Is this the death knell for bank branches?

Are bank branches about to become yet another casualty of the coronavirus pandemic?

The trend towards a cashless society has picked up pace in the past few months as major retailers have been encouraging customers to pay by card rather than cash in the hope of limiting the possible spread of COVID-19 from banknotes.

As National Australia Bank boss Ross McEwan told The Australian Financial Review this week: "As a result of the coronavirus, cash utilisation has fallen dramatically – people don't want to touch it any more.

"The trend that's been going on for a decade – the drop in the use of cash and cheques – all of a sudden has taken a different trajectory."

But cash isn't the only casualty. With the introduction of social distancing measures, people have been avoiding visiting bank branches. Bankers estimate that foot traffic in the branches has fallen by anywhere between 50 and 90 per cent.

One of the big consequences of the pandemic, it seems, has been to make people increasingly comfortable with the idea of banking online.

In response to the coronavirus, the big four banks have closed around 400 branches, redeploying the branch staff to call centres.

The big question that bankers are now grappling with is how many of these branches will reopen when the crisis subsides.

It's important to note that banks have so far closed roughly 10 per cent of their branches. According to figures from the Australian Prudential Regulation Authority, there were 5314 bank branches in the country as at June 2019, down from 5816 two years earlier.

The bulk of these branches – 3041 – were in the major cities. In contrast, 1276 branches were in "inner regional" areas, 776 in "outer regional" areas, 150 in "remote" areas, and 71 in "very remote" areas.

Most bankers say that decisions on branch closures will be guided by the changes they see in customer behaviour.

"Over the next three months, when we emerge out of the COVID-19 crisis, we'll see what the utilisation of the branches is," McEwan said. "That will be the big determinant as to the size of the branch network – we'll respond to customer utilisation.

"We're seeing more and more customers use digital. They're using less cash and certainly fewer cheques. Things are changing, but let's just see what comes out of it."

If other banks take this approach, then the overwhelming majority of the branches that were temporarily closed will reopen as economic activity picks up.

But some bankers take a more pessimistic stance on the long-term future of the branch networks. They predict that the big four banks will embark on a fresh wave of major branch closures similar to what took place in the 1990s.

The difference this time, they say, is that the primary motive of the banks isn't to strip costs out of the business. They're simply responding to the changing demands and behaviour of their customers.

Bankers point out that until recently there were two categories of customers that remained heavy users of the branches: older people and small businesses.

One of the initiatives that Australia's banks took in response to the coronavirus was to issue a record number of debit cards to customers who didn't have them and who may be self-isolating.

There are more than half a million people – mostly over the age of 70 – who use a passbook account or a transaction account that isn't linked to a debit card.

The debit cards allow these people to shop online or to order goods and services over the phone.

Bankers say it's still too early to determine how many of this older cohort have been persuaded to make a permanent transfer to digital banking.

But they do report there has been a huge jump in the number of customers using credit cards, and a massive increase in the use of digital banking services.

Bankers estimate digital log-ins have increased by around 20 to 25 per cent during the coronavirus crisis, suggesting that people are keeping a close watch on their finances.

As the restrictions on social distancing are relaxed, bankers will be watching closely to see whether traffic in the branches rebounds or whether many of the older customers who traditionally used branches have now migrated to digital banking.

Of course, small businesses also depend heavily on bank branches. And again bankers will be watching whether their decision to shun cash during the coronavirus has caused a behavioural shift.

Although they have to pay merchant fees on cards, small businesses may decide that they prefer digital payments rather than handling cash, which has to be counted up at the end of the day and physically deposited in a bank.

If small businesses transition away from cash, there's less justification for banks to maintain such a large and costly branch network.

If banks do embark on a fresh wave of branch closures, it will represent a further blow to commercial property landlords.

Over time, banks have progressively sold off their branches and opted to lease premises. And as their leases have expired, they've tended to move into prime positions in shopping centres, which have greater foot traffic.

Banks have traditionally been seen as desirable tenants because they were solid institutions that always paid their rent on time.

Still, bankers point out that physical bank branches won't completely disappear from the landscape. People still want to have face-to-face conversations with their bankers when they're discussing important financial decisions, such as taking out a home loan.

What's more, bankers say, being able to attract customers through their branch network means they're less dependent on mortgage brokers for new business.

Indeed, bankers point out that in the past few months people have been returning to the major banks for their home loans, which not only reflects the competitive mortgage rates on offer, but also a preference for dealing with the big, established banks during a period of intense economic stress.

And bankers believe that branches will remain a key factor in attracting small business clients, because these people still like the idea of having a relationship with their banker.

This could result in the big banks – which are all trying to grow in the area of small business lending – putting more business bankers in their branches.

So the challenge for bankers is to work out how to use their branches more effectively, with staff spending less time on straightforward transactions.

Bankers are also extremely conscious of the huge political sensitivity of closing branches in regional areas. Most bankers have already been contacted by politicians and local communities seeking reassurance that branches that have been temporarily closed will reopen.

Indeed, in March 2019, NAB decided to boost its support for drought-affected rural communities by undertaking not to close any regional bank branches until at least January 2021.

After all the effort that the big banks have put in to repairing their tarnished image during the coronavirus crisis, they are going to be very tentative about stirring up a fresh controversy over branch closures.

The author owns shares in the major banks.