FDIC Paper: Technology isn’t Killing the Branch

By Laura Alix


Long live the branch! The branch is here to stay. At least, that might be your conclusion if you put any store by a recent analysis of bank branch distribution out of the Federal Deposit Insurance Corp. (FDIC).

The report’s title pretty much spells out the FDIC’s thesis: “Brick-and-Mortar Banking Remains Prevalent in an Increasingly Virtual World.” In the study, the agency examined the question of whether the rise of ATMs, online and mobile banking and other technological innovations in the financial world have put a damper on branch formation – and concludes that they haven’t.

The FDIC supports its hypothesis with some pretty heavy numbers. Between 1935 and 2014, the total number of brick-and-mortar bank locations has increased by 67,222, or 244 percent, nationwide.

The agency divided the interval between 1935 and 2014 into two periods of expansion, between 1945 and 1989 and again from 1995 through 2009, bracketed by three periods of contraction. On the whole, far more offices were added during expansion than removed during contractions, it concluded.

The FDIC considered the notion of branch density, or the number of bank offices per 10,000 people, and also concluded that bank office growth outpaced population growth over the long term.

While the report doesn’t break down the number of branches in Massachusetts specifically, other FDIC data show the Bay State had 2,227 branches as of June 30, 2014, down just slightly from 2,245 in 2009, but up from 1,968 in 1994, the earliest year for which that data is available.

According to the FDIC, four main factors influenced the distribution of bank branches since 1987: population and demographic shifts, banking crises and legislative changes.

Robert M. Mahoney, president and CEO of Belmont Savings Bank, would add another to that list: interest rates.

“When interest rates are low, people don’t open branches. When interest rates are high, people open branches. Branch growth has been slow because interest rates are low,” he said. “The money is not worth as much.”


Dissenting voices

Brett King, the founder of Moven and recent author of “Breaking Banks,” cautioned against reading too much into the FDIC’s analysis.

“My disappointment with the FDIC was … there was no mention of risk factors, factors that could affect branch numbers and branch density in the future. In that way, I think the report was a fait accompli,” he said. “I thought it was very disappointing that such a critical part of the U.S. banking infrastructure would be so naïve.”

King thinks the agency ignored a host of other data, including consumer behavior that’s shifting away from the branch as transactional hub and toward the branch as a service center.

“When [customers] go to the branch, they go because they have a problem they couldn’t fix on digital. Either you’re going to be giving them technical advice, or you’re getting into specifics about a credit facility or managing their money or something like that, but it becomes a service hub in the future,” he said. “The overarching trend will not just be branch closures, but for many of those that remain it will be shrinking the square footage down.”

And that appears to be the direction in which many banks are moving anyway. While King’s own discussion focused on giants like Chase and Bank of America, banks closer to home have also experimented with smaller and less traditional branches.

When Eastern Bank opened a second branch on the campus of Northern Essex Community College in Lawrence last fall, it partnered with a local pizzeria and put tablets and charging stations in full view of its front window, hoping to lure college kids in need of a bite to eat or an outlet to charge their phone.

And when Belmont Savings opened new branches over the past few years, it located them inside of supermarkets, a strategy Mahoney credited with boosting the bank’s retail deposits.

Even though it offers a host of online and mobile banking products, Robert DeGiovanni, Eastern’s director of retail banking, said the vast majority of the bank’s new checking accounts are still opened in the branch. Like King, he sees the branch shrinking down and moving from a transactional function to more of a sales and service function.

“I think the physical presence is incredibly important. Customers, when they’re looking for a new bank, may do their research online and may start with branches close to where they live,” he said. “I think if you don’t have that physical branch, you’re probably not in that consideration, so the branch itself it still very important.”


Laura Alix is a staff writer for The Warren Group. She may be reached at lalix@thewarrengroup.com.