In mid-2020 Keefe, Bruyette & Woods published a special report on the state of the bank branch and questioned whether COVID-19 had made branches obsolete.
Not yet, the firm decided.
“Our analysis brings us to a somewhat politically correct conclusion that the future delivery of banking services will likely represent a balance between branches and digital channels — or ‘bricks and clicks’,” the report states, “though we conclude that the U.S. banking industry as a whole is over-branched by at least 20-30% and progress on digital enhancement should yield enhanced operational synergies.”
The report adds that COVID has forced a point that digital backers have been pushing for years.
“Unlike the last financial crisis, when customers seemingly preferred to transact in branches given the stress and uncertainty on the industry, the lesson from this crisis has been very different, in our view, essentially disproving the thesis that customers are only comfortable transacting in branches during periods of stress.”
Support for this view is out there. During a fall investor presentation Mark Mason, CFO at Citigroup, noted that two-thirds of the company’s digital growth has been from out of market sources, “and that’s with pressure — fewer branches open. So as we sit here today, 27% of our branches are still closed, and yet we still are experiencing robust deposit growth.”
The continuing preference of many consumers for contactless ways of handling their money will continue to drive lower usage of branches, the report adds.
Comments at the Barclays Global Financial Services Conference and in other forums indicate that KBW may be on target. While increasing usage of digital channels during the COVID crisis is making branch closures more practical, banks have continued to expand into new markets with physical facilities, though they tend to be very different from traditional facilities. Even while they have been reducing branches, the largest U.S. banks have had their eyes on other opportunities. They have no intent thus far to shut branches wholesale even as they see digital transactions rise through the pandemic period.
In an interview with The Financial Brand, Wells Fargo’s Mary Mack, Senior Executive Vice President/CEO of Consumer & Small Business Banking, noted that even in the midst of the pandemic, the bank has been seeing over a million customers daily coming into branches for service. And in an analyst interview, JPMorgan Chase’s Jen Piepszak, Chief Financial Officer, said that the megabank’s plans for continuing to branch into new markets would continue pending an in-depth review of what had been learned during the COVID period.
PNC: Surprises as Traditional Branches Give Way to Digitally Oriented ‘Solution Centers’
Some of the headlines coming out about PNC Bank have given the impression that it is ditching physical banking in a big way. But what PNC has been doing, and will continue to do, even as the COVID era continues, is to prune legacy branches big time, while continuing with its “thin branch” strategy as part of its nationwide market expansion.
The thin branch strategy hangs on new breed branches that PNC calls “Solution Centers.” They blend physical presence and human banking consultants with the bank’s digital banking tools. The bank recognizes that consumers were moving towards digital channels even before COVID forced the issue for many, but that at the same time for many significant banking needs they still wanted to meet with a banker. The bank considers the centers to be the best of both worlds.
“You’re going to continue to see us visit our ‘thick’ network and invest in more solution centers as we build our national franchise.”
— William Demchak, PNC
The centers debuted in 2018 in two new markets, Kansas City and Dallas, the same year it brought out national online-only accounts.
From the start, and through COVID, the bank has learned some valuable lessons, according to William Demchak, CEO at PNC Financial Services.
As of fall 2020 the bank has opened 13 solution centers across Kansas City, Dallas, Houston and Nashville. It plans to open a dozen more before the end of 2020. Another 25 are slated to open in 2021.
Thus far, Demchak says, the results have been strong. Prior to the COVID-19 pandemic the solution centers were opening accounts, by number of households, at twice the rate that would be expected of a traditional-style de novo branch. When the virus hit and many financial institution offices reduced service, the solution centers saw openings fall by 50% to pre-COVID rates. (Demchak points out that that meant falling to the traditional branch’s rate.) But since the centers have been reopening for sales — they offer ATM and banking kiosks for routine transactions — Demchak adds that volume has risen by 25% over pre-COVID levels.
The stress is on digital products, and Demchak, with understatement, says the latest rate is “really encouraging.”
He adds that PNC has discovered that “having a physical presence in a market is more important than we thought.” He says the bank originally believed that putting a solution center within 25 miles of a consumer was close enough. Given its experience so far, now he says PNC has cut that in half.
That physical presence isn’t merely a matter of real estate. The technology woven into the solution center approach envisions tremendous mobility for each center’s bankers. Many were out of their branches representing the bank more than half of the time. Once COVID arrived, this mobile banker role shifted to video chats and similar contactless encounters.`
Experience has also led to revision of PNC’s landmark Virtual Wallet product. The accounts, which debuted in 2008 in original form, combine checking and savings with digital tools, wrapped up in a mobile app.
As COVID pushed more sales to digital channels, the popular account ran into an issue. “Our product offering for Virtual Wallet, which worked great in person, didn’t work digitally,” says Demchak. “It was too complex. We saw of lot of people dropping off after initially clicking through. So we’ve launched a new product called Virtual Wallet Pro that vastly simplifies the digital offering and we’ve seen a substantial pickup in acquisition volume.”
