Banking Without Branches: The Hidden Costs of Digitalization

Jun. 17, 2024

Widespread bank branch closures can significantly reduce credit supply to firms, particularly short-term loans, leading to declines in employment and sales among local firms, a new study shows. The closures disproportionately affect small, young firms and increase the likelihood of business exits.

As the banking industry shifts towards digitalization, physical bank branches are disappearing. A new study by Swedish House of Finance’s Bo Becker and Sverige Riksbank’s Niklas Amberg examines the financial and economic consequences of widespread bank branch closures, using detailed data from Swedish banks and firms.

The study examines whether the move towards digital banking services, observed across the OECD and beyond, may reduce the availability of credit for small and medium-sized enterprises (SMEs). Traditionally, lending decisions for these firms rely on personal interactions and information gathered at branches. Without branches, banks may favor asset-backed loans, potentially hindering new business formation and entrepreneurship.

Disappearing Bank Branches 

The number of bank branches in Sweden has seen a dramatic decline, from nearly 1,900 in 2001 to around 750 in 2023. By the end of 2023, 43 out of 290 municipalities in Sweden no longer had a single bank branch.

This trend is not unique to Sweden; globally, the number of bank branches in OECD countries fell by 30 percent from the 2008 peak to 2022. Countries like France, Italy, and Spain have also experienced significant reductions, with branch numbers decreasing by 22%, 42%, and 65% respectively​.

Diminished Credit Availability

The closure of bank branches has led to a marked reduction in credit availability for local businesses. The study found that when a municipality loses 10% of its bank branches, the amount of loans given to local businesses that are not financial firms decreases by 1.8% within the next two years. This decline is most acute in short-term lending, essential for operational and working capital needs.

Employment and Sales Decline

Bank branch closures also precipitate declines in both employment and sales among local firms. The study found that a 10% decrease in branches results in a 1.3% drop in employment and a 1.8% decrease in sales over a three-year span. These effects on employment and sales take about a year to appear after the initial decrease in available credit due to bank branch closures, the study found.

Impact on Firm Assets

While the total assets of firms remain largely unaffected, their working capital (inventories and accounts receivable) saw a 1.3% decline over three years following a 10% reduction in branches. In contrast, fixed assets, such as buildings and machinery, did not show significant changes.

Firm Exits

The probability of firm exits rises with branch closures, the study found. The likelihood of a firm exiting the market increases by approximately 0.6 percentage points over three years if 10% of local branches are closed.

Disproportionate Impact on Smaller Firms

The negative repercussions of branch closures are particularly pronounced for small firms, younger firms, and those with fewer tangible assets. Small businesses experience a more significant reduction in lending due to their reliance on the soft information that bank branches provide.

“More generally, large-scale, technology-driven disruption, even if it is beneficial overall, is harmful to some activities and to some firms,” the authors say. “In banking, technology-driven retail banking efficiencies may come at the expense of SME lending. Perhaps this creates an opportunity for new providers of SME loans to fill this gap.”