海角社区

Have you noticed fewer brick-and-mortar banks in your neighborhood recently?

Following decades of consistent growth, the number of bank branches in the U.S. peaked in 2010 and has been declining ever since, a trend that accelerated dramatically after the COVID-19 pandemic. A new working paper with the National Bureau of Economic Research (NBER) by Rajesh P. Narayanan, professor in the 海角社区 Department of Finance, alongside co-authors Philip Strahan (Boston College) and Dimuthu Ratnadiwakara (Federal Reserve Bank of Richmond), suggests that this decline is driven by technology, which has fundamentally altered the profitability of local bank branches by making customers more powerful and less loyal.

鈥淢y co-authors and I have been thinking and writing about structural changes in the banking industry for a long time now,鈥� Narayanan said. 鈥淲e have been involved in previous research that showed that, prior to the Global Financial Crisis, a forty-year expansion period unfolded as large banks expanded into new markets, fostered by deregulation 鈥� [however] since 2010, this trend has reversed, reducing both the number of banks and branches. When we were discussing these issues at a conference at the FDIC, we decided to explore this [current] phase of restructuring further.鈥�

 

What They Found: An Industry in Flux

To first understand what drives a bank branch鈥檚 success (or failure) the researchers analyzed an extensive dataset of all U.S. bank branch openings and closings from 2001 to 2023, building a model to predict each branch's "deposit franchise value" (DF), which acts as a key measure of profitability from deposits.

A branch鈥檚 DF will be higher when customers are 鈥渟ticky鈥� 鈥� they are less sensitive to interest rate changes or face higher barriers to moving, making their deposits highly profitable for a bank. However, using census and IRS data, the researchers found that this 鈥渟tickiness鈥� is disappearing in areas with more financially and technologically sophisticated residents. This includes individuals with higher income and education levels who are more likely to adopt new technologies, such as mobile banking. The researchers confirmed their findings with anonymized cell phone data, which further showed that these customers visit branches less frequently.

鈥� Technology, such as the internet, mobile banking and payments, has allowed rate-sensitive customers to quickly move their funds to higher-yielding alternatives. This stands in contrast to earlier periods, where deregulation was the main driver of restructuring. Our findings highlight the different incentives facing incumbent banks versus potential entrants. 鈥�

These findings have direct practical effects for the average banking consumer and help explain an apparent paradox: why the same neighborhoods are often targeted for both closures by incumbent banks and openings by new ones.

• An existing bank is more likely to close a branch in an area with financially savvy customers (low DF) because it is difficult to earn profits from depositors who demand competitive rates.
• A new bank sees that same area as an opportunity. It is easier to attract rate-sensitive customers away from an incumbent with a better offer, making it a prime location for a new branch.

 

What鈥檚 Next for the Future of Banking?

Narayanan and his co-authors suggest that the COVID-19 pandemic acted as a "teachable moment" for both customers and banks. This generational event pushed more households toward digital services and made them less reliant on physical branches, increasing pressure on those branches鈥� profitability.

While the disappearance of a local branch can be a loss for a community, their research suggests that it is part of a broader shift eroding the old frictions of physical distance. As the digital banking playing field expands, it may lead to a more competitive landscape, potentially resulting in better services and rates for consumers in the long run. However, this shift is not without risks that call for further study.

鈥淚f technology is changing the structure of the banking industry, a natural question to ask is if it poses risks to financial stability. During the banking turmoil of 2023 鈥� we experienced the second, third, and fourth-largest failures in U.S. banking history. We are already working on another paper that examines how technology influences the stability of deposits in the banking system.鈥�

Want to dive into the full research and data? Read the paper here.

 

About the Researcher

Rajesh P. Narayanan is the Hermann Moyse Jr./Louisiana Bankers Association Professor of Finance. His academic research focuses broadly on issues related to banking and financial markets and has been published articles in leading academic journals including the Journal of Financial Economics, Review of Financial Studies and Journal of Money Credit and Banking. He has delivered lectures to and conducted seminars on various topics for executives and technocrats in Brazil, China, the Czech Republic, India, Malaysia and South Africa. His interviews and commentary have been featured in national media outlets such as the Wall Street Journal, CNN/Money, Bloomberg, Fortune as well as in regional and local media outlets such the Times Picayune, The Advocate, Greater Baton Rouge Business Report, WBRZ-TV, and WWL-Radio.