The COVID-19 pandemic has led to the temporary closure of thousands of bank branchestemporarily closed, orlimited business hours and visitor numbers, as governments implemented social distancing measures to slow the spread of the virus.

This new normal has exposed bank customers and employees tonew habitsanddigital options. Some experts say banks are therefore reassessing the value of their branches and office space.

"With the forced mobility experiment of COVID-19 fresh in mind, I think this will accelerate banks' timelines for taking action on the cost side," said Michael Perito, managing director at Keefe, Bruyette & Woods (KBW), regarding bank branch consolidation.

Against the backdrop of the pandemic, banks are changinghow branches operate, shortening business hours, limiting customer flow, or even closing some branches entirely. Paul Schaus, president, CEO, and founder of consulting firm CCG Catalyst, noted that customers are forming new habits as they adapt.

"If you close a branch for four months, and now everyone has moved to other branches, do you really need to reopen? You've trained your customers," he said.

Industry observers, including Jim Miller, vice president of banking intelligence at J.D. Power, believe the COVID-19 crisis is accelerating the shift from branch interactions to digital.

A survey conducted by the data analytics firm in Julyshowedthat only 9% of respondents said they had conducted transactions inside a bank branch in the past week, while 29% used drive-thru services, 29% used mobile check deposit, and 33% used ATMs.

Nearly one in five (18%) respondents said they plan to use branches less after the crisis, while 29% said they plan to use mobile more, and 24% said they will shift to online banking.

"The more customers feel it might not be safe to go to a branch and shift to digital channels for banking, the more entrenched the habit of not using branches becomes," Miller said.

Banks are catching on to this trend and have hinted at or formally announced plans for how they will adjust branch strategies in light of the pandemic.

During last month's earnings call, PNC CEO Bill Demchaksaidthat the bank is reconsidering its branch strategy given changes in consumer behavior.

"It's clear that consumer behavior has changed, and I believe that change will be permanent as this embrace of digital continues," he said. "We have to adjust how we serve customers, and that likely means less physical space."

The bank has beenconsolidating branchesand has applied to regulators toclose 29 branches in August. The bank closed 16 in May as part of a previously submitted application to the Office of the Comptroller of the Currency (OCC).

U.S. Bank may also accelerate branch consolidation due to increased digital channel usage. The Minneapolis-based bank has been planning to close 10% to 15% of its retail branches for over a year, but nowis considering more。

"Digital activity grew 17% to 35%, and that activity would have happened in branches," U.S. Bank CEO Andy Cecere said in May. "All of that saves expenses, and we will continue to invest in that."

OCC Acting Comptroller Brian Brooks has warned againstusing the pandemic as an excuseto close branches.

However, Miller expects more large U.S. banks to decide to shrink their physical branch networks, like PNC and U.S. Bank.

"In most markets, they have high branch density, so the impact on customers is minimal; they can move to other nearby branches," he said. "Also, due to their investments in digital and younger customer base, branch usage is lower than smaller competitors. This will allow them to close branches and retain customers."

During the pandemic, U.S. bank deposits have surged. According toFederal Reservedata, bank cash has surged by $2 trillion since the first cases were reported in January.

Miller said this means banks can afford to lose some deposits when closing branches.

According to Federal Reserve data, as of the end of July, total U.S. bank deposits were $15.47 trillion, up $2.2 trillion from $13.3 trillion at the end of February.

'Branch rationalization'

Perito said decisions to shrink office and branch space will continue as banks seek to cut costs amid economic uncertainty.

"Branch traffic was already declining. Overall, it will never return to pre-pandemic levels, and I think that's where branch rationalization will come into play," he said.

In KBW's latestbranch focus report, the firm estimates that the U.S. banking industry has excess branches, and the number could shrink by 20% to 30% as digital adoption continues to rise.

"Before the pandemic, this reduction was expected to happen over the next 15 years. Now it might take only five years," Perito said.

Branches won't be the only real estate cut. As employees and management become more comfortable with remote work, banks may also shrink corporate office space.

KBW estimates that over the past few months, more than 70% of bank employees have worked efficiently from home, and they may be discussing future office needs.

Another study by Accenture found that 61% of bank executives do not expect all remote employees to return to the office.

More than half (55%) of respondents said their companies are planning to deploy physical, digital, and hybrid workplace strategies, and 42% said they expect to reduce their real estate footprint, Accenture found.

Bryn Mawr Bank (assets of $4.9 billion) in Bryn Mawr, Pennsylvania, is already making such adjustments.

The bank disclosed that 40% of its employees (more than 300 of the company's nearly 700 employees) will continue to work from home after offices reopen,the Philadelphia Business Journalreported last month.

Bryn Mawr said it plans to sell one building and terminate leases on two others by the end of the year, reducing its back-office space by 33,000 square feet. The bank also cut more than 20 back-office employees in June, calling them "redundant positions," the publication reported.

"They're not a poorly performing bank, yet they still found significant ways to save money," Perito said. "It really comes down to math. Banks have to cut costs somewhere. You don't want to cut revenue-generating people, and you don't want to cut technology costs. Going down the list, physical occupancy costs seem to me to be the lowest-hanging fruit."

Strategy shift

ConnectOne Bank, a regional bank with $7.5 billion in assets and branches in New York and New Jersey, closed 8 of its 22 branches last quarter and expects to close 4 more by the end of the year.

Like many other banks, ConnectOne Chairman and CEO Frank Sorrentino said the decision was based on increased customer digital usage, accelerated by the pandemic.

"We built this capability, thinking more about customers' needs for hub offices and moving away from the 'branch on every corner' model of many community banks," Sorrentino said.

Although some banks may be reconsidering the "branch on every corner" growth model, there is still value in maintaining a strong physical presence in certain markets, said Keith Brannan, chief marketing officer of fintech and marketing firm Kasasa, on last month's 11:FS Fintech Insiderpodcast.

"Having branches in certain areas actually drives your acquisition performance," Brannan said, noting that a bank with 10 branches outperforms one with 3 every time, even if both institutions run the same marketing campaigns.

"Like it or not, people driving by still believe that your (bank's) presence means their money is there," he said. "Although I think in some competitive markets, there is overinvestment in certain branch areas, in others, it's a service need that will persist."

However, for banks looking to cut costs by divesting excess branches, the COVID-19 pandemic provides a unique opportunity, Schaus said.

"If you're going to make changes to a bank, now is a good time," he said. "People are more open to change right now."