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Banks Are Shutting Down and Depositor Risks May Increase As a Consequence

Wells Fargo Assets
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The COVID-19 lockdown has prompted a shift in consumer behavior. Perhaps that’s a bit of an understatement; it might be better described as something of a potential sea change in the way we live our lives, from home to work.

People realize that working in the office, going to the gym, and eating at a restaurant among other activities not only increase risk of infection but might also be unnecessary.

Among those on this list is the practice of visiting local bank branches. Certainly not a “fun” activity, COVID-19 convinced people that banking is something to be done online, and (for most things) online only. 

In the period between March to May, weekly bank branch visits declined nearly 50%, from around 63 Million to 32 Million visits per week, with teller transactions falling around 32% between March and April, according to Novantas.

Now, banks are considering the prospect of shutting down a significant number of their physical locations. If there’s no need, why have them, right?

Well, as with most actions, even those that are well-intentioned, there are second-order effects. And in the case of banking, the unintended consequences can put depositors in a vulnerable situation.

A Big Win for Banks, Branch Closures Escalate the War on Cash

Banks save money when customers can bypass teller service, opting instead to make transactions on apps and websites.

US Bankcorp’s CEO Andy Cecere stated that his bank plans to close up to 15% more than what they had originally planned back in 2019. US Bancorp has around 3,000 branches, all servicing the redundant inefficiencies of person-to-person transactions.

The COVID-19 lockdown has changed all of that, according to Cecere, with “behavioral change” taking place in a “fairly substantial way,” he said in a recent industry conference.

Three other banks--Fifth Third Bancorp, Regions Financial Corp and Citizens Financial Group--all affirmed the trending viewpoint that branches were unnecessary save a few big-ticket purchases such as mortgages and other large loans.

Since the middle of March, logins to digital banking platforms surged 25% while branch activities fell by nearly an equal amount.

Similar to the new “work-from-home” economy, banks are betting on the probability that around 85% of the customers who used mobile banking apps during the crisis will continue to do so moving forward.

And similar to the trending remote workforce, digital banking has been following a similar trajectory over the last decade, with over 95,000 branches in 2009 down to more than 83,000 branches in 2019.

In short, COVID-19 didn’t suddenly create the digital branching trend, it simply accelerated what was already taking place.

From a “sound money” perspective, however, what’s at stake here is the aggressive yet inconspicuous neutralization of physical assets, starting with cash.

The digitization of cash can’t translate into the digitization of physical gold assets, but it can easily lead to a wider “normalization” of digitally tracked precious metals. CUSIP coins and bars are a perfect example.

In the case of CUSIP, the benefits of fungibility, convenience, and standardization are the flip sides of monetary surveillance, transparency of “private” assets, and (by extension) control.

Banks certainly can reduce costs by investing in digital (as opposed to physical) infrastructure, but they can also make money charging technology-related service fees.

Aside from the conveniences that digital transactions provide, there’s also the risk of technological errors, cybersecurity, and even human error.

And although these risks do have their counterpart in the world of physical transactions, these errors have the added risk of scaling exponentially on the digital end simply because digital signals travel close to the speed of light and their negative effects aren’t necessarily slowed by geographical boundaries.

Another downside is that big banks with larger financial and hence technological means can easily snuff out smaller regional banks, making the banking environment less competitive, less local, and more centralized (never a good thing in a competitive free market).

If you’ve read our Bank Failure Survival Guide, you’re well aware of the risks surrounding the entire industry. A consolidation of banks through branch closures can only concentrate these risks even further.

There are several ways to hedge these risks, all of which are explained in our guide. Whatever you decide to believe or however you decide to respond, just be aware of these issues and know that there are solutions out there to protect your wealth should the industry put itself, and in turn, your money, at even greater risk.

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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