U.S. banks are shifting their branch strategies as talent and wage pressures present a new set of challenges.

The industry shuttered a record number of branches two years in a row after the COVID-19 pandemic accelerated digital adoption and altered consumer banking preferences. As banks continue to evaluate their branch footprints, the industry is now grappling with how to staff remaining branches and pay those employees competitive wages. Many banks are opting to modernize their branches to more technology-focused models in order to operate with less staff and also adapt to consumers' changing behavior.

"There's a lot of competition out there for people at the branch level skill set, which is that interpersonal relationship that can easily transition to other businesses like restaurants and different things. The cost of those people have come up substantially also," said Charles McQueen, president and CEO of McQueen Financial Advisors. "We're having a lot of conversations about rethinking the entire model of branch personnel."

McQueen added that banks are focusing on how to modernize the branches they are left with in order to operate with less individuals that are more highly paid and focuses on consultative activities rather than transactions.

Closures slow in Q2

U.S. banks shuttered a record number of branches in both 2020 and 2021 following the impact of the COVID-19 pandemic on consumer behavior. Many banks chose to close large portions of their footprints, with 28 U.S. banks shuttering more than 20% of their branch footprints since Jan. 1, 2020.

Just at the end of May, SouthState Corp. announced it is closing 30 of its branches, or about 10.5% of its footprint. But such announcements will be more sparse going forward, according to McQueen.

U.S. bank branch closures have slowed in recent months. While the industry posted 809 net closures in the first quarter, it has only shuttered roughly 30.7% of that total so far in the second quarter with 248 net closures.

In April, the industry posted 61 net closures, compared to the trailing 12-month average of 219 net closures.

The slowdown in closures comes as some banks are taking a more "scalpel-based approach" to offset both digital adoption and talent pressures in which they continue to close some branches here and there, but instead focus more on updating existing branches, shortening branch operating hours or trying lighter staffing models, according to McQueen.

"There's going to be more reinvestment in branches with good population centers and large customer membership groups close by," he said.

Modernizing branches

Since Jan. 1, 2020, PNC Financial Services Group Inc. has closed 419 branches, but the company still sees value in having an accessible branch footprint, Kevin McCann, executive vice president and growth and innovation executive at PNC, said in an interview. According to the executive, 75% of the company's retail sales in the first quarter took place inside a branch.

In order to respond to the branching pressures the industry is feeling and remain accessible to customers, PNC plans to convert 60% of its branches nationwide over the next five years to a more technology- and consultation-focused, modernized model. According to S&P Global Market Intelligence data, PNC has about 2,676 branches.

"You get to a point where there are no more closures to be had that aren't going to make things really inconvenient on your customers," McCann said. "So you really have to think about how to use the branches differently and still provide best of both worlds — those conveniences of digital plus the value that relationship brings from the human side of things."

The modernized branch model will focus on consultation rather than transactions and be technology-forward with features such as video teller machines, but the pace of conversions will be determined by customers' responses, McCann said.

"This is a progressive change of our footprint. This isn't a light switch," he said. "More of a dimmer that we're doing over time."

Community banks are also opting to make their branches more technology forward. Russellville, Ala.-based CB&S Bank Inc. is deploying interactive teller machines, or ITMs, into all its branches, Chief Analytics Officer Dawn Cherry said during a panel at S&P Global Market Intelligence's Community Bankers Conference in May. However, the $2.37 billion in total assets bank is seeing discrepancies between customers' willingness to use technology in branches.

"That is being accepted in the metro markets very well," Cherry said. "In the rural markets we're having to do a lot of marketing to get people to use the video side of the ITM."