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Why Closing Bank Branches Isn’t Always a Road to Riches (11/29/16)

A new Bain & Co. study suggests that branch closures could actually make things worse for banks in the future

By Telis Demos

One of banks’ favorite cost-cutting strategies in recent years has been closing branches. But a new study suggests the approach may soon backfire.

With mobile phones now able to provide virtually all of the services of a branch at a fraction of the cost, banks have cut their costs massively by shuttering physical locations and moving customers to apps, relieving some of the pressure of low interest rates, new competition, and slowing loan growth.

A new Bain & Co. study however suggests that branch closures could actually make things worse for banks in the future. Most customers who want to do mobile banking are already doing so. And moving remaining branch customers to mobile could further imperil the cross-selling model that is already under regulatory scrutiny.

Many customers who rely on a branch now often use the closing of one as an opportunity to switch banks, Bain found. Even customers who do make the move to mobile are less loyal, doing more shopping around for loans, cards, and other services. That leaves banks stuck with the expense of maintaining checking accounts, but fewer of the benefits of other, more profitable products.

“It’s a scary time for banks,” said Gerard du Toit, who leads consulting for banks in the Americas financial services practice at Bain. “They run the risk of being the dumb regulated utility with all of the costs, while all the high-margin juicy stuff is hollowed out.”

Already the number of branches has been shrinking for several years, driven by a need to cut costs.

But the U.S. remains over-branched, many argue, with about 32 bank branches per 100,000 adults, higher than the Organization for Economic Cooperation and Development, or OECD, average of 24, according to a recent report by Autonomous Research. Bringing the U.S. branch density closer to what it is in parts of Europe would save some $11 billion a year for the 25 largest U.S. banks, not including saving money on rent or selling buildings, Bain said.

Some argue that the advent of mobile apps make branch closures possible in a way banks’ websites, which they have offered for years, did not. Mobile devices are with customers at all times, and cameras can do things like snap pictures to deposit checks, while thumbprints scanners can identify customers almost as readily as in person.

But Bain says growth of mobile usage has plateaued, suggesting that people who naturally migrated, like millennials, have already done so—with only the most branch-tied customers left to convert. The percentage of bank customers using their bank’s app leapt from 32% in 2012 to 52% in 2015, Bain found. But it inched up to just 55% this year.

Now, closing branches runs the risk that customers just move to another bank with a nearby branch, rather than migrate to mobile. About 40% of customers whose main branch closed in the last 12 months either switched banks or started new products with other banks, Bain found.

And, even more troubling for banks, mobile customers who stick with their bank appear to be worse customers, because it becomes easier to switch from one app to another for different services. In 2016, U.S. consumers were almost twice as likely to have used a competing bank than their primary bank for their most recent digital financial product.

Many financial technology upstarts such as lender Social Finance Inc. and investment manager Betterment Holdings Inc., alongside established firms such as Capital One Financial Corp., have also raced into the mobile realm as a way to entice other firms’ customers to take out new cards, loans, or investment accounts.

http://www.wsj.com/articles/why-closing-bank-branches-isnt-always-a-road-to-riches-1480430865