Brick & Mortar Banking – Are Branches Actually in Decline?
By now, many of us handle a good portion of our routine bank business by computer or smartphone. We can log in to check balances, transfer funds, and send payments. And we can deposit checks using our bank’s app in tandem with our phone’s camera. The ability to manage our deposit accounts from wherever we are, and without stepping foot inside a physical branch, has not only never been greater, it’s likely to continue expanding.
So with the necessity of brick and mortar branches becoming ever slimmer for most customers, are banks trimming their location numbers? And what about credit unions? We looked into the data to find out.
Once a year, the FDIC publishes what’s called the Summary of Deposits, which among many other things, includes the number of physical branch locations for each bank operating in the country. It’s released every September for the previous year ending June 30. Similarly, the NCUA releases data on the number of operating credit union branches, with its reports coming out every quarter.
In 2003, the NCUA changed its reporting structure, making it much more straightforward to identify the number of credit union branches as distinct from non-branch corporate addresses. As a result, we opted to start our analysis of credit union branch numbers in 2004, and followed suit with bank branches to keep the data comparisons parallel.
We also needed to identify which branch types to count. The FDIC classifies branches according to more than a dozen categories based on type of location and level of service. For our analysis we counted three location types: those that provide full service at a brick and mortar office; those providing full service within another retail location, meaning a bank branch located inside a grocery store or other retail establishment; and those that offer limited services but include the acceptance of deposits and payments, and may be independent branches, in-retail branches, or drive-through locations. Although this excludes locations such as those serving only a loan processing function or only a restricted area like a military base, as well as those operating as a mobile or online banking office, our filter includes 98 to 99 percent of all FDIC-listed branches.
For credit unions, the NCUA designates only locations that provide member services, excluding offices that serve a solely corporate function.
What we learned about banks & bank branches
From 2004 to 2016, two clear trend lines stand out. First, we see that the number of bank branches has indeed been in decline for several years, but only after first climbing to a substantial peak. Bank branch expansion experienced a boom period that culminated in 2009 with 98,395 branches, representing a gain of almost 11 percent since 2004.
Since that high-water mark, the number of branches has dropped slowly but steadily for seven years, with annual decreases ranging from 0.4 to 1.6 percent. In the FDIC’s latest reporting, the number of branches stood at 90,269. Though down close to 8 percent from its 2009 peak, today’s figure still stands above the number of branches a dozen years ago.
While this might seem to be evidence that digital banking trends are chipping away at the banking industry’s willingness to operate physical branches, looking at the second trend line offers another angle to the story. In 2004, there were over 9,000 FDIC banks in existence. Today? Just 6,068. That’s a drop of more than a third, over just a dozen years. As larger banks have subsumed smaller institutions and other banks have combined or failed, the number of registered banks finds itself on a steady declining path.
This industry consolidation would play a significant role in the number of existing branches. While the merging of two banks in disparate regions might not result in branch reductions, consider instead the bank mergers that turn two banks in the same market into a single branded bank. That’s when branch reductions may happen more quickly, as newly combined banks seek to avoid location redundancies and reduce operating costs.
So with bank numbers down 33 percent, it’s a logical follow-on that branch numbers would be in decline.
A similar trend among credit unions
The number of NCUA-regulated credit unions in the U.S. is remarkably similar to the number of banks, although they operate less than a quarter of the number of branches. Still, both the branch and institution trend lines we saw for FDIC banks generally carried through the credit union data as well.
Branch numbers technically peaked in 2010 for credit unions, climbing 11.6 percent since 2004. But from 2009 to 2012, they held almost exactly flat, so their peak experienced a longer duration. Since 2012, branch numbers have come down about 4 percent (compared to the bank branch decline of approximately 8 percent), mostly in a large drop in 2013. For the last three years, they’ve again held essentially steady, at levels just above what we saw in 2005.
Again, however, we see a steady, straight-line decline in the number of credit unions themselves, dropping even a bit more steeply than banks. In 2004, NCUA-insured credit unions numbered over 9,300, while today they’ve dropped more than 35 percent to just over 6,000, bringing the number of active branches down with it, although less dramatically for credit unions than for banks.
Branches per institution are up
One last set of calculations shows how the decrease in institution numbers, particularly among smaller institutions, has affected the branch analysis. As seen in the chart below, the average number of branches per institution is actually increasing rather significantly. Whereas a bank in 2004 had an average of 9.8 branches, today it has over 14. For credit unions, the figures are lower and therefore the gains less pronounced, but a typical 2004 credit union would have had 2.06 branches versus the 3.43 branches operated by an average credit union today. In addition to revealing the other side of the branch decline narrative, this trend also underscores the regulatory, technological, and administrative challenges that smaller institutions have experienced over the past decade in trying to operate as stand-alone entities.
Until the story continues
In the fall, a new set of annual FDIC counts will become available, along with new NCUA data, and we’ll be anxious to see if banks, credit unions and their branches continue their multi-year decline or if they level off. Until then, it’s interesting to note that digital banking’s impact on branch closings is not substantial so far. While the effect is certainly there, and is combining with branch decreases from mergers and consolidations, the rumors of branch banking’s demise are much exaggerated, making it still likely your brick and mortar institution has a branch near you.
To the right of the teller windows, you have the annuity salesperson, the stock salesperson, the bond salesperson, and the life insurance salesperson. Tellers are forced to stand. The salespersons get desks and chairs.
Another less scientific indicator of the digital influence is lobby traffic in the bank or credit union branch. Branch foot traffic is down substantially in the past 5 or 6 years. Banks and I presume credit unions as well measure daily transaction totals. By my observation, these must also reflect marked declines. As transactions decline to a predetermined level , management begins a review of the viability of keeping or closing a branch, or reducing personnel within the branch.
Maybe the occasional customer that wanders in and gets convinced to open a brokerage account justifies all the branches, but it's hard to see.