What is branch banking?
Branch banking is a bank operating one or more physical customer service locations (branches) that sit outside the institution’s main office. Each branch functions as an extension of the bank’s operations and offers basic retail services—deposits, withdrawals, account access, lending, and in-person advice—so customers can conduct business face-to-face rather than only online or by phone.
Key concepts and definitions
– Branch: a physical retail location of a bank where customers can transact and get in‑person service.
– Unit banking: a single, standalone bank that serves a local community and does not operate a network of branches.
– Chain banking: a governance model in which one owner controls several separately chartered banks; the banks are not branches of the same chartered institution.
– Banking desert: a census tract or neighborhood with no bank branch located in it or within 10 miles of the tract center.
– Retail (consumer) banking: financial services provided to individuals rather than to corporations or institutions—examples include checking/savings accounts, debit and credit cards, personal loans, mortgages, and certificates of deposit.
Brief history and recent developments
– Deregulation in the 1990s reshaped branch networks. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 allowed well-capitalized banks to buy or open branches across state lines. In 1999, U.S. law (the Gramm‑Leach‑Bliley Act) removed many restrictions that had separated banking from securities and insurance activities, enabling banks to offer a wider mix of financial products under one roof.
– After the 2008–2009 financial crisis the industry consolidated; many Americans now use large national banks for branch services.
– Digital banking (mobile apps and online banking) has reduced some routine branch traffic and accelerated branch closures. The COVID‑19 pandemic further accelerated adoption of digital channels and led to an increase in branch closings in 2020, although regulatory obligations—such as Community Reinvestment Act (CRA) expectations—can limit where and which branches banks can close.
Advantages of branch banking
– In-person help: complex or sensitive transactions, financial advice, notarizations, safety‑deposit boxes, and large cash withdrawals are typically handled in branches.
– Local presence: branches make services physically available to customers who prefer or require face‑to‑face interaction.
– Brand and trust: a visible retail footprint can strengthen customer relationships, especially for services that require documentation or identity verification.
– Network benefits: a branch network lets customers access their accounts at multiple locations and supports local business banking relationships.
When branches matter (services usually done in person)
– Large cash withdrawals or deposits
– Safe‑deposit box access
– Complex loan closings or mortgage signings
– Identity verification and notarizations
– Financial planning meetings that require document review
Unit banking vs. branch banking (short comparison)
– Unit bank: one charter, one location; typically very local and independent.
– Branch bank: one charter operating multiple offices as parts of the same institution; branches share systems, brand and centralized management.
– Chain banks: one owner controlling several separately chartered banks; not the same legal structure as branch networks.
Checklist: What consumers should check about a branch before opening an account or visiting
– Services offered in that branch (cash, safe‑deposit boxes, notary, loan officers).
– Hours of operation and weekend/after‑hours access.
– ATM availability and surcharge policy.
– Digital access quality: mobile app, online statements, remote deposit capture.
– Proximity and alternatives (other branches or ATMs within 10 miles).
– Any special community obligations or programs (CRA statements).
Simple numeric example (pandemic effect on channel use and branch closures)
– Mobile app use: rose from 33% before the pandemic to 44% after. That is an absolute increase of 11 percentage points and a relative increase of 11 / 33 ≈ 33.3%.
– Computer/laptop use: rose from 24% to 26%, an absolute increase of 2 percentage points and a relative increase of 2 / 24 ≈ 8.3%.
– Branch closures: roughly 3,700 bank branches closed in 2020. Spread evenly over 12 months, that averages about 308 branch closures per month (3,700 ÷ 12 ≈ 308).
Regulatory and social considerations
– Laws such as the Community Reinvestment Act encourage banks to serve low‑ and moderate‑income neighborhoods; regulators and community groups may scrutinize branch closure plans to avoid creating or deepening banking deserts.
– Branch strategy is a balance: banks weigh operating costs, local demand, regulatory commitments, and the degree to which digital services can substitute for in‑person service.
Practical guidance for banks (brief checklist)
– Market assessment: customer demographics, foot traffic, and digital adoption rates.
– Compliance review: CRA and other local regulatory commitments.
– Cost analysis: lease/staff/technology costs versus expected
expected savings, lost fee income, and potential deposit attrition. Below are additional checklist items, practical steps, and a worked example to help quantify decisions.
Additional checklist items (continued)
– Exit costs: estimate one‑time expenses such as lease termination, severance, ATM removal, signage, and IT decommissioning.
– Revenue impacts: estimate lost fee income (teller/service fees, safe‑deposit rentals), and the effect of customer attrition on deposits and cross‑sell revenue.
– Customer access plan: identify alternatives (nearby branches, ATMs, mobile/remote banking services, partnership points such as retail kiosks).
– Community/regulatory mitigation: prepare CRA (Community Reinvestment Act) and regulator notifications, and a community outreach plan to explain mitigations for low‑income or underbanked areas.
– Staff transition/retention: plan reassignments, severance, retraining, and recruiting for roles in digital support where appropriate.
– Communications and timing: create a customer notification schedule (e.g., 60/30/14/7 days) and scripts for frontline staff and call centers.
– Measurement & review: define KPIs (customer retention, deposit balances, digital adoption rate, complaint volume) and a monitoring cadence after closure (30/90/180 days).
Practical timeline (example)
– T–90: Market assessment, regulatory pre‑check, initial staff consultation.
– T–60: Final cost/revenue model, draft customer communications, file any required regulator notices.
– T–30: Public announcement to customers and community partners; begin staff transitions.
– T–7: Final in‑branch signage and customer reminders.
– Closure date: execute physical shutdown, update digital channels, route deposits and payments.
– Post‑closure: 30/90/180‑day reviews against KPIs and adjust mitigation steps if needed.
