Consumers can’t seem to make up their minds about brick-and-mortar banking. More than a third consider banking in person to be “unnecessary,” yet 94% indicated in a separate survey that they prefer a bank with physical branches.
Physical branches are expensive for banks to operate. The salaries of branch employees, the utility expenses of each building, and the logistics complications of transferring funds between branches eat into the rates that traditional banks are able to offer.
The bet banks operating branches make is that consumers will accept those rate cuts in exchange for an in-person experience. But now that consumers can manage their financial lives almost entirely online, are branch locations still worth the expense?
Mortgages and Investments Have Moved Online
Except for the largest financial institutions, deposit banks have never made that much money on services like checking and savings accounts. Traditionally, most have derived their profits from two places: loans and investments.
Now that those services are widely available online, the cost-benefit equation for banks has changed. Most investment apps give consumers access to all the financial instruments and more that they can choose from via branch advisors. Online mortgage lenders generally offer lower rates and an easier approval process than their bank-associated counterparts.
Especially in smaller communities, the customer base for each branch’s investment and mortgage services is dwindling. At some point, they simply can’t afford to pay a five-or-six figure salary to someone who’s generating less revenue every year.
Storage and Exchange Services Are Shifting
To bring customers in for those high-value services, many banks accept a loss or break even in other areas. Many branch banks convert coins to paper bills to their customers for free. Others offer safety deposit boxes for just a few dollars per month or exchange foreign currency at near-market rates.
It’s true that those services create a “stickier” experience for customers: Someone who has his most important documents housed at a certain branch is unlikely to suddenly stop doing business with that bank. Turning a cup of coins into paper bills feels like receiving free money, which makes the customer come back.
The trouble is that online services and other trends are eating into those extras. Online currency exchanges ship money directly to the customer rather than force him to stop back by the bank. Coinstar machines take a cut from exchanged coins, but it’s often such a small one that customers are willing to eat the cost.
For the time being, the one service that seems safe is safe deposit boxes. Wall safes, which most homes don’t have, aren’t as secure as safe deposit boxes. Standalone safes, even disguised, are significantly less so. The FDIC continues to tell consumers to use safe deposit boxes for original copies of documents like birth certificates and car titles.
The Community Component
Alone, safe deposit boxes aren’t enough to keep branch banks afloat. But the sense of community that many branch bank defenders feel just might.
The bank-cafe hybrid model, pioneered by Capital One, may be an effective balance of community and cost savings. A McKinsey study found that branch redesigns could reduce costs by up to 70%. In that smaller space, banks can still offer plenty of reasons for users to stop by.
With discounted coffee and intriguing artwork, many bank cafes act like co-working spaces. While there, consumers can get one-on-one counseling and, of course, open new accounts.
The question is whether consumers will see enough value in things like money coaching when they can find similar services elsewhere. It’s not clear that the sort of people who use bank cafes are also the ones who’d do business with the bank. Most working professionals already have a checking account, but few have thousands of uninvested dollars just waiting around for the perfect pitch from a cafe banker.
As online lenders and fintech tools claim a larger share of their customers, traditional banks are at a crucial juncture. Branches are a big investment: Whether or not they remain, the right one will come down to just how important those community touchpoints are to bank customers.