While banks continue their best efforts to move customers to digital tools aimed at reducing their costly branch networks, customers keep coming back to keep the branches alive.

Reuters cites data by the Federal Deposit Insurance Corporation (FDIC) that the number of bank branches peaked in 2009 almost touching 100,000. In the last seven years, that number has declined 6% to 93,283 branches. The considerable increase in banks’ assets over the same period indicates that banks could do more with less. These moves led analysts to demand increased branch closures and aggressive slimming down. (See also: 3 Reasons Banks Can Freeze Your Account.)

The banks disagree.

Tradeoff Between Setup & Closure

A branch setup in the U.S. costs $2-4 million followed by annual operational expenses of $200,000-400,000. While closure may significantly reduce costs, it may lead to revenue loss of higher magnitudes. For instance, a JPMorgan Chase & Co. (JPM) branch earns around $1 million each year which surpasses the annual expense, but it takes around 10-years to realize its potential.

JPMorgan also records and mines the data related to customers’ branch visits and their activities. It is used to assess the need for continuity, closure or limiting the branch operations. JPMorgan's head of consumer and community banking, Gordon Smith, attributes the limited number of branch closures recently to customers retaining a preference for banking at their local branch. While banks continue to get more innovative in offering a wider array of services through ATMs, mobile apps and websites, the continued foot traffic at the neighborhood branch indicates customers still want a physical place to do their banking.

The Branch Abides

Customers are psychologically atuned to trust their money to an institute having a widespread physical presence, rather than the ones having limited or no presence. While many Internet only banks, like Ally Bank and Bank of Internet USA, continue to operate, they have failed to attract larger masses despite low cost offerings.

Beyond individuals, small businesses require frequent cash transactions. Such customers have a preference for personal face-to-face interaction for direct negotiations for loans and offers. Investing customers seeking advisory services also prefer direct talk. The prevalent use of checks in the
 U.S. also requires branch based processing.

Based on the ongoing trends, the online, digital, and automated services may remain limited to complementing banks’ traditional services for a long time to come, and banks may be forced to absorb the high operational cost for branches.

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.