Worked numeric example — simple payback and NPV
Assumptions (example only; plug in your own numbers):
– Annual operating cost of branch = $480,000
– Lease: $180,000; staff: $200,000; other: $100,000
– One‑time exit costs = $300,000 (severance, lease penalties, ATM removal)
– Expected lost annual revenue after closure (fee income, cross‑sell, interest from lost deposits) = $120,000
– Discount rate for NPV = 8%
– Evaluation horizon = 5 years
Step 1 — Annual net savings after closure
Annual savings = operating cost − lost revenue
= $480,000 − $120,000 = $360,000
Step 2 — Simple payback period
Payback = One‑time exit cost ÷ Annual net savings
= $300,000 ÷ $360,000 ≈ 0.83 years (≈10 months)
Step 3 — NPV of closure (cash flows at year 0 = −$300,000; years 1–5 = +$360,000)
PV of annuity = 360,000 × [1 − (1 + r)^−5] / r
With r = 0.08, factor ≈ 3.9927 → PV ≈ 360,000 × 3.9927 = $1,437,372
NPV = PV − initial cost = $1,437,372 − $300,000 = $1,137,372 (positive)
Interpretation:
– In this example the closure pays back in under a year and produces a positive NPV over five years. That result hinges on the assumed lost revenue and discount rate; if lost revenue or regulatory/brand costs are higher, the economics change materially.
Worked example — deposit attrition impact (illustrative)
– If
If 20% of the branch’s deposit base leaves after closure, the bank must fund that shortfall either by attracting deposits elsewhere (costly marketing or rate increases), by borrowing in the wholesale market, or by reducing assets (selling loans or securities). Each option has a cost that reduces the closure’s net benefit.
Step-by-step worked example — deposit-attrition impact (illustrative)
Assumptions (additive to previous worked example)
– Discount rate r = 8% (same as earlier). Annuity PV factor for 5 years = 3.9927.
– Closure-related annual lost revenue = $360,000 (from earlier example).
– Initial closure cost = $300,000 (sunk at year 0).
– Branch deposit base = variable; we’ll show scenarios for $10M and $30M.
– Attrition rate after closure = 30% in scenarios below.
– Incremental funding cost (Δr) to replace lost deposits = 1.00% (0.01) per year. This is the extra interest the bank must pay compared with the deposit cost it previously enjoyed.
Formula — PV of extra funding cost caused by deposit attrition
PV_extra_cost = (D_attrit × Δr) × [1 − (1 + r)^−N] / r
where
– D_attrit = deposit dollars lost (deposit base × attrition rate)
– Δr = incremental funding spread (decimal)
– r = discount rate (decimal)
– N = horizon in years (5 in earlier example)
Scenario A — modest branch (deposit base = $10,000,000)
1. D_attrit = $10,000,000 × 30% = $3,000,000.
2. Annual extra interest = D_attrit × Δr = $3,000,000 × 0.01 = $30,000.
3. PV_extra_cost = $30,000 × 3.9927 ≈ $119,781.
4. Earlier
4. Earlier we calculated the present value of the extra funding cost caused by deposit attrition (PV_extra_cost ≈ $119,781). The next step is to combine that result with the present value of operating savings and any one‑time closure costs to determine the net economic effect of closing the branch.
Step 4 — compute the NPV of closing the branch
– Formula: NPV_closure = PV_operating_savings − PV_extra_cost − PV_one_time_closure_costs
– PV_operating_savings = present value of annual cost savings from eliminating branch operating expenses (staff, rent, utilities, maintenance) over the chosen horizon.
– PV_extra_cost = present value of the additional funding cost from deposit attrition (we computed this above).
– PV_one_time_closure_costs = lump‑sum costs (severance, lease termination, signage, IT decommissioning) expressed in present value (if already paid, include actual cash; if future costs, discount to PV).
–
Step 5 — decision rule and interpretation
– Decision rule: If NPV_closure > 0, the closure produces a net present value gain (economically favorable); if NPV_closure < 0, it destroys value (economically unfavorable). NPV_closure = PV_operating_savings − PV_extra_cost − PV_one_time_closure_costs.
– Note on NPV: net present value (NPV) is the sum of discounted future cash flows (positive and negative) measured in today’s dollars. The discount rate should reflect the bank’s marginal funding or opportunity cost of capital for this decision.
Worked numeric example (continue from prior intermediate result)
– From earlier we computed PV_extra_cost ≈ $119,781 (present value of additional funding cost from deposit attrition).
– Assume PV_operating_savings (present value of future annual cost savings from closing) = $250,000.
– Assume PV_one_time_closure_costs (lump-sum closure costs, present valued) = $50,000.
– Compute:
NPV_closure = $250,000 − $119,781 − $50,000 = $80,219.
– Interpretation: With these assumptions the NPV is positive ($80,219), so on purely financial (NPV) grounds closing the branch would add economic value. Remember this result depends on the inputs and assumptions; change any input and the conclusion can change.
Sensitivity checks (quick step-by-step)
1. Vary deposit attrition: increase attrition (higher lost deposits) raises PV_extra_cost and lowers NPV. Example: if PV_extra_cost rises to $180,000, NPV = 250,000 − 180,000 − 50,000 = $20,000.
2. Vary discount rate: a higher discount rate reduces PV_operating_savings (and may reduce PV_extra_cost depending on timing), typically lowering NPV. Recompute PVs using the alternate discount rate.
3. Vary closure costs: if one‑time costs are higher (e.g., $100,000), NPV = 250,000 − 119,781 − 100,000 = $30,219.
4. Build a small scenario table (base, optimistic, pessimistic) and report NPV for each scenario to show robustness.