Hailey Johnson
There has been a notable increase in bank closures across the US in recent years, with the rate of bank branch closures doubling since 2020. This trend has been exacerbated by the COVID-19 pandemic, with banks shifting their focus towards digital platforms and reducing their physical presence. While this shift to online banking has been accelerated by the pandemic, it is not a new phenomenon, with the move towards digital banking services being well-established in recent years. This has resulted in a decline in foot traffic to physical bank branches, with banks now seeking to save costs by closing branches. However, it is important to note that banks are not completely eliminating their physical locations, as many customers, especially older adults and those with limited internet access, still rely on in-person banking services.
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What You'll Learn
The shift to digital banking
There are several reasons for this move to digital banking. Firstly, there has been a decline in foot traffic at bank branches as more people turn to mobile apps and online banking for their transactions. A study by Rivel Banking Research found that Generation Zers visited bank branches an average of 3.6 times per year, while baby boomers averaged 4.6 visits annually. This indicates a generational difference in banking preferences, with younger generations favouring digital platforms over in-person transactions.
Another reason for the shift is cost-cutting. Banks are increasingly pursuing acquisitions of competitors to reduce overlapping staff, services, and facilities, which results in branch closures. Additionally, the rise of digital banking has made it easier for banks to save costs by closing physical branches while still serving their customers through online platforms.
While the move to digital banking offers convenience and accessibility to most customers, it also poses challenges for some groups. Older adults, people with limited internet access, and those in rural communities may face barriers to accessing financial services due to bank closures. These individuals often rely on in-person banking, and longer distances to branches could mean reduced access, longer wait times, and a higher risk of financial exclusion.
As the trend towards digital banking continues, banks are reshaping their physical footprints. While some banks are completely closing their physical branches, others are right-sizing by opening new branches in high-traffic areas while closing others. This allows them to maintain a physical presence while also adapting to the changing preferences of their customers.
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The impact of the pandemic
The COVID-19 pandemic has had a significant impact on the banking sector, affecting banks' operations, financial performance, and long-term strategies.
One of the most notable effects has been the acceleration of digital transformation and the decline in branch visits. During the pandemic, many bank branches were closed or offered limited services due to state stay-at-home orders. While some predicted a return to "normal" as restrictions eased, it is widely believed that the banking industry will be forever changed. The pandemic has prompted a shift towards digital banking, with customers increasingly adopting online and mobile banking tools. This trend is expected to reduce demand for physical branches and traditional banking services in the long term.
The pandemic has also had a substantial impact on banks' financial performance. In the United States, big commercial banks experienced a significant decline in profits due to the pandemic-induced recession and record-low interest rates. The net interest margins of banks, the spread between their cost of money and earnings on loans, fell to their lowest levels in 35 years. Additionally, banks have faced challenges due to their exposure to government bonds and the inverted yield curve, resulting in profitability and liquidity risks.
The pandemic has also influenced banks' long-term strategies regarding branch networks. While banks are not closing branches en masse, they are rethinking their physical footprints. There is a growing trend of branch closures in the industry, with banks reviewing their branch strategies to cut costs and adapt to changing customer behaviour. However, banks must carefully consider retention strategies when closing branches to ensure they do not lose a significant portion of future sales volumes.
Furthermore, the pandemic has highlighted the importance of banks' resilience and risk management practices. The 2023 United States banking crisis, which occurred in the aftermath of the pandemic, exposed vulnerabilities in the banking system. Some banks incurred significant losses due to their exposure to cryptocurrency and cryptocurrency-related firms, with the collapse of Silvergate Bank, Silicon Valley Bank, and Signature Bank. The crisis underscored the need for robust risk management and regulatory oversight in the banking sector.
Overall, the pandemic has had far-reaching consequences for the banking industry, impacting their financial performance, operational strategies, and long-term resilience. Banks have had to adapt to changing customer behaviour, navigate economic downturns, and strengthen their risk management practices to ensure stability and sustainability in the post-pandemic landscape.
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In-person banking remains essential for some
The decline in foot traffic at bank branches is undeniable, with a decrease from 53% of US bank account holders conducting activities in person in 2019 to 45% in 2024. However, generational differences are evident in branch visitation patterns, with Baby Boomers averaging 4.6 visits annually, compared to Generation Zers' 3.6 visits.
