In June 2021, Lloyd’s Bank closed one of its most iconic locations in Towcester Kentish Town, England. It was followed by 29 more branch shutdowns. And, it wasn’t just Lloyd’s, turning off the lights on their properties but also Halifax. In less than a month, 44 branches - of both financial institutions - were boarded up and fixed shut. Both banking groups expect to shutter more than 100 branches across England by Christmas — and that trend has become endemic, worldwide. Bank branches have been closing around the world at a rapid rate. There’s a revolution taking shape right under our noses and, only now after more than 10-years of forwarding momentum by it, are we witnessing the changes. Why are branches closing? And, more importantly, how will this affect us?
The great shutdown — Bank Closures in the US.
Between 2008 and 2020, over 13,000 bank branches have been terminated indefinitely in the United States. This represents about 14% of all brick and mortar banks in the country. The rate of closure, about 18% to 23,6% was mostly felt in either LMI (Low-To-Moderate Income) communities or outskirt locales. The biggest regions hit? Alaska, Idaho, Hawaii, and Louisiana.
A study, by the Federal Reserve, published in 2020, indicated that some counties - most of them rural - had lost at the very last half of their 10 or fewer branches in the span of 5 years. That same study identified which company had an aggressive policy towards branch termination. The answer? Capital One, which has closed 32% of its assets since 2017.
Why are Bank Branches shutting down?
Banks are now facing a confluence of events that have made them rethink their strategies and reposition their worth. Not just when it comes to properties but also when it comes to their services. Where do they funnel their investment? How do they better capitalize on their actions?
The Digital Revolution
Since the start of the millennium, banks have been experimenting with a new business model. A business model that up until the late 90s, was too far-fetched for their liking. A model galvanized by technology and fueled by high-speed digital services. Since that period, way back in the Clinton administration, banks have been on their guard - and toes - waiting for their predictions to come true. Waiting for that moment when technology would finally catch up to their vision of a faster, safer, and more affordable infrastructure. As of 2021, technology has not only managed to reach that vision, it has left it in the rearview. It has surpassed their expectations.
Shutting down branches is just one of the many patterns this technological leap has created — a trend that seems irreversible. Banks and their customers are moving towards digital services and embracing the change, in most parts.
Banks no longer have to keep so many branches open because they’ve become redundant and unnecessary. Most of their customers have transitioned to online banking and, as services became more flexible and more encompassing, they have started to see less traffic in their branches. Today’s bank platforms and apps are highly intuitive, easy to operate, incredibly secure, and they have managed to include - in an automated fashion - most of a bank’s services.
Apps and platforms have become so robust that most bank clerks redirect their walk-in customers to use them — while inside the branch. Why? Because they are faster, more secure, more efficient, and are far more enveloping
Consolidation
Another reason why bank closures have spiked over the years is mergers. On early morning October 16, 2020, a press release hit the newsstand and left the financial world stunned: CIT Group and First Citizens Bancshares announced their intention to merge and create a bank with a combined net worth of over $100 billion.
Over the years, midsize US banks have managed to survive. They have held their own against a competitive field that’s constantly pressuring with new consolidations. In the coming years, that’s bound to change. They’ll have no choice but to merge with their competition. This will likely bring about major upheavals and even more bank branches closing.
Larger banks have a huge advantage in three ways.
- They have a superior-tech platform, investing heavily in skills and innovations that allow them to not only compete against their peers but give a higher caliber of service to their clients.
- Consumers have become accustomed to the high bar their cellphones and tech brands have created. What does that mean? They want more, digitally speaking, from their mobile apps and digital experience. Large-cap banks have solid e-commerce platforms that they constantly invest in — giving their clients unequal access to their accounts, services, and financial tools.
- Large-cap banks have deeper pockets. This means that they can hire better professionals, more rapidly adapt to compliance issues, take advantage of big data science more easily, and have greater tools when facing risk.
These 3 factors have incited a wave of mergers between small to midsize institutions and large-cap banks. Financial mom and pops simply can’t get ahead in today’s fast-paced world in the same way a JPMorgan Chase can — a company that spends more than $11 billion on technology annually.
These mergers translate to more branches closing as banks.
Low-interest rates
Low-interest rates are great for us as consumers, but bad for a bank’s profit. Having low-interest rates means that a bank’s net interest margin goes down. Suddenly they have to squeeze every red-cent they get and have no other choice but to cut back on operation’s costs.
Banks, to make up for their now lower margins of income, have no other choice but to shut down branches.
COVID
The pandemic transformed consumer habits. People that were once reluctant to interact with their bank over the internet had no other choice but to embrace the practice. In less than a year, banks managed to capture the hearts of outliers who still felt cagy about operating on their digital platform.
By 2034, experts predict that the brick-and-mortar way of operating will become extinct. Why? They made a cost-to-benefit analysis based on today’s - post-COVID - foot traffic and then compared it to the ratio of bank’s digital performance. The outcome? Traffic has declined in most branches by over 74% and increased online. In other words, branches will have to close simply because they’ll transform into ghost towns.
ATMs
Yes, the bank branch - as a huge rather sumptuous building full of tellers and cashiers and a crisp staff - has been popping out of existence. Nonetheless, that doesn’t mean the idea of the bank branch has gone the way of the dodo. On the contrary, today’s ATMs perform all the tasks of those grand granite buildings — at a fraction of the cost. They are smaller, easier to operate, faster for the client, and, as of 3 years ago, banks have incremented their presence immensely. Statistics have shown that for every bank branch that closes, 5 to 6 ATMs sprout in the vicinity of that power vacuum.
Digital Brokerages
Another reason why banks have to cut overhead and need to make a leaner more affordable business model is on account of digital brokerages. Less than 6 years ago, the only way you could buy stocks, ETFs, bonds, or any type of security was through a broker — in many cases your bank. For this service, they would charge you a fee and/or a commission.
That’s no longer the case. Due to platforms like eToro, Acorns, Robinhood, and dozens more, the investor now has other options. Banks are no longer amassin the kind of revenue they used to from this sort of trade. Not only that, but to compete - and maintain their client's funds within their ecosystem - they’ve had to cut down on fees while also investing heavily in services.
The bank of tomorrow
Currently, visionaries and experts in the field no longer believe there will be a distinction between “online banking” and “banking” in the near future — it will simply be called “banking.” In less than a year, more than 34% of Americans have opened an online-only bank account. More than half of our nation’s men and women believe that traditional banks have reached their end. And about 46% know that the current way banks operate - in a sandstone building - will have to change.
The branch model has evolved — to the point of extinction. Nevertheless, banks are maintaining their flagship branches in main cities, not because they need to for their clients, but because their image/brand demands it. The old model has progressed and matured — it has increased its efficiency, ripen its potential, and made it easier for clients to control their financial future. It has come at a cost, less face-to-face, but in the end the benefits are worth it
