How best to manage the cost of running branches is a pressing concern for UK retail banks. The Royal Bank of Scotland (RBS) has just announced the closure of 259 branches, together with the loss of 680 jobs while Lloyds is shutting 49 branches and laying off 99.
For RBS, that cut represents around one quarter of its current branch network and will leave it with 744 branches. At Lloyds, given the additional 100 branch closures announced earlier this year, the overall estate will come down to 1694 branches under the Halifax, Bank of Scotland and Lloyds brands.
It is argued that banks are closing branches mainly because of the rise of mobile banking. RBS said in a statement about the branch closures that the number of customers using its branches has fallen by 40% since 2014. Already, twenty per cent of RBS customers bank purely online.
Start-up banks on the ascendancy?
Banks have found that they can close branches without losing customers. However, the large banks do not plan to shutter all their branches. There are a number of reasons for this. One is that the government wants to see some branches maintained, the other is that branches do still generate revenue, boost the customer base and cement brand loyalty. Further, according to Eric de Putter, a managing partner at Payment Redesign, speaking at the recent “Branch Transformation 2017” conference, run by RBR in London, customers will continue to want to go to branches to “do specific, difficult and complex things”, such as taking out a mortgage. De Putter also believes that “half of the UK start-up [mobile only] banks will not be around in 3 years. They will be bought up or go bust.” The question then, for banks is how best to devise a hybrid branch/mobile strategy.
Some start-up banks, of course, are planning a hybrid approach in direct competition with the incumbents. One, iam bank, which is due to launch in early 2018, plans to offer community spaces that will also be open to non-customers. The strategy of iam bank is to make money when its customers make money, taking a percentage on what they make from savings and investments and helping them to manage their money better. It said it will not levy “negative charges”, such as overdraft fees.
It remains to be seen whether iam bank can upend the typical charging model of UK banks. However, in its recent report on stress tests, the Bank of England noted that challenger banks might well make a dent in the overdraft income of banks by helping people manage their money better – getting into debt less often and finding cheaper credit when they do borrow. “These dynamics seem likely to impact both the quantity and price of banks’ overdraft products, which could lead to a material reduction in their profitability,” the report noted. It added that the major UK banks currently generate around £2.6 billion in annual pre‑tax profits – or around 0.6 percentage points of projected return on equity in 2023 – from overdraft charges.
Following the Customer
As their existing business models come under pressure, banks will have to plan investment in their branch networks carefully. 87.5% of customer interactions with banks will be mobile by 2022, according to Ian Goodliffe, of CACI, also speaking at the “Branch Transformation 2017” conference.
Goodliffe said that there have been, on average, around 550 bank branch closures a year over the past 10 years and that the pace of change is likely to accelerate. The number of bank branch visits has fallen by 37% over the last five years and will fall much further as more people take up mobile banking. However, he noted that, unlike purely retail outlets, banks need “to serve as well as sell” and added that there are three locations in which branches typically work well for both banks and customers. First, in cash rich, time poor areas within 50 miles of London. Second, in university towns. Third, in remote, rural areas such as parts of Scotland. Still, Goodliffe believes that some large towns, like Leeds (a university town), could lose 45% of their current bank branches without the banks themselves losing income. However, he believes that branches themselves will continue to be important “brand anchors”.
Ouida Taaffe is the editor for Financial World, the official journal of The London Institute of Banking & Finance.