The Next Brick and Mortar Death: The Financial Sector

With 76,000 bank branches across the U.S., is the next brick and mortar death likely to occur in the financial sector? Just last week, TD Bank announced that it will close 82 of its 1,223 retail branches in the U.S as "... many people have begun doing more transactions online or over TD's app in the past year." The post-COVID world and its acceleration of digital trends suggests that Amazon might not be the only one eating retail storefronts for breakfast. Maybe smartphones are going to be responsible for the brick and mortar attrition. After all, there are 260 million smartphones in the U.S.

The future of banking is digital and the digital wallet plays a huge part in this transition. Digital wallets are becoming "neobanks," a direct bank that operates exclusively online (i.e. without traditional physical branch networks). Examples include Paypal's Venmo, Square's Cash App, Chime, and MoneyLion, among others. 

The neobank's rise is driven by demographic change, best-in-class UI and UX, lower operating costs, and higher transaction fee capabilities. The growing proportion of digitally-native customers is a boon for the sector as more than half of the population is of the millennial generation or younger. These cohorts expect digital interaction first and sleek user interfaces rather than face-to-face interaction. This digital-first approach lowers operating costs drastically, which enables the neobanks to operate with fewer fees. Lastly, neobanks earn higher transaction fees on debit transactions due to the Durbin amendment passed with the Dodd-Frank financial reform legislation in 2010, which excluded financial institutions with less than $10bn in assets from fee caps. 

Neobanks not only serve as an incremental competition to traditional financial institutions, they also address a critical societal need - financial inclusion. After all, the FDIC estimates that 63 million U.S. adults are unbanked or underbanked. While traditional banks find these potential customers to be unprofitable and unattractive, neobanks can offer a wider range of financial services to this cohort with lower and fewer fees. 

Globally, there are an estimated 300 neobanks with an average of five opening every month. In Asia, key players include Alipay and WeChat Pay. In Europe, Revolut and N26. In Latin America, MercadoPago and NuBank. 

With plenty of traditional competitors and new neobank competitors emerging on a regular basis, customer acquisition is vital. Square commented at an investor conference in December 2020 that the cost of acquiring a new transacting customer was $5 from 2017 - 2019. That compares to hundreds of dollars to acquire a credit card customer and in many cases north of $1,000 to acquire a retail banking customer at a traditional bank. Importantly, both Venmo and Square each possess an annual active user base estimated to be greater than sixty million, roughly on par with JP Morgan's deposit account base, which took years instead of decades to accumulate. 

As the digital landscape continues to advance with innovations in AI and ML that tease out observations and analytics from the software platforms created by neobanks, it becomes very difficult to see traditional banks retaining such massive deposit bases over the long-term. This becomes especially true when thinking about the ease with which a customer can transact on the streamlined UI of a neobank. 

With all of these advances in the digital banking landscape, do we need to go into a brick and mortar bank anymore? Probably not.