What Is Branch Banking?

Branch banking is engaging in banking activities such as accepting deposits or making loans at facilities away from a bank's home office. Branch banking has gone through significant changes since the 1980s in response to a more competitive nationwide financial services market. Financial innovation such as Internet banking will greatly influence the future of branch banking by potentially reducing the need to maintain extensive branch networks to service consumers.

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 authorized well-capitalized banks to acquire branch offices, or open new ones, anywhere in the United States outside their home states after June 1, 1997. Most states passed laws enabling interstate branching prior to that date.

[Important: Branch banking networks are gradually evolving into multistate financial service networks where depositors can access their accounts from any banking office.]

How Branch Banking Works

Branch banking allows a financial institution to expand services to an area outside of the home location, functioning as an extension of the home location. This can be a more cost-effective approach because not all locations are required to offer the same levels of services as the home location, allowing smaller offices to provide key services while larger locations provide additional services.

According to a GOBankingRates survey in early 2019, almost half of the 1,000 participants stated their preferred method of banking was using a branch bank or ATM. Twenty-five percent responded that they use a mobile app instead of branch banking.

However, according to the American Bankers Association (ABA), the number of US bank branches went down from 99,540 in 2009 to 91,861 in the third quarter of 2016. (These are the most recent figures available, as of early 2019.) These figures were gathered by the Federal Deposit Insurance Corp. for the ABA and reported in an article in the Washington Post.

Certain banks assert that additional branches are underperforming, likely due to the increase in online banking options, but will likely remain. Concern over certain regulations, like the Community Reinvestment Act of 1977, which governs banking activities in rural communities, has reduced the rate and number of bank closures to a degree.

Unit Banking Versus Branch Banking

In contrast to branch banking, unit banking includes any bank that operates without any associated branches. The bank may exist as a single unit by choice, such as certain small, independent community banks, or may not be permitted to open branches per certain government restrictions.

Not all unit banks are completely independent, even if they do not share a name with a larger banking entity. Some are owned by larger holding companies with associations with other banks.

Key Takeaways

  • Branch banking is engaging in banking activities such as accepting deposits or making loans at facilities away from a bank's home office.
  • Online banking and banking via mobile apps are competition for branch banking.
  • Branch banking has gone through significant changes since the 1980s in response to a more competitive nationwide financial services market.