The year 2020 brought a slew of new and uncomfortable experiences for all industries and their customers. Banks have been no exception.
Despite their status as essential businesses, changing customer behavior has left bank branches devoid of meaningful activity. Banks that temporarily closed branches in response to the coronavirus have since re-opened them, but many customers have chosen not to revisit them.
Banks were already experiencing a technological shift in operating models prior to the pandemic. Many small community banks have a mobile banking app, remote deposit capture and AI-driven ATMs; this increased access to technological efficiencies decreases the need to physically visit a bank branch.
Still, customers’ diminishing need and desire to enter a bank branch has decreased at a far greater rate. How will these trends impact banks’ approach to their branch footprint strategy?
Pending Paradigm Shift
Whether the coronavirus has fundamentally shifted the banking industry’s approach to the size of its branch footprint is a question that will be answered in 2021 and beyond. Recent headlines indicate a pending paradigm shift.
Univest Financial Corp., based in Souderton, Pennsylvania, plans to shutter a fifth of its branches in 2021, saving an expected $2.4 million annually. In its release, the $6.4 billion bank shared that financial center transactions declined 21% over the past year, and 41% of its service center contact took place through its remote chat function.
As Covid-19 has reduced in-person transaction volumes, investments in digital capabilities continue to accelerate as customers increasingly view them as required capabilities. Portland, Oregon-based Umpqua Holdings Corp. plans to cut 30 to 50 branches, reducing the size of the $29.4 billion bank’s footprint by 13% to 22% and lowering annual expenses by up to $20 million.
Charlotte, North Carolina-based Truist Financial Corp. announced plans to shutter 104 branches, accelerating merger-related closures in 2021 to achieve $1.6 billion in cost savings. Chairman and CEO Kelly King said in an earnings call, “Once we get the branches back to kind of normal and our client service capability is back to normal, then we will be more aggressive in terms of the closings.”
Smaller Branches, More Deposits
Since 2009, the number of branch locations in the U.S. has consistently declined thanks to industry consolidation, changes in customer behavior and technological advancements. But the average deposit size at those branches has grown annually as the size of the industry’s deposit base increased.
As of June 30, 2020, total U.S. bank branches declined to 85,136, compared to 86,490 a year earlier. But average deposits per branch increased to $161.6 million from $131.2 million over that time. Branches declined 1.5% between June 30, 2019, and June 30, 2020, compared to the average annual decline of 1.4% from 2009 to 2020. At the same time, deposits per branch increased at an annual pace of 7.9%.
The need for physical branches cannot be fully eliminated, especially in markets where the community bank remains a center for trust, service and livelihood. But even within those communities, customer are utilizing digital tools, allowing banks to offer seamless transactions and continue meeting customer needs remotely.
Tom Keenan, founder of branch footprint consulting and advisory firm Keenan & Partners, pointed out recently that “Covid-19 has caused a once-in-a-generation forced shift to new technology adaptation.” Community banks need to evaluate the cost of increased closures — beyond the one-time monetary expenditures required to close a branch.
“Don’t forget that the branch will always remain the place where customers will come to find their bank when they need something from it,” says Keenan. “It will be the banks that can efficiently manage [their] footprint that will thrive in this new environment.” If closing locations leads to the loss of customers seeking that personal touch, community banks may choose to hold on to branches deemed essential by their customers.
Larger banks and those in metropolitan areas may experience a higher use of technology in day-to-day life. The benefits of branch consolidation the industry has seen since 2009 only increases in such environments — so long as the banks initiating those cuts are also focused on digital platform investment. This would be true even in a world absent of Covid-19.
The question remains: How much adjustment will there be to branch strategies, even when the universally desired return to normalcy occurs?