Branch-based banking is dead, Part Two

A few folks seem to disagree with my assertion that branch-based banking is dead, but they may have misinterpreted my assertion as being branches are dead.

They’re not.

Branches are very much alive and kicking ... just not as transaction centres.

Branches are sales centres.

And it is for this reason that the current branch system is dead, long live the new branch system.

It’s very much in keeping with the realignment of the other industries.

For example, book, record and travels shops have been closing faster than a stealth fighter in recent years ... until some bright spark realised that these stores need to realign. Their customers had gone online and were self-serving, so they need to do something different.

That’s why most book and media stores are now coffee lounges that encourage reading and entertainment.

So banks tried to do the same thing ... become a coffee lounge that encourages folks to talk about money ... but, unless you’re ING who can start from scratch with ING Cafes ...

... it doesn’t work.

There were too many coffee shops around for a start.  Then customers just didn’t trust going into bank branches for a free cup of coffee and, the few that did, found the staff grimacing as they served it.

What this demonstrated is the reason for wiping the branch slate clean and starting all over again.

How would you build the branch and the branch network if you were starting all over again?

First, you would probably look around and ask: “who’s got the best retail network?”

And your answer might be Marks & Spencer, John Lewis, Tesco or Wal*Mart.

Large retailing stores in hypermarkets and shopping malls.

So you would select the largest shopping places and locate your main stores there.

These would be the biggest shopping malls, and the towns and cities with the largest populations.

Then you would ask: “who has the coolest shops?”

And your answer would probably be Apple.

So you would design your mega branch stores to be cool Apple style sales and advisory centres in the largest locations for shoppers and workers.

Would Apple build a store in every city, town, suburb and main street?

Of course not.

So why have banks done just that and, even worse, still maintain that structure?

Because it’s their legacy.

It’s the way things were done in the past.

And it’s a lesson banks are learning.  The lesson is that this is broken, just like the old record store and book shop distribution system is dead.

The result is that most banks will eventually rationalise down to just one store for every 250,000 people – or one store for every large town, city and shopping mall – rather than the current structure where this is about one store for every 20,000 people.

So what do you do with 80% of stores that are no longer needed?

The ones that are in suburbs and smaller main streets.

As I said last week, you ditch them.

You substitute them with satellite self-service hub stations where folks self-serve with ATMs and deposit machines.

These hubs don’t disconnect the customer from the human face of the banks as, if you want to talk to a human, then there would be a remote advisor station in the ones that have larger footfall. A video terminal for access to advice.

And if you want to talk to a real human, we would offer you an appointment making facility where someone could visit you either at home or work.

So that’s the bank distribution of the future.

80% or more of existing branches close down and are replaced by machines.

20% are relocated into the best shop and work locations, and become cool mega branches for sales and advice, modelled around genius bars and yes, a place that encourages you to come in and relax over a cappuccino whilst talking about your money.

That still holds true.

Many banks are implementing the strategy above as we speak ... whilst some poor countries are left with an affliction called the old bank model ,with management too worried about operational expense to see the bigger picture.

The problem being that if they don’t rearchitect their branch network, then they will be walking the path of Woolworths (one of UK’s largest and oldest retailers: born 1909, died 2009).

NOTE: This blog primarily focuses upon economies where the cost of physical distribution is high. due to staff and building costs.   It does not necessarily apply to countries where it is cheaper to run a branch operation than an IT operation.

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Comments

[Abhijit Pai]

I stay in India (near the financial capital Mumbai) in a city of over half a million population, nothing special about the city other than having a mainly tech savvy population mostly IT and finance professionals.

At the last count we had about 150 bank branches and few more are in offing. The charge is led by the co-operative banks including the two locally headquartered ones and the ones from nearby places.

Even after all these expansion and a proliferation of ATMs (ratio is about 1.5-2 ATMs to 1 branch), the rush at the branches do not seem to be abating. This is despite the fact that most of the folks here have Internet banking facilities and use it very frequently.

