The term “new normal” has become a staple in our lives, stretching beyond simple social changes like wearing masks and maintaining social distancing. For the banking and finance sectors, the new normal means embracing branchless banking, mobile banking, and minimizing physical interactions.

As a result, the trend of closing physical bank branches is accelerating. While many fintech companies celebrate the shift to digital-only banking, the question remains: is the disappearance of physical branches truly the future of banking? This is a question being debated by bankers, fintech founders, and digital innovators alike. Let’s explore what branchless banking might mean for the future of the financial sector.

The Trend of Bank Branch Closures

Even before the pandemic, the number of bank branch closures had been steadily increasing. Following the 2008 housing crisis, U.S. banks began closing branches at an unprecedented rate. According to the National Community Reinvestment Coalition, more than 4,400 U.S. bank branches shut down between 2017 and 2020—a decline of 5.1%. The pandemic only accelerated this trend, with the rise of digital banking and fintech pushing banks to close even more branches globally.

In Europe, major banks are also scaling back their physical presence. In Spain, Banco Santander is set to close nearly 1,000 branches, and Deutsche Bank in Germany plans to shut down 150 additional locations. Similar trends are visible in China and Australia, where digital banking solutions are replacing traditional brick-and-mortar branches.

What Do the Numbers Say?

A survey by the Economist Intelligence Unit found that over 65% of global banking executives believe branch-based banking will be obsolete in five years, with more than 95% predicting that the last bank branches will close within a decade. These insights are backed by consumer behavior trends. In the Asia-Pacific region, more than 90% of consumers are using contactless payments, while over 80% of Mastercard survey respondents consider contactless payments a “cleaner” way to pay. In Africa, mobile money transactions totaled nearly $500 billion. In the Gulf Cooperation Council (GCC) region, digital payments surpassed cash on delivery for the first time in 2020, further highlighting the shift toward digital transactions.

However, physical bank branches are still vital in regions where the fintech ecosystem is not yet fully developed. In India, for example, 83% of people still prefer cash on delivery over digital payments, and over one billion people continue to rely on cash transactions. Similarly, in Pakistan and Vietnam, cash remains king, with many adults still unbanked. While physical branches have a place in the financial system, fintech and digital banking are quickly bridging the gap for the unbanked and underbanked, offering financial inclusion through technology.

How Banks Can Move Forward

Banks need to cater to three key customer groups: migrators, engagers, and aspirers. Migrators are ready to switch to digital products, engagers are leaning toward digital options, and aspirers have yet to make the transition. For most banks, their customer base will consist of a combination of these segments.

Although digital banking is the clear future, physical branches still serve an important function, particularly for older customers who feel more comfortable visiting a bank in person. A hybrid approach, combining physical branches with robust digital offerings, is becoming increasingly common. For example, Mashreq Bank in the UAE operates both physical branches and a fully digital platform called Mashreq Neo. Similarly, KFH-Bahrain has launched Jazeel, a digital-only service alongside its physical branches, offering customers the choice to bank online or in person.

Is Digital Banking the Answer?

While digital banking is growing rapidly, even millennials and Gen Zers still occasionally visit bank branches. A study by Fintech Snark Tank found that half of millennials and Gen Zers who opened an account in the last three years had to visit a branch to meet with a bank employee. The primary reason for this was to resolve issues that could not be addressed online or through mobile apps. Forty percent of respondents said they couldn’t find the information they needed online, and 25% said their bank’s website or app didn’t support certain functions.

This doesn’t mean physical branches are needed; rather, it highlights that digital banking still has room to improve. Customers want the ability to engage with human support when they face challenges, which supports the idea of a hybrid banking model rather than a complete elimination of branches.

Conclusion

The transition to branchless banking is inevitable, but banks must ensure that they guide their customers through this shift smoothly. The future lies in digital banking solutions, but banks should also consider a hybrid model to accommodate customers who still value in-person interactions. To stay ahead, banks should partner with fintech companies to innovate and lead the digital banking revolution, ensuring they meet customer needs both now and in the future.