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Bye-bye branches: Banking hits 'inflection point'

The successful bank of the future will have fewer branches but better branding, with technological advancements getting priority over the traditional neighborhood touch, according to an analysis that sees an industry "inflection point" at hand.

Bank branches have been in a modest decline over the past several years, but an acceleration in the trend is one of the major changes that many experts see occurring in the future.

Amid shifting customer needs and demands to find new ways to make money as regulatory pressures increase, banks are adjusting their models toward improving the mobile experience and continuing customer service with less of a physical footprint.

Of the 12 largest banks in terms of branches, only two—Wells Fargo and U.S. Bancorp—are increasing branches. Expect the trend to continue, according to financial services firm Keefe, Bruyette & Woods.

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"We believe that reducing the number of branches and reinvesting some of that savings in brand enhancement will be the winning retail bank strategy of the next 10 years," KBW analysts said in a report for clients.

Commercial bank branches edged lower in 2014 to 82,613 from 82,860 a year earlier, according to FDIC data. The number peaked at 83,663 in 2013.

While the branch numbers for the moment aren't likely to show as precipitous a decline as total banks—down 26 percent in the past 10 years and 61 percent from the historical peak in 1994—underlying changes in the way the institutions operate will be dramatic.

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"This modest decline (in branches) pales in comparison to the technological change in banking and payment processing and raises the question of whether or not banks are transforming their delivery systems fast enough to accommodate changing client needs," KBW wrote. "We believe that the wide adoption of the smartphone, with its enhanced payments capacity, is transforming retail banking and will accelerate branch reductions."

Customers increasingly are doing their banking either online or with apps. The future for branches, then, likely will be more for sales than actual customer transactions.

Surveys have shown, in fact, that younger people are highly geared toward how well institutions provide mobile services, indicating a willingness to switch banks based solely on smartphone applications.

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"We do not believe that shrinking branch numbers can be a simple cost savings for banks as it reduces the presence of the institutions to consumers even if consumers are not going into the branches," KBW said. "Therefore, we believe that successful banks must reinvest some of the savings into branch enhancing measures, including advertising, marketing and technology."

Customers also increasingly are shifting retail banking operations to credit unions. The numbers for that industry are impressive, with the National Association of Federal Credit Unions reporting 101 million members as of the second quarter, an increase of 3 million on a yearly basis.

Auto loans at credit unions, for instance, grew 15.4 percent to just more than $248 billion total, according to SNL Financial, which also reported that total income for credit unions hit $2.42 billion for the quarter, a six-year high.

How quickly the trend to branch-cutting evolves likely will depend on technology as much as the bottom line.

"Branch numbers are only going to decline if bankers believe that the branches aren't profitable," KBW said. "When the industry was highly profitable, branch numbers expanded despite changing technology. We believe that bankers will increasingly realize that branches are not critical to attracting deposits, but brand identity is."