UK banking giant Barclays has revealed plans to lay off 1700 branch staff and shrink its branch network as customers embrace online and mobile banking.
The street faces of banks are changing quickly. Where once banks had big buildings, strong walls and lots of marble facings, all designed to impress users with strength, solidity and safety, new branches can look more like pop-up shops. Certainly outside Australia, pop-up banks located in shopping malls are becoming common. Even here, bank sales sites are cropping up in shopping malls without any cash handling facilities at all.
The drivers are the standard ones. Branches are costly to run. Even the smallest branch will have four staff, with two or three of them not busy most of the time. A new branch also takes about three years to become profitable so branch expansion can put a drag on the business.
Patronage is also changing. As facilities to do banking by desktop or mobile device and online payments become easier to use, the need to visit the bank declines. Exponential growth in mobile banking has exceeded that of early internet banking, surpassing the expectations of the major banks.
But despite the growth, bank points of presence have only been declining slowly in Australia. The latest APRA data suggests that they have fallen from 7975 in 2004 to 7725 this year. The drop for credit unions has been from 1485 to 783 over the same period, and from 550 to 286 for building societies. But the big drops for credit unions and building societies are misleading since a number of them have converted to banks, nine in the last two years. If we take the total points of presence for all financial institutions, the number of branches has fallen from 13059 to 12036 between 2004 and this year (about 8%).
Since there is usually a public outcry when communities lose a bank, politicians and banks treat the risk of complaint seriously. Potential closures are usually subject to substantial community consultation, and closures where banks are scarce are scrutinised particularly carefully. This might be one reason why the decline in branches in remote and very remote regions has only declined from 209 to 204 over the last decade.
Bank attitudes to branches have changed over time. Branches were cut back sharply in the 1990s, as EFTPOS, credit cards and ATMs were seen as the wave of the future. This caused a consumer backlash which damaged bank reputations.
Through the 2000s, banks took a different approach, realising that having good relations with customers was important both to help raise deposits and to sell additional products. But now the underlying economics of branches is changing: demand for standard services in branches is falling off as a result of customer choice rather than bank initiative.
So how do banks adapt? Essentially the bank branch is being reinvented. Branches are being made cheaper to operate with videoconference access to specialists, coin sorting machines, and internet facilities, and much reduced floor space.
Keep the branch, move the cash
Branches are also being made safer by under-floor cash repositories which means tellers do not have drawers bulging with cash. These strategies can reduce the cost of a branch while maintaining its operations so that it is not necessary to close them or to upset the local community.
The Australian banks are also changing the function of their branches to incorporate wealth management, insurance or share trading facilities. The modern branch is being refocussed to offer the full suite of financial services and self-service, allowing the considerable overheads to be spread across a wider range of services. So far none as gone as far as some of the Spanish bank branches where you can buy a ham or a bicycle as well as making a deposit.
The regulator in the room
Regulation can reinforce this transition. Under the Basel III reforms, the regulators are encouraging banks to have more stable funding. Term and other stable deposits will probably bear a higher interest rate as a result. And banks will respond by chasing harder for stable retail deposits, with branches playing an important part in their retail strategy.
Where the history of bank runs has images of people queued up in the street to withdraw deposits, this is actually much less of a problem than funds that can be withdrawn at the press of a button.
Regulation will make standard retail deposits more valuable to banks than say online deposits – because they are stickier. Banks will find retail and transactional customers more valuable, and so will do everything they can to keep customers returning to their branches, meaning the range of services bundled into your local branch is only likely to expand further.