When was the last time you walked into your local bank branch? I have banked with HSBC in the UK for two decades and can count the number of times I physically visited a branch. My banking needs back then were simple: a debit and credit card plus a rarely used cheque book. Today, I need additional products such as a mortgage and I’ll be damned if I must speak to a chatbot or wait on the phone until the cows come home. The customer service has deteriorated to the point where I am starting to think it is time to cut my losses and find another bank. But what is the alternative?
During the nine-year period I spent working in Asia, Africa, and the Middle East as a corporate banker (ironically for HSBC’s main rival), the number of bank branches in the UK reduced from 11,355 in 2012 to 8,525 in October 2021. A similar trend is being seen in many parts of the world. What is driving this shift away from brick-and-mortar banking and what are the implications for the banks themselves?
Banks argue that the main driver for branch rationalisation is the indisputable fact that the demand for branch services has been in decline for decades and was only accelerated by the pandemic. The automation of simple banking products like credit cards and personal loans has also reduced the need for face time. The rise of digital banking and the corresponding decrease in cash usage has been mainly driven by the tech savvy Millennials and Gen Z. The whole retail sector has been impacted by the shift to digital and the death of the high street is nigh as stores are closing at a faster rate than bank branches.
The UK Financial Conduct Authority (FCA) is concerned about the impact that bank closures will have on financial inclusion. Branches are the primary banking method for the elderly, rural communities, and small businesses, for whom cash remains an important part of day-to-day transactions. The tension between financial and societal impact is coming to the fore with branch closures. Customers view banks as a utility - there to provide a service when needed like electricity, water, and internet connectivity.
Banks see themselves as answerable only to shareholders and the pursuit of profits is of paramount importance. However, banks such as NatWest are developing services to compensate for the lack of branch footprint such as video banking, mobile vans (think ice cream truck but with cash) which allow customers to deposit or withdraw cash; community bankers who meet clients in local shared spaces such as libraries; and postal cash delivery services.
Banks have assumed that Millennials and Gen Z are using digital banking to keep their savings in low interest-bearing bank accounts. Instead, these younger generations are the main purchasers of crypto currencies (94% market share) and are fuelling the Non-Fungible Tokens (NFTs) trade. Their savings are not staying within the traditional banking system.
The neglected elderly, rural communities and small businesses will likely switch to other providers such as the Post Office, which provides limited services such as cash deposits and withdrawals but cannot give loans. Cooperative banks, which were originally established to serve rural communities, are in a unique position to increase market share as seen in countries like India where they performed strongly during the pandemic. Across the world, local and state-owned banks are now able to compete in the space long held by big international banks who are reducing their footprint.
The ability to collect customer deposits was unique to retail banking and the digital banking age has lowered the barriers to entry, allowing new players to swim in the same pool. Banks that will thrive are the ones who consistently deliver superior customer service to retain customers (think American Express). Banks will also need to deliver efficient transaction banking services to win corporate deposits such as from the Post Offices and Cooperative banks, which are not as cheap as retail deposits.
Analysts will start looking for earning warnings such as increasing loan-to-deposit ratios, signalling a drop in retail deposits; decreasing net interest margins, as banks rely more on corporate deposits; and an increase in bank funding costs. This will be passed on to consumers and have an impact at the macro level.
Will the branch closures strategy pay off in the long run? I think banks are giving away the keys to the castle and pursuing short-term profitability at the expense of the long-term. Only time will tell.
