be profitable,” he said.

COVID-19, McBride noted, has merely accelerated many ongoing digital trends in just a matter of months.

“Consumers who have realized during the pandemic that they can bank effectively without going into the branch won’t have a need to return afterwards,” he added.

Kimberly Palmer, personal finance expert at NerdWallet, told IB Times that with people more comfortable banking online, financial institutions have decided to shift their resources online, too, and away from expensive locations with high property rents.

Frank Gonzalez, managing principal of the Miami office at the accounting firm MBAF, also cited that increases in regulatory costs and expenses both for large banks and community banks have forced banks to look for efficiencies in operations in order to save money.

“The increase in technology has greatly contributed to virtual banking for customers which has led to additional closures of branches and cost savings,” he told IB Times. “In recent years more consolidations and mergers have occurred between large institutions and community banks.

"COVID-19 has also had a significant influence in branch closures as customers have a fear of conducting transactions in a public setting and risk getting the virus especially in a time when almost all bank transactions may be performed online.”

There are likely other factors at play as well. “I believe that younger bank customers expect to be able to self-serve in a completely digital experience,” Cavallaro noted. “As the demand for in-person banking decreases, you see banks responding rationally by decreasing their physical branch footprint and investing more in digital platforms and services.”

Gonzalez thinks many branches that have “temporarily” closed due to the pandemic, will close permanently.

“Cost cutting, including branch closures, are a significant focus operationally for banking institutions,” he noted.

Barth added that changes in customer behavior may become relatively permanent for some – “especially younger, more educated, wealthier, and more financially literate individuals.”

But Gonzalez observed that the issue with branches is not how much they cost to operate, but rather if their benefits outweigh such costs. “For instance, for large and community banks operationally the key is to be located in strategic locations which generate enough volume of business to justify maintaining the branch location,” he elaborated.

Indeed, Cavallaro pointed out that the expense structure and profitability of individual branches can vary widely. “No doubt bank executives are evaluating this on a case-by-case basis to ensure that their branch networks remain profitable over time,” he said.

Of course, bank mergers are one of the biggest factors behind branch closures.

For example, late last year when People's United Financial (PBCT) merged with United Financial Bancorp, People’s United closed 18 former United branches in Connecticut.

“There’s no need for branches right across the street from each other or at opposite ends of the same strip mall,” McBride observed.

Even after fears of COVID-19 subside, Gonzalez said, current economic conditions and regulatory costs will generate more mergers and consolidations.

But McBride does not think physical branches will disappear entirely.

“Banks are optimizing the use of branches – in terms of location and functionality,” he explained. “Ultimately this means fewer branches but those that remain will be strategically important locations. Bank branches aren’t going away entirely as they remain an important way to connect with customers – for consultation, to resolve problems, or for less frequent needs like safe deposit box access or cashiers’ checks.”

Gonzalez said he thinks that small and middle-sized businesses will save bank branches.

“Small, local businesses still depend heavily on conducting transactions in person and with the assistance of a physical person,” he explained. “Instructions and feedback by branch personnel is very much appreciated by businesses that are startups or small, growing enterprises that depend on [such] direction.”

Palmer noted that bank branches do still provide value, especially for consumers who prefer to get customer support in-person.

“We’ve seen a lot of banks struggle to provide high-quality customer service remotely throughout the pandemic as call volume has skyrocketed,” she noted.

Barth said that the use of online and mobile banking by many customers has increased over recent decades and will undoubtably continue to do so in the future.

“However, brick-and-mortar banking and virtual banking should still be viewed more as complements than substitutes for one another,” he added. “This is more likely the case at community than noncommunity banks, where relationship banking plays a larger role.

"Some services, moreover, such as those involving more complex financial transactions that may require some degree of negotiation may be better done in person in a branch. And some individuals, such as older people, may feel more comfortable going to a branch than a computer for their banking transactions.”