Unprofitable, underperforming and under threat. Banks are closing thousands of high-street branches in response to declining visits from customers and a shift to internet and mobile banking. The future of branches looks grim but there is potential to re-invent them.
Bank branches are struggling financially. About 15% of the current UK branch network is unprofitable (note 2), Intelligent Environments suggests. CACI puts the figure at 30% (note 1).
Faced with the perfect storm of rapidly-evolving technologies, changing customer habits and tougher banking regulations, banks have tried to cut costs by closing unprofitable branches.
In the last two decades, the number of branches operated by the UK’s retail banks shrank by more than a quarter (note 2).
Why? One of the main reasons is a reduction in the number of times customer visit branch (down by as much as 30% (note 3)). Customer visits are estimated to decline by another 35% by 2020 (note 4).
This change in customer behaviour is mainly due to rapid growth in internet and mobile banking, which are now used for transactions worth £6.4 billion per week – up from £5.8 billion last year (note 4).
Banking regulations passed after the banking crisis of 2008 have increased banks’ business costs and encouraged them to look for easy savings. The deterioration of the business case for the branch has been exacerbated by the increasingly tough environment in retail banking since the financial crisis. At the root of the current pressures is the introduction of Basel III, which requires banks to increase their capital reserves to help them withstand future financial shocks. Banks need to increase their core-capital ratios to at least 18.5% of risk-weighted assets by 2019, under the regulation.
Customers still need branches but for different reasons.
They still use branches for complex transactions, such as for a mortgage or a review of their company’s financial health. But they prefer to do routine activities, such as balance transfers or setting up a direct debit, online. Also, while customer visits into branches have fallen, they still perceive branches as important.
As Ana Botín, chairman of Spain’s Santander told the Financial Times earlier in 2015
('Democratising finance: Botín charts Santander’s digital course’, Martin Arnold, Financial Times, February 2, 2015)
“You are not going to get married through technology. You are not going to buy a house through technology. I think that is where we are going to compete very effectively with these guys [technology companies such asApple, Facebook, Google and Amazon if we can find a model that combines the personal side with the technology.”
One solution, could be creating banking hubs that can cater to customers by providing products and services from multiple banks. The hubs would reduce the burden of unprofitability while still allowing banks to maintain a presence in local communities. Banks have been heavily criticised for closing branches in small towns.
The banking hub
The business model for a banking hub is already widely used on High Streets – by travel agents. Travel agents, which also face growing competition from online rivals, give customers access to deals from lots of travel companies (hopefully) ensuring that the service is personal and efficient.
The banking hub would be ‘brand-neutral’, perhaps operated by a third party, or a combination of participating banks. Staff in the hub would be able to provide customers with general information about products and services and walk them through the relevant processes (for example, applying for current accounts) by using online terminals within the shop.
For more complicated and specialised products, customers could then be directed to a remote advisor on the phone, online or a Skype-type video chat. The hub could blend the best of digital service with the traditional face-to-face service. It’d be a kind of Carphone Warehouse of banking.
It wouldn’t reduce competition. Banks in the hub would still compete against each other and keep their brands by offering different products and investing in digital infrastructure (such as innovative online remote advisor technology) to optimise their processes and the service to customers.
Participating banks would achieve significant savings by sharing operational costs of branch operations, and have the opportunity for geographic growth and a larger customer base.
Considering the political pressure on retail banks to keep “the last bank in town” open, the hub could provide a tactful solution. It’d be a convenient and valued presence in in local communities and could improve customer satisfaction.
The banking hub has many attractions but it’s unclear whether banks are prepared to make such major changes to their branches. But doing nothing is likely to be bad news for them and their customers.