I suppose the branch banking is more to do with the culture of the country and the bank too. Out here the banks attract business if the branch staff is friendly, not the decor of the bank. I have had bank staff giving me the correct advice for free despite the fact that the advice would not have resulted in business for them directly. And now I prefer doing business with that bank and not in many other places.

Its really interesting to know that while in the west branches are getting closed, we see a proliferation of branches here in India.

[Chris Skinner]

Thanks for the input Abhijit

One of the factors I don't get into in this blog is the cultural differences.

Spain has a branch for almost every man and his dog, whilst some of the Scandinavians would find it hard to find a branch without a major trek cross country.

India has great opportunities for new ways to bank ... if the regulator would allow more competitiveness.

For example, the regulators mandate that 1 in every 4 branches must serve rural populations.

This makes it prohibitive to open large numbers of branches when a quarter must serve people who may not need or use the services profitably.

There are also severe limitations on competitiveness due to foreign ownership and entry rules.

Nevertheless, with a young population, India probably has the greatest opportunity to change the. way people do banking and banks, such as ICICI seem to lead the way.

ICICI ... where 9 out of 10 transactions are self-serviced outside the branch?

Chris

[Harry Pike]

Well the problem with self-servicing is surely that it is good for cost-cutting but maybe not so good for cross-selling. Compared with Spain, for example, where you do have some sort of personal relationship with bankers (in my experience), the UK banks don't seem much good at this.
I often wonder if my bank of the last 25 years actually makes any money out of me, since all my high-value financial activity (mortgages, funds etc) goes through other providers.

[Chris Skinner]

Hey Harry

i agree that a personal face-to-face relationship is an idealistic view for a banking connection.

As banks cut costs, we are moving away from that for transactions although, as I say above, for advisory services remote connections via video or direct to office or home will become the standard.

Except for countries that can afford the high costs of old style banking of course, or those who serve pure high net worth clients remote and direct ...

Chris

[Abhijit]

Hi Chris, thank you for your view on the cultural matter. Incidentally , the bank you named, ICICI , though is the number 2 in the country, it still isn't held in so high regard as its rivals both from the private sector or even the government sector. It has been victim to rumours of run on bank in some places.

About the regulatory framework for banking, we Indians are kind of very appreciative of what RBI (our central bank) does, especially in the kind of economy we are.

While the banks are subject to numerous restrictions like priority sector lending, opening of branches in rural areas, it works in a way to balance the portfolios and avoid unnecessary concentration of business in one sector and geography.

I do have my differences on the foreign ownership of the banking sector , irrespective of the country. Its basically to do with the critical status of the banking sector for the country's economy rather than anything else.

Indian banking sector as I see as a customer (I have banked with half a dozen banks at various point of time in my life) has lessons for other consumer oriented sectors too. More of it at some other time.

[Chris Skinner]

Thanks again Abhijit

Good insight and feel free to post me anything that provides further insights into Indian banks and banking.

All best
Chris

[David Hannam]

...did a spur of the moment financial transaction the other day, whilst getting the groceries....topped up my supply of Euros for an imminent trip...no Q...friendly service...kiosk near the exit to catch my eye...this is (ok may be) the future you describe...every little helps...

[Iang]

The problem circulates around two issues, being the age old economic concept of banking as borrowing and lending from/to the public, and the franchise granted by govt/society to the banks to permit this otherwise-fraudulent behaviour under contract law ("you can't promise what you gave away"). Extensive branch banking was an obligation inherited from that deal, to some greater or lesser extent.

Western/rich country finance has now departed that scene (through securitisation for a long time, Internet access to competitors in recent times, a financial crisis or two, and via newer Zopa-style "markets" in the future).

But Western banks still hold the franchise, and argue strongly to maintain it. They are caught with their cake, do they eat it or do they have it?

Personally, if I was a bank, I'd eat the cake. I'd give up the banking licence, and explore what real opportunities exist for a competitive finance operation. And I'd do it before the new boys arrive (Nokia, Zopa, etc) because they will eat my cake. Once that happens, to mix metaphors, the only thing left would be to get drunk, sit in the park, and sing "someone left the cake out in the rain...".