Finance

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

It turns out bonuses aren't the only part of the banking industry that's shrinking. 

As anyone who's endured enjoyed a presentation from bank executives in the last few years knows, banks are hacking down more branches than tree crews after an ice storm. JPMorgan Chase is planning to close 150 branches this year, Citigroup is closing its Boston-area branches, PNC Financial Services is closing some, too, and, well, there are plenty of other examples if you go looking. And the "banks of the future" that were built in the past or are being planned here and there include less square footage and fewer employees.

Regulators have taken notice. From 2009 to 2014, banks closed 4,821 branches, which reduced the number by about 5 percent, according to a post on Monday on the New York Fed's Liberty Street Economics blog.  Why? According to the blog, "the forces driving the trend are not entirely clear" and "although identifying the causes of the debranching trend is clearly important, we cannot resolve this issue here."

We'll take a stab at it: People just don't need to go to bank branches very often anymore. They bank on their phones and computers.  There are too many pitches for mobile-banking apps to cite, but this Associated Press reporter's Q&A with Michelle Moore, Bank of America's head of digital banking, says it all:   

Q: What else can you do to make things easier for mobile customers?
A: You can now do nearly everything through our app that could have been done at a branch. You can open an account. If you need help, you can set an appointment to meet with someone at a (branch). We do 21,000 appointment requests a week now through either smartphone or the website. We also now allow customers to be connected directly to our call centers without having to re-authenticate. The credentials from the phone's app are transferred directly to our associates' desktop. We do 150,000 calls a week now this way and that number was effectively zero a year ago. So now you can connect to our ATMs, our call centers, our financial centers (branches) all from your mobile device.

It's not such a mystery why branches are disappearing. Maybe the Fed needs some hard data to back it up, so perhaps it should check the spots where banks are expanding their real estate: "fintech bunkers" like the 125,000-quare-foot one Hugh Son wrote about Monday. They feature all the stereotypical accessories of a tech startup: video games, foosball tables, etc. So maybe a chart showing the inverse correlation between bank branches and foosball tables would be enough to solve this riddle?

Let's wait for the foosball-table audit to confirm, but in the meantime here's a look at how many branches JPMorgan Chase has closed and plans to close this year: 

Pruning Branches
JPMorgan Chase's consumer and community bank unit plans to close more branches this year.
Source: Company presentation

And here's a look at how digital channels have surged to become the dominant method of signing up new credit-card customers:  

Clicks, Not Bricks
JPMorgan Chase's distribution of 2015 new credit card accounts by channel.
Source: Company presentation

While struggling with the obvious question, the Liberty Street blog post also ventures into a more difficult one concerning the drawbacks of branch closings, namely "banking deserts," or areas where there are no branches. Are they places with mostly low-income or minority populations? And are residents and businesses in those areas losing access to financial services? 

The authors cite a recent study by an economist at the University of California, Berkeley, who found that when merging banks close a branch, the number of small-business loans made in the area fell by 13 percent for more than eight years afterward. The reason is that "soft information" -- such as branch managers' knowledge of local business trends and the intangible traits of customers like competence and work ethic -- is lost when a branch closes. Algorithms, on the other hand, rely solely on "hard information" such as credit scores and balance sheets.  

The blog post doesn't quantify the effect on local communities left without bank branches nor does it draw any hard conclusions, but it does suggest that low-income areas are more likely to be part of a banking desert because branch openings fail to compensate for closings.

These questions may not be of huge concern to executives looking for ways to increase the bottom line, but perhaps they should be viewed through another lens. For banks that still haven't recovered from the public-relations damage caused in the financial crisis, maybe appearing to abandon the most vulnerable isn't the best image.

More important, is there a higher obligation for everyone to have access to essential financial services, especially if they don't have access to computers and smartphones? Banks shouldn't be forced to keep underperforming branches open, but it would be wise to make sure all efforts are being made to ensure there's something of an oasis in every banking desert.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net