By Jason Welham, a member of Lazard’s Financial Institutions Group, focused on Fintech
As featured in The Telegraph on 20th August 2018
In the first half of 2018 in the UK we have seen a wave of announcements of further branch closures by retail banks – bringing the total closures in the UK to more than 2000 since 2015. Such announcements always provoke dismay from customers and politicians. Such dismay sometimes confuses the withdrawal of branches with the withdrawal of services. We should be asking different questions, and making different kinds of demand of banks.
Too often we fall into the trap of thinking that focusing on branches is focusing on the needs of customers. But technology is changing the way customers can and want to be served, and the right approach is to demand more innovation from the banking market, not to insist that it props up the old model.
Some of the most exciting innovation in retail banking in the last few decades has taken place in developing markets where the absence of physical bank infrastructure has compelled banks to exploit other channels to the advantage of the customer.
The issue with branches is often portrayed as the choice between physical and digital banking. This is not the right way to think about it. The problem is with how we think about what a branch is and how it is designed.
It is of course true that huge volumes of banking activity have moved from branches onto mobile devices, the internet and telephone services. A small but growing number of British banking customers can’t imagine themselves ever setting foot in a bank branch again. However, the British economy continues to use cash, and that is not going to disappear any time soon, despite a steady rise in cashless transacting.
Banking also continues to depend on some personal interaction for a range of reasons from customer service to anti-fraud checks. There is some evidence that the loss of a branch impacts local SME credit in a negative way. For these reasons, some physical presence of our banks in our communities will almost certainly remain necessary for cash withdrawals and deposits, customer advice and other services.
The basic question is whether the conventional branch model is required for this, and the simple answer is no. The fall in cash use has already made it much more feasible to imagine a mix of shared-service hubs like post office counters or specialized ATMs handling the needs of local SMEs.
Although the protocols exist in the UK Link system, rollout of deposit services at UK ATMs has been slow – but could be accelerated. UK banks are already deploying ATMS that can issue new bank cards and dispense services on the basis of a range of security protocols that do not require cards.
For personal advice, a mix of models can almost certainly replace much of what is currently done in branches. SME banking is already being undertaken by many banks through mobile specialist SME advisors operating out of regional hubs rather than local branches. Some US banks are already piloting ATMs that connect a customer to a teller or advisor by video and recognize biometrics or other identifications.
There is no reason why ATMs cannot be shared by multiple banks – a model that has been piloted in the Netherlands. The post office counter and the ‘bank in a van’ model used in some rural parts of the UK also have the potential to fillsome of the gaps, although there is admittedly further work to be done before this can be rolled out more widely. The ‘mini-branch’ model that collocates some branch services in a supermarket, local shop or other venue is another viable alternative.
Rethinking physical banking would have a range of advantages. Many, if not most branches, trap capital that could be better invested in innovation. Branches require customers to visit them, rather than integrating banking services into the rest of a customer ’s daily journey.
A model that enables banks to share infrastructure like specialist ATMs or to share banking counters, like they do with the current payments system, could push down the cost of physical presence through simpler customer interfaces, improve the customer experience and potentially create a more even level for new, smaller players aspiring to a wider national presence quickly and economically.
Clearly, a move to a more technology-enhanced banking system creates its own challenges for financial inclusion. People need to be online, comfortable with cashless payments and banks need a firm commitment to easy digital access. The loss of bank branches has been shown in the past to be correlated with falling levels of local SME credit and this is something that should worry us. But the right response to this is to look at the service commitments banks put in place as they transform their physical presence. It is the service commitments that matter and to which banks must be held. Many banks is better than one branch.
Rather than worrying about slowing or halting branch closures, we should be focused on what banks build in their place, to better serve customers who want the same services, and may even want a physical bank and banker, but may not need a branch.