Bank branches matter. Countering the overwhelming messaging from many banks and even some regulators, the National Community Reinvestment Coalition (NCRC) has published several reports over the years that detail how much branches still matter for consumers and communities, even in 2019. Just look at the number of branches that banks opened in the last year, and it is clear that they also know the value of a physical outpost in the community they want to serve.
And yet, we still hear about the obsolescence of branches whenever banks merge or when they want to close a branch in a low- or moderate-income neighborhood. Often they cite the many ways that traditional bank transactions are now done on our smartphones or online. Branches are, as we are told, just not “needed” by consumers anymore.
Yet, consumers seem to disagree. At least this is what the Federal Deposit Insurance Corporation (FDIC) found in its surveys of unbanked people, who often cite the lack of local branches for why they don’t use banks. While the way that consumers use branches has shifted from easy-to-measure transactions to a more nuanced kind of relational banking, that hasn’t diminished the value of branches.
Yichen Xu, a former intern with NCRC’s research team, just completed her doctoral dissertation on the link between bank branches and mortgage and small business lending. In the past, the presence of a bank branch was correlated with local mortgage lending. This effect has faded over time, and today over half of all mortgage loans are made by non-bank lenders that lack any physical offices. Xu attributes this to the way that mortgages are originated and underwritten, where approvals are based on a standard formula that takes into account the value of the property, the income and credit history of the borrower and any assets the borrower has. In fact, she determined that when bank branches close there is no observable effect on mortgage lending to the community.
However, small business lending is a very different story, as it relies on what Xu calls “soft information.” This refers to the details a loan officer learns about a business and the local community through social and financial interactions, which is very different from the “hard information,” such as credit score and debt-to-income ratios, that dominates mortgage lending. These critical soft details are highly localized and are usually known only to the bank staff that works with local businesses. The relationships between bank staff and local business owners allow more confidence between lender and borrower. When local branches close, those relationships are lost, resulting in the loss of credit that local businesses need to thrive until new relationships can be established with the bank branches that remain. This process can take years, resulting in a period of less small business lending in the area near the closed branch location. Xu demonstrates that a decline of just 8% in branch locations reduces nearby small business lending by 22%.
Bank branches still matter. Individual consumers might deposit the rare check they get with an app on their phone, and they might never set foot in their local branch or ever learn the name of a teller that works there. But that local branch supports all of the other local businesses that they do visit, and without that branch, those businesses will have a harder time staying open. There is no app for that.
Jason Richardson is director of Research and Evaluation and Zoe Paige was an intern at NCRC.