The success of the solution centers has led PNC to step up its closures of its traditional branches in its main footprint. Original plans for 2020 called for closure of between 80-90 institutions. Demchak says 160 will now be shut instead. The new plans also call for closing as many as 120 traditional branches in 2021 as well.
“You’re going to continue to see us visit our ‘thick’ network,” says Demchak, “and invest in more solution centers as we build our national franchise.”
Any institution with plans to stress digital service with a thin branch scheme should bear this advice of Demchak’s in mind: “For this to work, your digital sales have to pick up at a pace that offsets the sales you would get from the branches you are closing. So far that is happening — and then some.”
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KeyCorp: Ramping Up Closures in a Changed World
Chris Gorman, already a senior officer at KeyCorp, stepped into his post as Chairman, CEO and President in May 2020 just as the full extent of the coronavirus crisis and its industry-changing impact began to be understood. By the end of the second quarter of 2020, mobile remote deposits had increased to 19% of branch and ATM deposits, more than doubling over 2018 levels. First-time use of mobile deposit service had tripled. And Key’s digital sales rose 50% year over year.
“The new normal is a digitally led business”
— Chris Gorman, KeyCorp
The implications of these and other increases for Key’s cost cutting impressed Gorman. He sees a huge opportunity to take out expenses, send some of the savings to the bottom line and invest much of the rest in further building digital channels.
“The world has changed, we all know that,” says Gorman. “As we look at our branch network, last year we consolidated 61 branches. This year to date we have consolidated 21 but there’s now an opportunity to ramp that up.”
“We have been on a quest to have fewer branches that are more impactful,” says Gorman. He notes that before Key acquired First Niagara Financial Group in 2016 the company had 1,200 branches. The acquisition pushed that to 1,600. In the fall of 2020 the bank had slimmed down to 1,077.
The winners moving forward, says Gorman, will be those financial institutions that can figure out how to provide both a strong digital experience and branches where consumers can obtain good advice.
“That’s what you’re going to see us focused on,” says Gorman. “The new normal is a digitally led business.”
One facet of that is Key’s national affinity digital bank built to serve doctors, dentists and other professionals, an effort that began before COVID, with Key’s acquisition of digital lender Laurel Road.
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Regions Bank: COVID Dovetails with Digital Growth and Thin Branching Expansion
Regions Bank had been trimming branches and reducing its real estate holdings for several years before COVID came, while pursuing a “thin branch” de novo strategy to grow in selected markets. During 2020 thus far it shuttered 37 branches in ten states. The de novo effort is focused on Atlanta, Orlando and Houston at present, according to John Turner, President and CEO.
Turner says the bank has seen a 30% increase in mobile deposits over the course of COVID, with two million of its customers becoming active digital users. Digital account openings have reached 30% of new account enrollments.
“We have been investing in our mobile app and other digital capabilities,” says Turner, with the bank unveiling a revamped mobile app in mid-2020. COVID has convinced management to step this up, even to the point of pushing its planned core transformation ahead to 2028 from 2024. The intent is to rechannel budget and talent towards digitization.
“As a result of both what we’ve seen in the way of changing customer preferences and our own experiences with reacting more quickly through the crisis, we’ve elected to accelerate our investment in both mobile and enhancing our mobile app and in our digital origination capabilities,” says Turner. “And so those things will be a real focus of ours internally over the next six to nine months.”
Meanwhile, the thin network expansion continues because Regions has seen strong results: “We are growing at twice the rate of our growth in our more core traditional markets.”
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U.S. Bank: Trimming While Grafting On
Plans originally called for U.S. Bank to close between 10%-15% of branches in various markets during 2020 but Andrew Cecere, Chairman, President and CEO, says the desire to save costs and to invest more in mobile in the wake of increasing usage will likely lead to more closures in 2020. As of the end of the second quarter 2020 the bank had 2,729 U.S. branches, down from 2,795 in 2019 and 3,133 in 2015.
“Customer behavior was already migrating to digital and that has only accelerated in the last six months,” says Cecere. The bank sees increasing strength in digital sales.
“While it is true that branches will always be important to and a key part of how we serve customers, we have the opportunity to not only decrease the number of branches overall but also the square footage of the branch system as well,” says Cecere.
At the same time, the bank will continue to expand to new markets with branches, including new designs that are being introduced this year. Initial attention has been in Charlotte with a single branch opened in fall 2019, but additional locations will be added. Cecere says that COVID slowed things down a bit, but that it still intends to open a second branch there. More experience must be gained in Charlotte before the bank expands to more new markets, Cecere says.
One offset for U.S. Bank is a relatively new partnership with State Farm, through which the bank sells product via over 19,000 company agents throughout the country.
Institutions are pursuing varying strategies all over the country, of course, with the above being only a sample. Some regional banks, for example, are still attempting to expand their geographic footprint with branches, potentially through acquisitions. Others, like Truist, build from BB&T and SunTrust, are still consolidating systems. During the Barclays conference, Truist Chairman Kelly King noted that 800 total closures had been accomplished thus far.