The scramble to overhaul the retail distribution network is forcing bank teams to consider branch closures that were unthinkable just a few months ago. Conventional wisdom about which branches are most efficient, productive and profitable has been turned upside as Americans make radical changes in the way they lead their lives.
In many cases, the COVID-19 pandemic has accelerated changes that were already taking place. But those changes are far from over and they aren’t one-time events.
Novantas believes that an ongoing analysis of consumer movement patterns can help banks as they enter the next phase of branch closures. This analysis will also be valuable as some Americans begin the long transition back to work from stay-at-home orders while others wrestle with new surges in cases of COVID-19. Such data can be particularly helpful on an ongoing basis as banks consider how to redistribute resources and make real-estate decisions at a time when purse strings are tight due to interest rates that are hovering at zero and rising credit risk.
The Supply / Demand Switch
The U.S. branch network has long been a supply-driven business. Banks decided where to build branches based on market opportunity, traffic patterns and competitive factors. In short, banking was a local scale game where physical convenience drove density of outlets.
That was all changing even before the COVID-19 pandemic swept the U.S., where banks have been closing branches at a steady pace since the 2008 financial crisis. The first wave was largely focused on underperforming or “dead-on-arrival” branches that were often unprofitable. Banks then turned their attention to low-performing or marginally-profitable locations characterized by lower deposit levels and lower sales.
Many banks were still in this phase, which focused on low-growth community and rural markets, before the pandemic hit the U.S. in March. It seemed to be working: banks experienced limited balance attrition and few lost new sales in this phase because customers were already less dependent on branches than they had been in the past.
Novantas has long believed that the next round of network rationalization needs to move beyond the low-risk closures of the past to high-deposit locations in densely-branched urban and suburban markets. Ultimately, branch visits will be infrequent and focused on advice and issue resolution – just like a twice-yearly visit to the phone store.
The pandemic has changed traffic trends significantly
Activity by Market Type*
Source: Novantas Analysis, NovaLocation, PlaceIQ
*Markets Included: Atlanta GA, Baltimore MD, Buffalo NY, Los Angeles CA, Memphis TN, Minneapolis MN, New York NY, Portland OR, San Francisco CA
Market Type Definitions (click + to expand)
- Feeder – Primarily markets where people live, but commute to other markets for work
- Hybrid – Markets where large populations both live and work
- Work Center – Places that have a high working population, particularly during the day, but few people live there. Often downtown areas or central business districts
Traffic Patterns Can Drive Current and Future Branch Decisions
Although banks have closed branches, changed hours and directed customers to other channels during the pandemic, many of the changes in branch traffic have been out of their control. Instead, it is the customers who have driven these new trends by following stay-at-home orders.
Novantas has spent the past few months analyzing consumer movements across the country by plotting anonymous cell-phone signals on a base map. This dynamic data show where people are shopping, working and visiting.
As of mid-June, visits to bank branches and other retail locations were down 30% from pre-pandemic levels, but off the April peak of nearly 50%. These figures were highly variable, based on geography and local market characteristics. Bank branches near retailers that were deemed “essential” experienced fewer traffic declines than others, for example.
The situation has been far different in work centers where traffic had plunged by 70% as of late May. This is unlikely to return to near-normal levels any time soon since many companies have already said that they won’t be headed back to the office until well after the end of the summer – or even next year. Furthermore, a growing number of companies have announced that they will permanently allow employees to work remotely.
Real-time tracking tools will be increasingly important as markets remain dynamic; this isn’t a one-time exercise. Banks that regularly monitor traffic patterns in these work centers can use them to make decisions about branches in those areas. Once-prized locations may no longer be considered viable. On the flip side, anticipated declines in real-estate prices could create opportunities for banks that still want to have a presence in these locations.
The same will likely also be true for retail centers – particularly shopping malls – as a wave of bankruptcies, store closings and liquidations pummel the industry. In addition, many consumers have grown even more accustomed to online shopping during the pandemic and may be unlikely to return to physical stores. Banks may be better off putting branches in shopping areas that are expected to see a resurgence of traffic, such as those with outdoor restaurants. Others may be best-suited as limited-service, appointment-only centers.
These traffic patterns can also play a role as banks make decisions about engaging consumers with digital capabilities. After all, customers who have been forced to stay home are now accustomed to digital interactions with their bank. But banks historically have a first-year retention rate of just 50% for accounts that are opened digitally compared with as high as 80% for those that are opened in a branch.
Customers who live or work in areas that aren’t seeing a resurgence in traffic can be targeted for digital engagement if the bank decides to close branches for good.
Banks can also enhance digital onboarding capabilities – a typical weak spot – for new customers who are acquired through these channels and may no longer be driving to branch-dense areas.