Closing the Branch Costs More Than the Branch
Transactions moved to phones and branch networks became an expensive legacy. Closing them is slower and more consequential than the transaction data suggests, because a branch does something the app does not.
The Obvious Case for Closing
A branch costs money: premises, staff, security, technology, and maintenance. The costs are visible, allocated to a location, and easy to compare against the transactions conducted there.
Those transactions have collapsed. Deposits are made by photographing a cheque, balances are checked on a phone, transfers happen instantly, and cash use has declined. Branch visits per customer have fallen sharply over two decades.
On a transaction cost basis the conclusion is straightforward, and thousands of branches have closed accordingly.
What the Transaction Count Misses
The complication is that a branch performs functions the transaction data does not capture, and two of them are financially significant.
Deposit gathering. Research on deposit behaviour has consistently found that customers open accounts near where they live and work, and that branch presence is strongly associated with local deposit market share. Deposits are the cheapest funding a bank has, and their cost advantage over wholesale funding is a large part of what makes banking profitable.
A branch that conducts few transactions may still be holding a substantial deposit base that would partially leave if it closed. The cost of replacing that funding is the real cost of the closure, and it appears in the treasury function rather than at the branch.
Small business banking. Business customers use branches far more than consumers, for cash deposits, and they value a local relationship manager. Small business lending is relationship dependent, and the relationship is generally attached to a location.
| Visible at the Branch | Not Visible at the Branch |
|---|---|
| Premises and staff cost | Deposit funding advantage |
| Declining transaction volume | Small business relationships |
| Local marketing spend | Brand presence in the market |
A branch is not a transaction processing facility that has become obsolete. It is a deposit gathering and relationship asset that also processes transactions, and the transactions are the part that moved to the phone.
The Formats That Replaced It
Banks have generally not chosen between full branches and nothing. The response has been reformatting.
Networks have shifted toward fewer, smaller locations with different staffing: advisory oriented rather than teller oriented, with automated machines handling routine transactions and staff focused on lending, advice, and business banking.
Average branch size has fallen substantially, and staffing models have shifted toward universal bankers who handle a range of functions rather than specialised tellers.
The economics of that model are different enough that comparing branch counts across time without accounting for the change in format is misleading.
The Regulatory Layer
Closures are not purely commercial decisions. Federal law requires advance notice to regulators and customers before closing a branch, and closures in low and moderate income areas receive particular scrutiny under community reinvestment obligations.
The concern is banking deserts, meaning areas with no branch within a reasonable distance. Research has found that branch closures in already underserved areas are associated with reduced small business lending and increased use of higher cost alternative financial services.
That evidence has made closure decisions in those areas both regulatorily and reputationally expensive, and it is why banks frequently maintain locations that fail an internal profitability test.
The Digital Only Comparison
Digital challengers without branches have demonstrated both the potential and the limits of the alternative.
They acquire customers cheaply, operate at low cost, and have grown quickly. They have also found deposit gathering harder than expected. Without a physical presence, deposits are attracted principally by rate, which produces exactly the rate sensitive funding that is expensive and unstable.
Several digital banks have consequently pursued primary account relationships, direct deposit of salary, and business banking, all of which are attempts to acquire the stickiness a branch network produces structurally.
That is the most informative evidence available about what branches actually do. Institutions built without them have spent considerable effort trying to replicate the property they confer.
What an Analyst Should Look At
Useful measures are deposits per branch and its trend, which indicates whether the network is being rationalised effectively or simply shrunk; the cost of deposits relative to peers, since a bank losing branch presence typically pays more for funding; and the mix between consumer and business deposits, since business relationships are more branch dependent.
A bank cutting branch count while deposit costs rise faster than peers is describing the tradeoff badly rather than managing it.
The Bottom Line
Branch networks look obsolete when measured by transactions and remain valuable when measured by funding cost and business relationships, which is why closure programmes keep being paused and reformatted rather than completed. The cost of a branch appears in one line and the benefit appears in the price of deposits somewhere else entirely. The strongest evidence that the benefit is real comes from digital banks, which discovered that gathering stable deposits without a physical presence requires buying them with rate.