It's Long Past Time to Kill the Bank Branch

For years, bankers have bemoaned the looming death of the traditional bank branch. Now it looks like it’s actually starting to happen. Finally.

Last week brought a slew of announcements about branch closures from banks including JPMorgan Chase (JPM), Regions Financial (RF) and TCF Financial (TCF). Those cuts are notable, if more cosmetic than transformative; Regions closing 30 of its 1,700 branches amounts to more of the same careful pruning around the edges we’ve seen from expense-wary banks in the years since the financial crisis. But those handfuls of closures were overshadowed by a far more intriguing – and potentially game-changing – plan from PNC Financial (PNC).

After years of bank executives acknowledging that they will eventually have to do something about their outdated and expensive branch networks, PNC Chief Executive William Demchak appears to be taking the plunge. Besides closing some branches, he told investors that he plans to overhaul most of his company’s remaining physical locations in the next five years, retraining the staff and rethinking the layouts to incorporate more of the technology that most bank customers now use.  While 90% of PNC’s 2,700 offices are in the traditional mold, Demchak wants to dramatically shrink that proportion by the end of 2018, turning two-thirds of PNC’s network into smaller, more automated locations.

"We'll drop the operating costs out of it, and it will deliver a service that tomorrow's bank client expects," Demchak said last week at a Goldman Sachs (GS) financial services conference.

This sort of dramatic, ambitious plan is long past due. Bankers have spent a lot of time discussing What We Should Do About Branches, without making many big decisions about what to do about, well, you know. More and more customers are doing most of their banking online or on mobile phones, turning most banks’ sprawling locations into city-corner showrooms or special-occasion destinations, reserved for the handful of visits in a lifetime that most people need to, say, take out a mortgage. (While some customers, especially the elderly or the very wealthy, are less likely to do all of their banking online, banks don’t need the more than 82,000 branches they currently maintain nationwide to keep these customers happy.)

The increasing availability of remote deposit capture has accelerated this change in customer behavior, at least in my own experience. I used to visit my bank infrequently, mostly to deposit checks I sometimes receive as holiday or birthday gifts, but now that my bank allows me to do that by snapping a photo of any spare checks I luck into, I haven’t been past my local branch’s ATM lobby in months.

Perhaps I’m biased since I live in Manhattan, where ubiquitous megabank branches have done more to homogenize the streetscape than Starbucks. But you don’t have to be a harried New Yorker to see that the industry is overbranched – and unevenly so. Banks aren’t holding onto branches as a way to expand their services into "underserved" areas, or to make sure that low-income or more rural customers have better access to them. Instead they’re using – and even continuing to build – branch bulkheads in wealthy, urban, oversaturated areas like New York, in the hopes of getting a few affluent customers to defect from the rival bank right across the street.  

The financial crisis, while dramatically shrinking the number of banks, actually saw the survivors expand their physical presence. The overall number of U.S. banks has dropped by 19% since the end of 2007, when the FDIC reported 8,533 insured institutions. But the number of branches has gone up by 4% in the same time period. There were 82,467 branches in the United States at the end of November – the lowest number in five years, but still above the 79,153 there were at the end of 2007, according to SNL Financial and the Federal Deposit Insurance Corp.

Many industry members expect the number of branches to drop more in coming years. And bankers recognize that the days of spending an average of $3 million to open a 5,000-square-foot showroom are quickly coming to an end. Banks including Wells Fargo (WFC), HSBC and Citigroup (NYSE:C) have played around with the size and features of their branches, building smaller locations or ones with fewer human tellers and more video screens.

But before PNC’s decision, none of these banks have been eager to be the leader in giving up on branches. More than six in 10 banks said they want to expand their branch networks, according to a May report from the consulting firm Celent. In February, JPMorgan set out to increase its number of branches by 100 by the end of next year, though it is increasingly turning its offices into specialized destinations for wealth-management customers, who might require more regular counseling on their money than the less affluent checking-account masses.

All of the current branch shrinkage has been incremental and fairly conservative, which is to some extent understandable. Closing branches haphazardly, without a firm and well-researched strategy to make sure banks will not lose customers, is obviously a bad idea. But so is ignoring the irrevocable changes in what most customers expect from their banks – especially when such willful blindness carries ongoing operating and real estate costs. Now that PNC has taken the leap to redirect the future of its branches, hopefully more banks will move past their baby steps. 

Maria Aspan is the national editor for American Banker. The views expressed are her own.

Paul Davis contributed reporting to this post.