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November 11, 2016

Infrequently Asked Questions: Why do banks close so early?

Need to deposit a check after work? Tough luck

Need to deposit a check after work? Tough luck. Odds are, your bank tellers have closed up well before you've packed up your bag for the day. 

Baffled and intensely curious as to the historical precedence of banks closing early in the evening, we reached out to Jonathan Scott, professor of finance at Temple University's Fox School of Business, for an answer. 

Why do banks close so early? So many are closed by the end of an average workday. 

I’m not sure that I’m the ‘expert’ on this, but … most of the stuff online is just flat-out wrong. And certainly, that isn’t where you'd go to get the answer to this. 

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I'm thinking back because I’m sort of an avid financial historian ... I do know, historically, the U.S has always had a very fragmented banking system, and many of the small banks, and certainly back in the early 1900s, this is where I’m going where this practice was headed, you know in early 1900s when small banks, and it could be really small banks piled in the Great Plains or small banks in this area -- they would have correspondent relations with larger banks. At the time, it could have been Philadelphia National Bank or some smaller bank in Lancaster County or Harrisburg, and when they get checks they've received for deposit, this was a highly manual process. And they’d have to get these to the correspondent banks, the larger banks, who had a clearing house, where they would manually get all these checks. 'Here are all the ones for the Philadelphia bank, here’s the ones for Girard, here’s a customer here or there.' 

And so they had to get all these checks settled so the account balances could be correct the next morning. That’s why they closed early: so they could get all this stuff done. Over time this has become very mechanized, electronic. The number of checks written today are [diminishing], and the Philadelphia Fed and all the Federal Reserve banks, they’ve laid off a lot of people who used to be involved in check processing. I’m 99 percent sure that is the reason why banks historically closed early, so they could get all checks to the appropriate clearing houses. And get all the balances squared away for the start of the next business day. It’s inertia. 

The one bank who’s open seven days a week -- this started back in the ‘90s -- was Commerce Bank over in Cherry Hill. Because, Vernon Hill, he wasn’t a banker by trade, you know. He’d been in retail most of his life; he actually was in the fast-food business for awhile. Vernon had a habit of lifting his middle finger to the banking establishment; unfortunately to the regulators, too, which was his end, and so Commerce Bank was open seven days a week. They were open late, had people there. It’s not that it couldn’t be done. But there was a cost to that and loans were more expensive and not as available at Commerce Bank. So, in order to support those longer hours you had to have a slightly different business model. But it’s inertia. When TD Bank acquired Commerce Bank, the one thing they did was they kept those hours -- open on Saturdays and Sundays, and have real people.

It is also hard not to notice most banks – everyone I can think of, really – are also closed on a Sunday.

And Commerce Bank, I think they may even have people in their branches. There’s one near where we live that’s TD now. They kept it. 

At the same time, I think about my daughter and son who are late millennials, in their early 30s, but they don’t go to a bank. They’ve got accounts, but they do everything online. They go to an ATM, they have direct deposit. So the reasons for having a bank open – extended hours when you have ATM machines, is there a reason to do it? I don’t know. I think banks are struggling with what kind of model should they have for retail presence. And if you have well-lit, secure ATMs and have an online presence where it makes it easy to use, and then have payment applications for your phone. Chase has Chase Pay, and then you have Apple Pay. So the banks, in some sense, are stuck between their traditional customers -- who are used to writing checks and coming in and having customers and interacting -- and Millennials and Gen Xers who say, ‘I don’t know why I need to do this; let me do it over my phone.’

They all seem to conveniently close at 5 p.m., though. That’s the marvel. When is someone supposed to go?

Back in the ‘70s and ‘80s and ‘90s, when I was living in Texas, banks did not close on Fridays at 5 p.m. They closed at 6 p.m. or 7  p.m. because people were bringing checks in and you had to deposit them – before the days of direct deposit. And for some of them it’s just, 'OK, if we stay open past 5 p.m., maybe marginally my electric bill is higher and I have to pay for the teller,' -- and [the tellers] don’t get paid much to begin with. But is the business worth it? 

I don’t know why they don’t stay open more hours, but I will tell you with all the means of electronic banking, if you look at how millennials use banks, there's an argument for ‘Why do we need to stay open?’ But there are those who need to deposit checks – but then the office might be closed at 5, but the drive-through might be open later.

What’s next after online banking? What's the next big thing?

That’s a good question. Because I think that, if we step back and look at what’s happened, I think this – I was alluding to Apple Pay and Chase Pay as a way for payments, and I think that it’s going to be ways to improve payment systems. And this is going to get really geeky here, but it's about the availability of funds. And so I’m going to throw this out: I think for banks, looking forward, from a customer perspective -- you’ve probably heard about this blockchain technology. It’s associated with Bitcoin but it has a lot of applications for banking for verifying who the sender of money is -- who's the receiver, and some complicated algorithms, but you've got a public but secure ledger of what’s happening. So my sense of the next big thing, is it’s going to be a technology issue. Predicated on blockchain. And I don’t know how fast that will happen, but you’ve got major banks that are putting a lot of resources into this. Behind the scenes for banks, their biggest concerns are cyber security. Protection of customer records. And it would be really hard, from my cursory understanding, if you’ve got blockchain ledger with cryptographics, it would be really, really, really difficult for someone to hack into [an account].

 … I’m talking in tech terms here, but I think in banking the next big thing may not be visible to the retail customer.

Anything to add?

The business has changed so dramatically with millennials and how they use banks, and I think on the retail end, if you think about banks, there’s kind of a retail business that’s run separately from a commercial business with larger companies. Small businesses being the retail, and then other wealth management and capital market services. But in this retail area there are some real struggles, thinking about ‘What’s our future look like with millennials and successors when they become a bigger and bigger part of our business?'