Do banks need branches?

We had a great debate at the Financial Services Club last night, picking up on that perennial debating point: do banks need branches?

In the pro-branch corner were Anthony Thomson, co-founder of Metrobank and Ron Whatford, former Chief Experience Officer with Lloyds Banking Group; in the anti-branch corner were Mark Mullen, CEO of First Direct and Brett King, author of Bank 2.0 and founder of Movenbank.

It proved a highly enjoyable discussion, with many strong points made for why branches matter.

Branches are where most accounts are opened for example.

According to various research, Forrester in particular, 80% of all current accounts are opened in branches, 75% of Gen Y customers conclude their product purchases in a branch, and 67% of all product sales are made in branch. 

This is regardless of the fact that many customers are visiting branches less, and bear in mind this varies by country.  For example, only 7% of banking customers in the Netherlands visit a bank branch at least once a month, down from 9% in 2011 while, in Spain, 49% of banking customers still visit a branch once a month.

Why the branch is so key is because it provides a physical point of interaction.

That physicality acts as a security blanket as, when push comes to shove, you want a place to go and see someone and talk.

A branch provides a place for service, and that is key when you need service.  For example, when a family suffers a bereavement, the branch is a key support mechanism to sort out the financial affairs of the deceased. 

And it’s also a case of choice.  Some people may not want to visit branches, but they want them to be available.  For example, 88% of customers are more likely to choose a bank with multichannel capabilities including branch. 

This is all well and good, the anti-bank brigade cried, but you’ve got to realise that branches are not a good place anymore.  They were designed in the 18^th century for a market of three hundred years ago and are not fit for purpose today.

For example, a basic metric of banking is that a branch is a high cost overhead that is city-focused.

The city customer is in fact subsidising the rural customer by supporting low traffic branches in more suburban areas to be provided at the cost of the high traffic branch in downtown Main Street.

We are also in an industry today that is in terminal decline.  Bankers are viewed as being worse than estate agents, lawyers, journalists and politicians combined, which is why most banks are afraid of meeting customers in branch, because there’s no audit trail of what happens.  This is why remote digital service is so much better as you can keep a full audit trail of the telephone calls and clickstream of the customer. 

Add on to this that you can delight a customer through a remote digital experience, and that is the reason why you find the advocacy of banks like First Direct being far higher than the branch based banks.

Yea, yea, yea, retorted the pro branch team, we’ve heard all of that before.

You can claim greater advocacy but it’s a false number.  A bit like lies, damned lies and statistics, I could show you greater advocacy for our branch structure than your numbers, but our overall result will be lower because we are multichannel and the other channels can bring that number down, so don’t quote advocacy numbers at us.

Cross-subsidisation between rural and city locations is also a non-argument as we move branches to where the traffic is focused, so don’t give us that argument either.

The real reason why branches are required is the reason that everyone is here tonight: because you want to engage in a human dialogue.

You could all be sitting at home eating dinner right now, watching this via video stream or webinar, but you don’t want that.  You want to sit and talk and network and engage.

So do customers.

That’s why they want branches.

In particular, they want branches because dealing with money is frightening.  It’s not an easy thing.  It’s scary.  People need help with managing their money and for them, the branch is the place to go.

And don’t think that everyone will do this online and remote these days, as they’re not all like you.

Most of us are educated, financially aware, confident consumers, but 90% of the population are not.

They want to have someone to talk to about money, not serve themselves, and tha’ts what the branch gives them.

It is the reason why Virgin bought Northern Rocks branches and the Cooperative bought Lloyds branches.  It is the reason why Marks & Spencer is opening branches with HSBC and why MBNA pulled out of the UK when they failed to buy branches.

Without branches you cannot grow a banking business, and you wouldn’t pay millions for bricks and mortar branches if the bricks and mortar branches did not matter.

 OK you guys, argued the anti-branch lobby, you say a lot of stuff about branches are where customers go, they want face-to-face interaction and that we are the exception to the general population, but you are out of touch.

The next generation customer just does not think this way.

In fact, most of the points you’ve raised are purely about bank-regulated rules.

Customers, for example, only go to branches because you need them for AML and KYC purposes to turn up there and show you their passport and utility bills for account opening.

So banking is only difficult to transact because we have made it difficult.  The truth is that you only need to see a banker because we’ve made the rules and access hard.  If you stripped away a lot of the rules, then no one would particularly wake up and say: “ooh, I’ve got to go into my branch today”.

In fact most people would avoid the branch, given the chance.

For example, you mention that the branch is there for advice and information, but we live in a world of information overload.

There is no information scarcity.

“There were 5 exabytes of information created between the dawn of civilization through 2003, but that much information is now created every 2 days, and the pace is increasing.” Eric Schmidt, Google

That’s why all the stats show that the number of transactions and value of services in branches are falling rapidly, being displaced by online and telephone services.

From the Finanser, June 2011 

 But don’t get us wrong.

We are not saying that all bank branches are going to disappear overnight but, like music and video stores, they are going to shrink massively because most are not needed.

At this point, the debate opened to the floor for questions, and many were based around what a branch really is there for.

Questions were raised about whether you really need to see and talk to a banker, or whether the remote relationship serviced better.

The fact that a person in a bank branch is often a low paid teller and not a highly informed advisor being one critical issue.

Questions were asked about whether there really is a need for an intermediary channel between the customer and the product, and the panel argued to and fro on these points.

For example, we may not have information scarcity but we do have an information tsunami, and you need a broker to interpret the information between the product and the purchaser.

But then the alternative view is that banking is not somewhere we go, but something we do, and therefore it is far better to have access to finance and financial advice anytime, anywhere.

After all, we don’t want to make a payment, we want to buy a product; we don’t want credit, we want money; we don’t want a car loan, we want a car; we don’t want a mortgage, we want a home; and so on and so forth.

The debate was lively and heated, to say the least, ending with the inevitable vote: does this house believe banks need branches?

The vote was yes, but it was close with around 55% in favour versus 45% against.

When asked a subsequent question: does this house believe banks will still need branches ten years from now, the vote turned around with 55% voting the bank will NOT need branches in ten years.

In conclusion, one comment stood out above all for me: “this debate is not about whether banks need branches, but about whether customers want branches; that should be the core of our discussion”.

Very true.

All in all this is obviously a debate that will not be disappearing in the near-term, so continue to watch this space for more debate about the future ebank and future bank branch.

 

If you want to see more of the debate, then checkout our Facebook Page.

 

Useful reports to download:

• Cap Gemini Report,  Trends in Retail Banking Channels: Improving Client Service and Operating Costs
• Infosys, Branch Bank of the Future
• Wipro, The Future US Branch Banking

 

The is part two of a five-part series:

• Part One: One banker knows his industry is trashed, and here's his plan
• Part Two: Do banks need branches?
• Part Three: Why you really need a bank branch
• Part Four: Building a customer advisory bank
• Part Five: A truly social bank advisor is key

 

 

Comments

[Colin Henderson]

What if the 2nd question was " if banks need branches, what will they look like?"

My take: branches today are a composite of safe, cash, tellers, and sales activities. What if we eliminated the safe, cash, tellers, part and just focussed on sales. Account opening, mortgage and loan acquisition are sales activities, and the nature of the office to house those activities is a simple and cheap office space.

[Chris Skinner]

Thanks for this Colin. It inspired me to write today's blog :)

http://thefinanser.co.uk/fsclub/2012/10/building-a-customer-advisory-bank.htmll