The closures of bank branches, particularly in low-income and minority communities, pose significant barriers for those who rely on in-person services. Longer distances to branches can result in reduced access to financial services, increased wait times, and a higher risk of financial exclusion. For instance, some consumers still depend on physical branches for services like cash deposits, loan applications, and access to safety deposit boxes.
While banks are shifting investments towards digital platforms, they acknowledge the continued importance of physical branches. Bankers recognise that even tech-savvy customers sometimes prefer physical offices for financial advice, opening new accounts, or managing significant transactions. Therefore, banks strategically open new branches in high-traffic areas or booming neighbourhoods while closing others. This "right-sizing" approach aims to balance the demand for digital convenience and the need for in-person banking services.
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Customer satisfaction with online banks
The banking industry has been rapidly adopting Internet banking as an efficient and viable tool to create customer value. However, a large number of bank customers are still not willing to use online banking services. Customer satisfaction is a crucial factor in helping banks maintain their competitive advantage.
A 2024 study by J.D. Power found that customers of online-only direct banks reported higher levels of satisfaction than customers of traditional banks. The study, which surveyed 8,648 direct bank customers, identified problem resolution as a key factor dragging down overall satisfaction scores. While there were fewer problems reported, the issues that customers did experience were more complex and took longer to resolve. The study also found that mobile apps and websites needed improvement, with a decline in the use of these features and lower ratings for visual appeal, clarity of information, and the range of services provided.
The five factors that can influence customer satisfaction with Internet banking are service quality, web design and content, security and privacy, convenience, and speed. Web design and content, convenience, and speed were found to be the top three factors influencing customer satisfaction in a study conducted in Malacca.
Despite the overall decline in satisfaction with online banks, they still enjoy higher satisfaction than traditional brick-and-mortar banks. This can be attributed to higher deposit yields and fewer customer service issues. However, the shift towards online and mobile banking has resulted in the closure of many bank branches across the United States, with a 5.6% decline in total branches since the start of the COVID-19 pandemic.
While online banking is becoming more popular, it is important to consider the needs of older adults, individuals with limited internet access, and those in rural communities who still rely on in-person banking services.
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The rise of small banks and credit unions
While major banks across the U.S. are closing branches, there has been a notable rise in the popularity of small banks and credit unions. This shift in consumer behaviour is driven by several factors, including the lower interest rates and more personalised customer service offered by smaller financial institutions.
Credit unions, in particular, have experienced growth in their membership and assets, despite a decrease in their numbers due to mergers and acquisitions. The appeal of credit unions lies in their ability to offer lower interest rates on loans and higher rates on savings accounts and CDs. This is because credit unions are member-owned, meaning that everyone with an account is a partial owner. As a result, they can forego shareholder payouts and maintain lower rates, ultimately saving their members money.
Small banks and credit unions are also increasingly attractive to consumers because of their local focus. As consumers become more interested in shopping and sourcing locally, they are also considering the benefits of banking locally, such as keeping their money within their community.
Furthermore, the rise in remote working and the digital nomad trend has meant that more people are open to using smaller banks that may not have a physical branch in their area. This shift in behaviour has been accelerated by the COVID-19 pandemic, which saw a significant reduction in branch visits and an increase in the use of digital banking services.
While the formation of new banks has slowed, with only six established in 2024, small banks and credit unions are gaining traction. This is evidenced by the increase in credit union primary credit cards from 6% in 2020 to 8.3% in 2023, while community banks grew from 2.3% to 5.1% in the same period. Additionally, one in four survey participants stated that they would likely use a credit union or community bank for their next credit card application.
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Frequently asked questions
Yes, banks across the US are closing their branches.
There has been a shift towards digital banking, with a decline in foot traffic at bank branches. This has been accelerated by the COVID-19 pandemic. Banks are also investing more in digital services and cutting costs by reducing their physical presence.
Major banks such as Wells Fargo, U.S. Bank, PNC Bank, Bank of America, JPMorgan Chase, Flagstar and TD Bank have closed branches.
No, banks are still carefully opening new branches in some neighbourhoods with booming populations or fast-growing economies. Banks are also more likely to close branches in low-income and minority communities.
You can consider switching to a new bank or credit union, taking advantage of no-fee accounts and perks such as free credit monitoring. Online banks tend to have higher customer satisfaction.
