Collapse of branch banking in 1 century

By Nam Hyun-woo

Banking has existed since ancient times and has changed its shape significantly from grain loans between merchants to today’s banking without cash.

Throughout paradigm shifts, banks’ operations have changed dramatically. Many global lenders are now setting up branchless and digital operations as the way to go ― a move that is in stark contrast to the strategy they took over the past century.

Economists and experts say the branch banking strategy by Bank of America founder Amadeo Peter Giannini is the model case showing how banks bulked themselves up and penetrated into peoples’ daily lives in the 20th century.

Giannini was born in California on May 6, 1870, a son of Italian immigrants. Instead of schooling, he jumped into business in his early years and founded the Bank of Italy in 1904 with five partners.

After its survival from a series of natural and economic disasters, such as the San Francisco earthquake in 1907, the Bank of Italy’s business quickly hit its stride and Giannini began buying other banks in California.

He then turned the banks into branches of the Bank of Italy and continued such a tactic to extend his empire across the United States. In 1928, Giannini merged the Bank of Italy with the Bank of America, Los Angeles and two years later renamed the bank the Bank of America National Trust and Savings Association.

According to a 1932 Federal Reserve report, the Bank of Italy had 25 offices by the end of 1919 and it rapidly increased to 292, 10 years later. Except for 40 branches in San Francisco, home to its headquarters, 252 were out-of-town branches, scattered literally all over California.

“The spread of branch banking in California has to a large extent resulted from the activities of one man and the bank with which he has been identified ― A. P. Giannini and the Bank of Italy,” the report said.

Giannini’s branch banking tactic was soon adopted by rival banks, because it seemed branches were well functioning as an extension of the home location without playing the full role of the home office.

Through Giannini’s principle, the Bank of America grew its services networks. It continued to expand and in 2013 was operating 5,328 branches in the U.S. and was active in 40 countries, giving Giannini the reputation of “one of the greatest bankers in history.”

About five years ago, however, the situation began to change.

With the rapid advance of the internet and mobile banking, people relied more on clicks and taps than a walk to a bank branch. As the emergence of ATMs had done, the advance of internet and mobile banking quickly convinced banks they don’t need to maintain as many branches anymore.

Global banks were keen to scrap their old strategy of branch banking and channeled the resources saved to digital banking.

JPMorgan Chase is scaling down its branch networks, Citigroup is accelerating its move to transform into a digital bank globally and Wells Fargo is downsizing its branches so it can hire fewer employees and sit in a smaller space.

Even the Bank of America has been cutting down its branch network. A CNN Money report said the number of the bank’s branches in the U.S. dropped by 10 percent to 4,789 as of the end of the second quarter of 2015.

Citibank Korea leads efforts to reduce branches

Korea is no exception. Citibank Korea has created a stir in the domestic banking industry, by announcing a shutdown of most of its branches across the country.

This is in line with Citigroup’s belief that reshaping its branch network is essential because it reduces expenses.

Citigroup CFO John Gerspach said during a third-quarter earnings call last year the bank has “spent the last several years reshaping its branch network, enabling it to grow revenue while reducing expenses.”

But there is resistance.

Though the bank said it is part of its “next-generation consumer banking strategy to preemptively respond to the rapidly changing digital and financial service environment,” its union here opposed the plan, saying it will end up bringing massive layoffs as well as deteriorating service quality.

Citibank Korea’s management and union agreed on curtailing the initial plan of shutting down 101 branches, keeping 36 branches _ serving multiple functions such as wealth management ― operational.

“A large branch network used to represent a bank’s presence in the past. But now it is more of a burden incurring fixed costs,” a domestic bank official said, asking not to be named.

Korea’s homegrown banks are also joining global giants’ moves.

According to six banks ― KB Kookmin, Shinhan, Woori, KEB Hana, NH NongHyup and Industrial Bank of Korea (IBK) ― the total number of their branches across the country declined to 5,493 at the end of May this year, down 442 from 5,953 at the end of the first quarter of 2013.

KEB Hana has closed the most at 159, as part of branch network reshaping efforts after the merger of the Korea Exchange Bank (KEB) and Hana Bank in 2015. KB Kookmin, which is the largest in Korea by number of branches, shut down 123, while Woori followed with 102.

“Along with the advent of internet and mobile banking, there are so many ways of banking,” the bank official said. “For example, peer-to-peer lending is already occupying a significant share in financial services and there are so many new businesses which don’t require a massive network. For a bank, relying less on branch banking is becoming a matter of survival.”

“The banking world experienced similar issues when ATMs first emerged,” said Prof. Sung Tae-yoon of Yonsei University. “It is true that simple and standardized branches are quickly becoming unnecessary.”

“As we have seen in Citibank Korea’s case, branches will be merged and evolve into a massive financial center playing multiple roles and offering face-to-face counseling.”