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From Banking and Finance Law Daily, February 19, 2015

Customers prefer brick-and-mortar banking, FDIC study says

By J. Preston Carter, J.D., LL.M.

Despite the increased use of online and mobile banking, brick-and-mortar banking offices continue to be the primary means through which institutions insured by the Federal Deposit Insurance Corporation deliver financial services to their customers, according to a study released on Feb. 19, 2015, by the FDIC. As of 2014, the density of banking offices per capita was higher than it had been at any point prior to 1977, the study says. FDIC-insured institutions operated 94,725 banking offices as of June 2014, a decline of just 4.8 percent from the all-time high of 99,550 offices in 2009.

The study identifies four main factors that have influenced the number and distribution of banking offices over time: population growth, banking crises, legislative changes to branching laws, and technological innovation.

Population growth. The study found that office growth has outpaced the nation’s population growth over the long term and has tended to follow regional migration patterns. Between 1970 and 2014, the U.S. population grew by over 50 percent, while the number of offices more than doubled. Much of the nation’s population growth occurred in the Sunbelt states of the South and West and many of these states also experienced strong office growth.

Banking crises. Historically, net declines in branch offices have followed periods of financial distress, such as the Great Depression, the S&L and banking crisis of the 1980s, and the most recent financial crisis. The onset of the 2008 financial crisis brought about an increase in failures, with over 100 bank failures on average each year between 2008 and 2012.

Although the study notes that banks of all sizes have closed offices since 2008, just 15 institutions have accounted for one-third of all gross office closings. These include some of the nation’s largest banks, as well as large regional banks, two of which—Washington Mutual and Wachovia—failed or were forced to merge during the crisis. Other large institutions have pared back their extensive office networks as part of their post-crisis restructuring efforts. In all, just 52 institutions have accounted for one-half of office closings since 2008.

Legislative changes. The relaxation of branching laws in the 1980s and 1990s appears to have increased the prevalence of banking offices by removing legislative constraints on the size and geographic scope of the branch networks that each bank could operate. Also, interstate banking expanded when the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 established a uniform standard by which an institution headquartered in one state could branch into, or acquire banks in, any other state, and allowed institutions operating subsidiary charters in different states to combine them into a single interstate bank.

Technological innovation. The study found little evidence that the emergence of new electronic channels for delivering banking services has substantially diminished the need for traditional branch offices where banking relationships are built. Since 1970, banks have introduced a series of new electronic channels for delivering banking services. However, according to the 2013 FDIC National Survey of Unbanked and Underbanked Households, visiting a teller remains the most common way for households to access their accounts.

The study concludes by stating that convenient, online services are here to stay, but as long as personal service and relationships remain important, bankers and their customers will likely continue to do business face-to-face.

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