Point of View

An image that has been circulating recently on social media that perfectly sums up one of the main misperceptions about banking nowadays. It’s a picture of five ATMs in a line. The one in the middle is red. The two on either side are grey. Above them is the question: “Will bank branches be a thing of the past?”

If you know anything about the history of banking, which became an obsession of mine eight years ago, it’s hard not to chuckle at this. Since the ATM debuted in 1967, the number of bank branches in the United States has climbed from 18,079 all the way up to 79,163 in 2017, according to the Federal Deposit Insurance Corp.

This isn’t to say that the ATM didn’t change things-it did. “The most important financial innovation that I have seen the past 20 years is the automatic teller machine, that really helps people and prevents visits to the bank, and it is a real convenience,” said former Federal Reserve Chairman Paul Volcker in 2009.

But the ATM didn’t revolutionize the industry to the extent people thought it would. This was true even at an institution like Citibank, reputed to be the most technologically advanced bank in the country throughout the 1970s. Its CEO at the time, Walter Wriston, believed that branches were no longer a viable way of catering to customers, noted Phillip Zweig in a biography of the former Citibank chief. As such, Wriston doubted that the future of consumer banking lay with branches.

I mention this for two reasons. First, it demonstrates how hard it is to forecast the future with precision. If the indomitable Wriston, with the resources of Citibank at his disposal, couldn’t see that branch banking was in its infancy in the 1970s, not on its deathbed, how could anybody have predicted that the number of bank branches would go on to quadruple over the next four decades?

The second reason I mention the ATM is to point out that the digital revolution occurring right now, with transactions migrating to mobile devices, isn’t the first time that people have prematurely proclaimed the death of traditional retail banking. In fact, the very same argument could have been made back in 1928. That was the year Union Bank & Trust, based in California, began allowing customers to deposit money by mail. Within three decades, half its deposits were made that way as opposed to in its location in downtown San Francisco.

To be clear, there is no question that digital banking is changing how people engage with banks. Three-quarters of deposit transactions at Bank of America Corp., the nation’s second biggest bank by assets, are now done digitally. And at JPMorgan Chase & Co., the biggest bank by assets, 80 percent of transactions take place over self-service channels.

There is also no question that banks with a strong technology focus benefit from being at the vanguard of digital banking. As the CEO of Chase’s consumer bank, Thasunda Duckett, observed at the bank’s investor day in February, digitally-engaged customers are more satisfied, spend twice as much money on their Chase-issued cards and use twice as many Chase products compared to customers who don’t use digital channels. Additionally, because customers can now deposit checks remotely, the average number of teller transactions at Chase has dropped by 41 percent since 2014, allowing the bank to dramatically reduce its annual expenses.

Yet, these changes won’t revolutionize banking overnight. This is a point that John B. McCoy, the CEO of Bank One Corp. from 1984 to 1999, made in his book “Here’s the Deal,” which we’ve profiled in the inaugural version of Endnotes, an eclectic mix of resources for bank executives and directors located on the final page of the magazine. “The digital thing is happening,” McCoy told me last year, “but it’s not going at warp speed.”

Furthermore, the benefits accruing to digitally-savvy banks shouldn’t be interpreted as a sign that the traditional banking model employed by smaller regional and community banks is obsolete. Seventy percent of Chase’s industry-leading deposit growth since 2014 was driven by households that frequently use its branches. This explains why Chase has announced plans to open up to 400 new brick-and-mortar branches in the coming years.

On top of this, national and superregional banks with multibillion-dollar technology budgets have little appetite for expanding into smaller urban and rural markets. They prefer the major metropolitan areas that, since the financial crisis, have experienced the lion’s share of growth in the ongoing economic expansion. It isn’t a coincidence that the initial markets targeted by Chase’s growth strategy are Boston, Philadelphia and Washington, D.C.

As a result, while the nation’s biggest banks may hold a majority of deposits in a few dozen large cities, mainly on the coasts, smaller regional and community banks remain free to dominate the thousands of smaller urban and rural areas spanning the vast expanse in between. For instance, First Financial Bankshares holds 49 percent of deposits in its hometown of Abilene, Texas. Chemical Financial Corp. has an 82 percent market share in its hometown of Midland, Michigan. And Fulton Financial Corp. has the top market share in its hometown of Lancaster, Pennsylvania.

The moral of the story is, despite the predictions of many industry observers nowadays, the future remains bright for well-run community banks that rely on branches to actively serve and support their local communities.