Why Brick and Mortar Banking Still Matters

America’s biggest banks are opening more local branches. Our Head of U.S. Large Cap and Mid Cap Banks Research Manan Gosalia looks at the merits of physical locations.

Read more insights from Morgan Stanley.

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Manan Gosalia: Welcome to Thoughts on the Market. I'm Manan Gosalia, Morgan Stanley's Head of US Large Cap and Mid Cap Banks Research.

Today: why the bank branch you pass on your commute may matter more than you think.

It's Thursday, August 6th at 10am in New York.

When was the last time you went to your bank? You probably do most of your daily banking online and maybe go to the local branch for occasional transactions, like getting a certified check or talking to a financial advisor.

So, you might think that bank branches are fading into the background. But America's biggest banks are actually accelerating their investments in physical locations.

That shift could reshape the competition for your deposits. In our research, we looked at where 12 large U.S. banks are expanding their footprints, and we identified 57 target markets. 34 of those markets are being pursued by multiple banks, and nine of those markets are being pursued by five or more banks.

Since mid 2025, about 80 percent of these banks' new branches have opened in those markets. Most of the expansion is happening in the Southeast and Texas, with additional activity in the Midwest and several major metropolitan areas. 95 percent of the target markets have either above median projected population growth or they have ranked in the top 10 percent for deposit growth.

That helps explain why Nashville and Atlanta are each targeted by seven of the banks, while Miami, Dallas, and Denver are targeted by six. These are places where households and businesses are growing and where banks see an opportunity to build relationships that could last for decades.

The central question is whether physical branches still attract deposits. The evidence suggests that they do. From 2022 to 2025, 90 percent of the time when a large bank increased their branch share in the market, their deposit share also increased. But to become a real contender, a few scattered branches are not enough.

Banks generally need at least a mid-single-digit share of local branches to compete effectively. At 10 percent or more branch share, deposit share exceeds branch share by a median 3.5 percentage points. So, density, not just presence, is what matters.

Most large banks that we looked at have not reached that level. 60 percent of their positions in expansion markets remain below 5 percent market share. And so, this build-out looks like the beginning of a long competitive cycle.

Even then, the pressure is already visible in what banks are paying for deposits now. The highest offered retail certificate of deposit rates are higher in the South compared to the Northeast. Higher rates do make deposits more expensive for banks to fund.

In fact, evidence from the recent earnings reports suggest that this may already be happening. And we expect higher funding and branch costs to pressure bank margins and lift expenses into 2027. This means the cost of gathering core deposits could move structurally higher. And the lesson is surprisingly old school.

You can do almost everything on an app, but a branch on the corner still carries weight.

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