Commercial Banks and Branch Banking

The business model behind commercial banking practice has completely changed over the years. Earlier, commercial banks were heavily dependent upon branch banking.

Branches that served corporate customers were thought of as being an asset. As a result, it was common for corporate banks to advertise these branches to prospective clients. However, over the years, the tables have turned.

A large number of banks have now gone partially or completely digital. In the new business environment, the presence of a large number of branches is considered to be like a legacy system. It is expensive and considered to be outdated. As a result, it can be said that branch banking has already undergone a huge change and it is likely to undergo even more changes in the future.

In this article, we will focus on branch banking and why it is set to evolve at a drastic pace in the near future.

Why are Commercial Banks Shifting Away from Branch Banking?

Commercial banks are rapidly reducing the number of branches that they have. There have been studies conducted in this regard that have shown that the number of branches offering banking services is likely to reduce by 25% by the year 2025.

The number of branches offering commercial banking services is expected to decline even faster. One in three commercial banking branches will not exist after a few years.

This is obviously alarming and signifies a bigger trend. Some of the reasons behind this reduction in the number of bank branches are as follows:

1. Corporations Have Gone Digital: The first and foremost driver behind the reduction in branch banking is the fact that most corporations around the world have gone global. Companies around the world were already trying to digitize their operations.

   However, the pandemic has shown the corporate world, the importance of having a banking system that can be operated completely remotely. As a result, corporations are far more open to the idea of digital banking. Also, a lot of progress has been made in the area of data security. As a result, even smaller and more traditional corporations feel comfortable transacting online.

2. Branches are Expensive: It has been estimated that a banking branch costs about $4 million to open. Also, the commercial bank has to incur recurring expenses to the tune of $200000 to $400000 with a commercial bank branch. As per the same research, it takes at least three to four years for any banking branch to break even. This puts traditional commercial banks at a disadvantage.

   Any bank which relies heavily on branch banking finds its business model to be capital intensive and hence growth is slow. On the other hand, digital banks can avoid such expenses and can focus on improving their technology. The end result is that the technological divide keeps on increasing.

3. Branches are Inconvenient: Not only are branches expensive but they are also inconvenient. Corporate executives prefer to have a digital connection with their bank instead of a physical one. A lot of commercial banks are moving away from branch banking not because it is expensive but because it is inconvenient.

Why Branches Cannot be Completely Shut Down?

Despite all the factors that go against branch banking, it needs to be realized that branch banking cannot be completely shut down. Instead, it is possible to reduce the scale of branch banking. As we have seen earlier, even research reports suggest that the scale of branch banking will go down by 25%. It does not state that branch banking will become obsolete.

The fact of the matter is that branch banking is still deeply ingrained in the mind of many customers.

When corporations select a banking partner, they want a branch to be available at a nearby location. They do not intend to visit the branch and most never do visit the branch. However, they would like to know that it is possible to do so if they decide.

Internet-based supply channels have not been able to completely replace traditional channels like in other industries. The end result is that banking today is moving towards an omnichannel distribution network.

The Future of Branch Banking

The future of branch banking will definitely see a contraction in the number of available branches. For example, surveys have shown that more than two-thirds of commercial banks across the world want to cut down the number of branches. Around 10% of the commercial banks want to increase the number of branches and the rest want to leave it unchanged.

Hence, it is likely that commercial banks will have a closer look at their last-mile connectivity. Any location where the banking network is very dense will be carefully looked at and the density may be reduced. Corporate customers want to have a branch accessible in the case of an emergency but do not intend to visit it during the normal course of business.

The fact of the matter is that one size fits all approach cannot be followed here. Each organization will have to carefully evaluate its own need before it decides to pursue a strategy. Industry norms can be taken as a guideline. However, the final decision has to be made by the commercial bank.

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