Bank branch transformation is accelerating as mobile and digital banking change how customers conduct routine financial transactions. As more deposits, transfers, payments, and other activities migrate to self-service channels, financial institutions are reassessing the number, size, configuration, and purpose of their physical locations.
Bank of America illustrates this shift, with substantial growth in mobile banking occurring alongside a significant reduction in its branch network. The economics provide a strong incentive for change: transactions conducted through mobile apps and ATMs can cost financial institutions considerably less than those handled by branch employees. However, the evolution of the branch involves more than simply closing locations—it requires redefining what customers need from the physical banking experience.
Bank of America’s business model is in the midst of a dramatic shift, as increased adoption of mobile banking is allowing the nation’s second-biggest bank by assets to trim its physical branch count.
As can be seen in the accompanying chart, these two trends are headed in opposite directions. While Bank of America has closed 953, or 15.8%, of its branches over the past four years, active mobile banking accounts have increased by just under 10 million, equating to a 130% boost.Although other banks are flirting with the idea of strategically expanding their branch networks, there’s little question that digital banking represents the future of financial services.
FMSI, a consulting firm that tracks the financial performance of bank branches, estimates that transaction volumes at community banks and credit unions have dropped 45% since 1992. Over the same period, the hourly pay rate of branch employees has increased 90%. The net result is that the cost of each in-branch transaction has risen 133.3% in just over two decades.
Digital and mobile banking offer a potent tonic for these troubling developments. JPMorgan Chase (NYSE:JPM) says it costs $0.65 to handle a deposit transaction in a branch. The cost falls to $0.08 per transaction conducted on an ATM. And customers who deposit checks using JPMorgan Chase’s mobile app cost the bank just $0.03 per transaction.
With the surging growth of digital banking, the fundamental role of branches is being evaluated, and in many cases, redefined. Many of the initial reductions in branches were due to rightsizing as a result of redundant locations that were the result of earlier M&A activity. Some of the more recent reductions are the result of business requirements analyses and branch reconfiguration efforts, often done in conjunction with a review of business needs across full-, self-, and assisted-service channels.
Branch conversations are increasingly about how banking customers want to transact and interact with their bank or credit union. This often means reduces fewer basic transactions at branches, but more informational, relationship-building, and advisory discussions occurring there. The result is the potential for fewer traditional branches, but the creation of networks of hub-and-spoke branches that include a mix of digital solutions and mini and reconfigured traditional and flagship branches to meet evolving customer and member needs.
The continued growth of mobile banking is changing the economics of traditional branch networks. As customers increasingly use digital channels for basic transactions, maintaining large numbers of branches designed primarily around teller activity becomes more difficult to justify. Financial institutions can shift routine transactions toward lower-cost digital and self-service channels while reconsidering how their physical locations can provide greater value.
That does not necessarily mean the branch will disappear. Instead, its purpose can evolve toward activities where personal interaction remains important, including financial advice, product discussions, relationship building, and assistance with more complex financial needs. Different locations may also serve different purposes rather than following a single traditional branch model.
A hub-and-spoke approach combining flagship branches, smaller locations, self-service technology, and digital channels could allow banks and credit unions to maintain a physical presence while better aligning operating costs with changing customer behavior. The appropriate mix will depend on individual markets and customer preferences.
Ultimately, successful bank branch transformation will require financial institutions to coordinate their physical and digital strategies rather than treating them as competing channels. Mobile banking can handle an increasing share of everyday transactions, while redesigned branches can focus on the interactions where knowledgeable employees and face-to-face relationships continue to provide meaningful value.
Overview by Ed O’Brien, Director, Banking Channels Advisory Service at Mercator Advisory Group
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