Technology is disrupting many business sectors like never before, include retail, manufacturing plants, restaurants, and even financial services. In 2017, the financial sector saw a big change to its business operations, with 2,069 net bank branch closures. This is an increase of 18%, compared to 2016.
The bank branches closing resulted in more than 10 million square feet of retail space not being needed any longer. The closures involved some of Wall Street’s largest institutions, along with regional banks.
Wells Fargo & Co (NYSE:WFC) topped the list in 2017, with 194 bank branch closures in 2017. Second on the list was JPMorgan Chase & Co. (NYSE:JPM), with 137 net closures, and third on the list was Huntington Bancshares Incorporated (NASDAQ:HBAN), with 134 bank branches closing in 2017.
More Bank Branch Closures Expected in the Future
The number of bank branches closing could continue to accelerate because management teams continue to set more money aside for digital investments, rather than for acquiring more square footage for branches. The reasoning behind this is that the digital area of the business generates a higher return on investment, compared to retail branches.
Wells Fargo, for example, has told its investors that its plan is to, by 2020, only have approximately 5,000 branches in its network. This would reduce the current branch count by about 800, from its level of 5,800 branches (as of December 2017). Wells Fargo plans to reduce its annual operating costs by $2.0 billion in both 2018 and 2019; bank branch closures are a very effective method to this reach the goal.
Not all branches could be closed, because there are a certain number of customers who still prefer the old-fashioned method of banking. However, banks are looking to reduce their square footage needs.
For instance, Citizens Financial Group Inc (NYSE:CFG) chairman and CEO, Bruce Van Saun, has said, “There’s a little bit of pruning of the number of locations, but the greater element of that program is trying to take 4,200-square-foot branches and turn them into 2,500- or 2,200 square-foot-branches.” In this case, the rent savings will be earmarked for digital investments.
According to Ernst & Young LLP’s “Global Banking Outlook 2018” survey, 85% of banks plan to make their digital programs a high priority. In the survey, 59% of banks said they believe that their capital investments in the digital segments of their businesses will grow more than 10% this year.
The Impact of Bank Branch Closures
There are three aspects to the trend of bank branches closing.
The first is that real estate investors that own and operate commercial real estate will have a more difficult time finding tenants. In addition, this will result in the landlords losing negotiation power when determining how much to charge for each square footage of space.
The second impact of the rise in bank branch closures is on branch employees. If branches close or shrink, there is a need for fewer employees within the bank’s branch network. The number of job cuts will be based on the size of the impacted branches.
Third, investors will benefit. With banks reducing their staff headcounts and the number of branches they operate, it means more money is being saved, which helps the bottom line. This then could translate into shareholders being rewarded through dividend payments or share buybacks. This is highly possible, since public banks have more fiduciary duties tied to shareholders than to employees.
Conclusion on Bank Branches Closing
Even though banking is an old business model, it is changing with the times, as are many other industries, because of technology. Over time, it should not be surprising to see other divisions within the banks—such as capital markets, investment banking, asset management, and credit and loans—adapting more to technological advances. This then could result in further reductions in operating costs and headcounts within these divisions.
“Banks Close Record Amount of Branches in 2017,” CoStarGroup, January 22,2018.
“Wells Fargo plans to close 800 more branches by 2020,” CNN, January 12, 2018.
“Wells Fargo Reports Fourth Quarter 2017 Net Income of $6.2 Billion; Diluted EPS Of $1.16,” Wells Fargo & Co, January 12, 2018.