As Mark Twain, the famous American writer, allegedly once said, “the reports of my death have been greatly exaggerated”, so it is for the modern bank branch. Struck down by a Covid pandemic, branch numbers have become greatly reduced in recent months (KPMG says that post-Covid, 25% of branches globally have shut down, and the remaining 75% are operating at reduced hours). In fact, in the UK, the long-term trend has been very one-sided – banks have shut down almost 70% of their networks in the last 30 years (finextra.com - 20,583 branches in 1988, 7,586 in November 2018). But these stories of unrelenting decline often obscure a more complex reality – many financial services players are investing in branches and opening new and innovative branch outlets.Bank branches, which have a history going back hundreds of years, have been the pillar of retail banking. In the post-war era, modern branches with many tellers to undertake transactions and personal banking officers for product advice and sales became the norm. This distribution model was disrupted by the arrival of telephone banking first and then by online banking and mobile banking. The result was a 4-channel distribution model incorporating each pillar. Of course, the cost advantages and disadvantages of these different channels were quite stark. Branches have very high fixed costs (property leases, staff and IT) and a transaction performed in the branch costs twice as much as telephony and up to fifty times as much as internet banking.However, on the other end of the spectrum to branch closures, many banks actively invest in their branch networks. They are not necessarily just building more branches but building or modernizing their existing ones. These banks believe there is much to be gained from the branch network because it offers customers something that digital channels just cannot – and that is empathy. Many customers need advice when dealing with high-value products like mortgages, investment products and retirement planning. That is when they go to the branch. Many banks are making a calculation that it would be more successful to sell to these customers through the branch.
Source: Metro Bank
But what sort of branch awaits these customers?
This is where the new formats of bank branches come into play. Banks have been moving away from the transactional model of yesteryear (as transactions can be done much more efficiently via digital) and focusing on sales and advisory needs. In fact, moving transactions online has created the need for a new purpose for bank branches – one that is well fit by the branch as “store”. Branches as “stores” have become very popular where the entire design is engineered to have face-to-face human interactions about high-value products. These branches are characterized by open spaces, mobile tellers, and private rooms for consultations and sales. However, a bank might not want to convert all of its branches to stores – it will more likely close the ones in bad retail patches and only keep the store model open where there is a commercial case.
Source: Virgin Money
Yet, the branch is evolving even further.
We are now seeing branches become much more than sales stores. Caixa Bank in Spain or Virgin Money in the UK are investing in large, flagship branches that serve as business and entrepreneurial hubs. They offer shared resources like bookable meeting rooms, conference rooms, AV equipment and community spaces. The goal to become a pillar of the community and serve as a central point for local business and customers. Santander, which runs the Santander Work Café style flagship branch, says that it gets two to four times as many accounts opened from these flagship branches compared to the traditional ones. The new branch approach is not standard.We see all kinds of players actualizing their strategy in different ways through the branch. Some banks like Metro bank still plan to open more branches throughout the UK. Others like CheBanca in Italy started as a digital bank in 2008 but now have more than a hundred branches, a million customers and a EUR 10 billion mortgage loan book. While larger banks are investing more in cost-cutting, smaller banks are investing in design and structure.
We believe the branch is here to stay – but in smaller numbers and a very different format.
It might turn out that the pure cost-cutters were right all along. It is tough to argue with the inexorable rise of digitization. It might just be a matter of time before customers of all ages and demographic groups get used to purchasing online, even for high-value products like mortgages and investment products.However, recent evidence has shown that there is a sizeable group of people for whom the branch still matters for making life-changing decisions like mortgages, retirements and investment accounts. Some banks have designed the future branches – digital, conversational, consultative, non-transactional – around them. Will the bank branch survive in its latest form for the next decade? This remains to be seen.The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).