Bank of America's (NYSE:BAC) business model is in the midst of a dramatic shift, as increased adoption of mobile banking is allowing the nation's second-biggest bank by assets to trim its physical branch count.
You can see this in the chart below, which shows that these two trends are headed in opposite directions. While Bank of America has closed 953, or 15.8%, of its branches over the past four years, active mobile banking accounts have increased by just under 10 million, equating to a 130% boost.
Although other banks are flirting with the idea of strategically expanding their branch networks, there's little question that digital banking represents the future of financial services.
FMSI, a consulting firm that tracks the financial performance of bank branches, estimates that transaction volumes at community banks and credit unions have dropped 45% since 1992. Over the same period, the hourly pay rate of branch employees has increased 90%. The net result is that the cost of each in-branch transaction has risen 133.3% in just over two decades.
Digital and mobile banking offer a potent tonic for these troubling developments. JPMorgan Chase (NYSE:JPM) says it costs $0.65 to handle a deposit transaction in a branch. The cost falls to $0.08 per transaction conducted on an ATM. And customers who deposit checks using JPMorgan Chase's mobile app cost the bank just $0.03 per transaction.
JPMorgan Chase's experience in this regard is confirmed by the performance of BOFI Holdings (NYSE:AX), the parent company of Bank of the Internet, a digital bank with no physical branches. BOFI typically spends less than 40% of its revenue on operating expenses. By contrast, most banks struggle to get this figure, known as the efficiency ratio, below 60%. Doing so is particularly difficult in the aftermath of the financial crisis, thanks to higher regulatory and compliance costs spawned by the voluminous Dodd-Frank Act.
To circle back to Bank of America, then, the chart above makes it clear that the Charlotte, North Carolina-based bank not only appreciates the role that digital banking can play in reducing expenses, and thereby boosting the bank's profitability, but it's also taking aggressive steps to realize these benefits sooner rather than later.