Do Traditional Bank Branches Have a Place in Today’s Digital World?
My father was a banker in Olney, Ill., and as a result, growing up I was somewhat aware of the effects of the Illinois Constitution of 1870, which prohibited branch banking. I recall overhearing discussions about how banks were restricted to just one location when I was a kid. Fast forward a few years: I arrived at Millikin in the fall of 1966, and in 1967, banks were finally permitted to have one drive-in facility as long as it was within 1,500 feet of their main bank facility. I remember Dad being the first in the area to open a new drive-in facility down the street from the main bank.
Following in the family footsteps, I started my banking career in Decatur in 1976. That same year, banks were allowed to establish a second banking facility within 3,500 feet of the main bank. A third facility was allowed in 1982 and five facilities in 1985. In 1987, Illinois repealed Section 6 of the Illinois Banking Act, effectively ending the prohibition on branch banking. In 1988, Illinois banks were allowed to purchase branches from troubled banks regardless of the banking locations. Finally, after several more branching law changes, banks were allowed to expand without limitation in 1993. Unfortunately for Illinois banks, most other states had more progressive branching laws, and many Illinois banks ended up with home offices located out of state.
According to the Federal Reserve, in 1986 there were more than 14,000 commercial banks in the United States. In 2018, fewer than 5,000 remained, with their resultant fewer branches. In 2009, there were over 99,000 branches, and by 2017, that number had reduced to 90,000. The number of bank branches is projected to decrease 20% between 2017 and 2022, according to a recent report from the commercial real estate firm Jones Lang LaSalle. Costs to open a new branch run from approximately $2 million to $4 million, according to a report by Forbes last year. Annual branch expenses run from $200,000 to $400,000 a year, and it takes about 10 years for a branch office to reach its full potential.
According to “The Financial Brand,” in 2015, over 50% of consumers had not visited a bank branch in the last 30 days. Of the banks surveyed, 66% reported that they planned to keep the same number of branches or decrease that number. As online and mobile banking continues to gain traction, bank branches continue toward obsolescence. The growing popularity of mobile banking will continue to enable banks to diversify away from branches as a delivery channel for financial products and services, freeing them to consolidate their expansive (and expensive) branch networks.
My banking career has spanned over four decades, and the technological changes in banking have been phenomenal. Fifty years ago, one banking channel delivered financial services to the consumer: the main bank (maybe two, if you counted the rotary dial party line.) Today, the main bank, the branches, ATMs, voice response, computer, internet, plastic, email, mobile access, electronic, instant messaging, Facetime, texting, Bitcoin and Blockchain all compete for delivery market share and customer preference. Given all of these competing technologies, it is reasonable to ask, “Are banks just treating the symptoms (suffering branches) rather than the disease (fintechs – financial technology services)?” The more direct question might be, “Can the banks survive?” Bank branches are still needed today, but they appear to have a very short window of usefulness. The larger banks are likely being more proactive in dealing with costs and the changes in the banking space. The smaller banks are trying to hang on and likely believe that doing something is better than not doing anything. It appears likely that the fintechs will do for the bank branches what Amazon has done to retail storefronts: make them obsolete.
While physical branches may be decreasing, digital “branches” are exploding in popularity. The customer’s smartphone has replaced the branch visit. It’s not that hard to imagine a future “branch” experience as something like the following: visit a digital branch office with your HoloLens3 augmented reality glasses. You are helped by a 5G artificial intelligence avatar that looks like a real human, knows all of your financial history and can even anticipate what you are calling about today. After completing your transaction, you take off your goggles and start watching Netflix right where you left off a few minutes ago. We’ll see what happens, but I can guarantee you, things will continue to change, and the bank branch, as we know it, will never be the same.