The Continuing Relevance of the Retail Bank Branch

From the introduction of the first ATMs in the late 1960s, banking industry pundits have predicted the demise of the retail branch, rendered obsolete by technology.

The calls accelerated at the dawn of the Internet age in the early 2000s, and then again following the financial crisis of 2008/2009 during the rise of online and mobile banking; and most recently when the COVID pandemic forced many consumers out of branches and into electronic channels.

Yet an array of recent research studies, from the Federal Reserve Board and the FDIC, as well as from private sources, confirm that branch presence remains a key determinant in selecting a financial provider and that the majority of Americans continue to routinely use branches, at least in some capacity. Further, even as a subset of consumers fully embrace electronic channels, two of the most profitable segments — affluent seniors and small businesses — remain ardent branch users.

More importantly, though, many critiques of the ongoing relevance of the branch cite declines in teller transaction counts as a rationale for eliminating branches, but this fundamentally mischaracterizes the primary role of the branch.

No, the branch does not exist to cash your check. The branch exists to deliver advice to consumers and small businesses as to how best to address their financial needs, with the expectation that sound advice translates into product sales. Transactions are simply a costly burden that bankers are willing to carry to have the opportunity to sell products too. Transactions cost money, sales earn money so the less of the former and the more of the latter the branch can do, the better the bank or credit union will fare.

But as online account opening capabilities improve, will some consumers still opt to visit a branch? Perhaps we can take cues from elsewhere in society. Even as the COVID crisis drove many companies to a work-from-home model, post-COVID most mandated some level of in-office presence, especially to support major collaborations. Similarly, even consumers who may never return to the branch for routine interactions may continue to prefer in person for major financial collaborations, such as a startup loan for a new business, or a retirement plan.

Consumers value expert advice for complicated matters, and consumers trust institutions with a local physical presence, which convey commitment to the community, and credibility therein. Large banks continue to invest hundreds of millions of dollars in branching with the median cost of a new branch at around $2.5 million, every 40 branches built equates to a $100 million bet on the enduring value of the channel, and the 1,100 new branches opened last year — a level in line with trends of the past five years — likely reflected around three billion dollars in branch capital investments.

Beyond consumers’ inherent trust in personal interactions from a locally invested institution, there are two other critical reasons why branches continue to carry such value. First is billboard presence: the ability of the physical structure to inform consumers of the existence of the institution. No one can open a checking account with a bank until they first learn the bank exists and simple drive-by or walk-by observation remains a key means for consumers to discover any retailer. Framed inversely, absent physical presence, how could consumers learn of a bank’s existence? And if the answer is only “advertising”,  then the field quickly tilts toward only the largest national banks with the most massive ad budgets; thus the imperative of branch presence for community banks and credit unions.

Second is the AND: if one provider offers top-tier online and mobile banking applications but no branches and a competing provider offers top-tier online and mobile banking applications AND branches, why wouldn’t a consumer choose the latter? Even if you don’t plan to use branches, even if you think you probably won’t need a branch, isn’t it better to preserve the option of a branch visit, just in case? And as long as some providers maintain branches, then absent a severe pricing disparity, those providers will continue to enjoy an advantage versus the provider without branches.

In October 1908, some Chicago sportswriter likely wrote an article predicting that “fresh off of back-to-back World Series championships, the Cubs are poised to bring home another championship soon.” And the writer would be proven correct. It took 108 years…but he would be proven correct as the Cubs won that 2016 World Series title.

Likewise, predictions that all branches will vanish may bear out at some point, but will that point be within the career spans of anyone currently working in the banking industry… or will it take 108 years?

With basic financial transactions continuing to migrate to electronic channels, we do not need as many branches as we once had. And the branches need not be as close together as they once were. Rather, with a less regular need to visit branches, consumers are willing to tolerate broader spacing between branches, willing to drive a bit farther for that twice-a-year need than they would have for what was once a weekly need.

But we do need branches. And before condemning branches as anachronisms, bankers should remind themselves of a simple benefit of the channel: people like branches. Years of investment in customer service have built an expectation that a visit to the branch is probably at worst neutral and certainly not so onerous that consumers dread the visit.

The branch is not the Department of Motor Vehicles and the bank is not your cable TV provider, experiences so universally reviled that they’ve become comedic staples. Instead, the branch is the place where your dog gets a treat in the drive-in and your kid gets a lollipop, one more anodyne interaction in our daily lives.

Most importantly though, the branch remains that place where you can meet a knowledgeable, familiar banker face-to-face, in an environment that reinforces the enduring safety and stability of the institution, and as such the branch remains relevant and essential to America’s banks and credit unions.

Author: Steve Reider, president of Bancography