As the local bank branch becomes an endangered species, are there hidden consequences?

S&P Global chart
S&P Global chart

Many Americans still find themselves visiting a bank branch at least once in a while — to deposit a large check, for example. When big bucks are involved, dealing with a human being can be a nice security blanket.

But that may be about to change.

Banks are closing local branches at a slow but steady clip that seems bound to accelerate.

The Federal Deposit Insurance Corporations (FDIC) annual Summary of Deposit report shows that 8,000 U.S. bank branches have been shuttered since 2009 — about 8% of the total number of banks across the country. About 1,500 closed just last year, noted an analysis of the report by S&P Global.

(This story first appeared on Credit.com. Read it there.)

There have been plenty of warnings. The drip-drip-drip of closings will become a flood soon, former Barclays (British bank) CEO Antony Jenkins predicted in a speech last year, when he warned of banks closing branches throughout the world.

“The number of branches and people employed in the financial services sector may decline by as much as 50% over the next 10 years,” he said, according to Reuters.

This process might be accelerated in the wake of the Wells Fargo scandal, S&P Global noted. One key financial reason banks have branches is to entice customers who stop in with routine tasks to consider new products — to convince a customer cashing a check to refinance their home loan, for example — otherwise known as cross-selling. With cross-selling in the cross-hairs of regulators, more banks might decide the sales tactic isn’t worth the trouble, and neither are branches or their employees.

“Regulators have said the San Francisco-based bank pressed retail employees too hard to make sales at a time when fewer customers are walking into branches,” Tahir Ali and Kevin Dobbs wrote in their analysis of bank branch reduction. Banks may decide to redouble their digital initiatives instead, the report suggests.

Digital banking, and particularly mobile banking, is influencing branch closings. The Federal Reserve recently confirmed the meteoric rise of smartphone-based banking: As of the March 2016 report, 43% of all mobile phone users with a bank account had used mobile banking in the past 12 months, up from 33% in 2013.

And a report by Accenture suggests consumers have little loyalty to their bank branch around the corner: 81% of the about 4,000 people surveyed in 2015 said they would not switch banks if their primary branch was closed.

It’s a delicate dance for banks, however, because many consumers still like have a human to bank with, at least occasionally. In an informal survey on my Facebook page, a large majority said they often visit banks.

“Last time was to deposit a check for more than $5,000 because my bank won’t accept online deposits for over that amount,” Eileen Williamson said, echoing a familiar refrain.

Other special situations merit a trip inside the bank, too, readers said.

“Had to get a cashier’s check [for] my car tabs, [and] paperwork notarized to buy my leased car,” Steve White said.

The demise of bank branches raises other concerns, too. While new banking products have improved matters for consumers who can’t get traditional checking and savings accounts, the FDIC found that 7% of Americans are without access to banking services — a group referred to as the “unbanked.” The study also noted that 19.9% are considered “underbanked,” meaning they don’t have access to some products, such as traditional credit or debit cards.

It’s unclear how closing bank branches will harm the underbanked, but it’s hard to see how it helps. A paper published by former MIT researcher Hoai-Luu Q. Nguyen in late 2014 found that branch closings has a severe impact on credit available to small businesses in the area, and minority areas suffer most.

“Closings are associated with a substantial and prolonged decline in credit supply to local small businesses,” Nguyen wrote. “The number of new small business loans is 13% lower for several years after a closing … Second, the decline in lending is concentrated within low-income and high-minority tracts, indicating that closings are most disruptive in disadvantaged neighborhoods.”

Notably, her research found only a temporary decline in mortgage lending related to branch closings.

But Nguyen warns that the real reason people like bank branches — to have relationships in place when important decisions must be made — is not just a quaint 20th Century relic.

“These results suggest that, even in crowded markets, closings can have large effects on local credit supply when lending is information-intensive and lender-specific relationships are difficult to replace. These dynamics are relatively less important in the mortgage market, where rates of securitization are very high and the process of loan approval has become largely automated,” she said. “Small business lending, on the other hand, is an information-intensive market. If personnel-specific soft information is destroyed when a branch is closed, borrowers can face a prolonged decline in credit supply until they are able to build a relationship with a new lender. Similarly, low-income and minority borrowers may be particularly dependent on soft information and lender-specific relationships.”

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About Bob Sullivan 1387 Articles
BOB SULLIVAN is a veteran journalist and the author of four books, including the 2008 New York Times Best-Seller, Gotcha Capitalism, and the 2010 New York Times Best Seller, Stop Getting Ripped Off! His latest, The Plateau Effect, was published in 2013, and as a paperback, called Getting Unstuck in 2014. He has won the Society of Professional Journalists prestigious Public Service award, a Peabody award, and The Consumer Federation of America Betty Furness award, and been given Consumer Action’s Consumer Excellence Award.

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