Branch distribution for disruption?
Bank branches have traditionally been the principal distribution channel for everyday banking services. However, once an account is opened there is less need for traditional branch structure.
In July 2016, a briefing paper was published by the House of Commons over concerns of the seemingly remorseless decline in the number of bank branches in the UK over the last 30 years. These concerns have been supported by the British Bankers’ Association, who found that transactions in branches were down 6% over the last year, and the Guardian, whose graph below depicts how in 2011 there were some 478m “customer interactions” in Britain’s bank branches, whilst in 2016 it will be less than 280m.
According to the Campaign for Community Banking Services, about 3,000 branches have been shut across the UK in the last decade, with 1,700 of those closures happening in the last 5 years. Approximately 1,500 communities have been left without a bank on their high street, and the frustrations are beginning to show.
In recent weeks, customers in a village in Oldham staged a protest outside a Barclays branch that is to close a month before Christmas. Once the branch is closed customers must travel a further 2.5 miles for the same facilities. The Oldham Evening Chronical quoted the parish councillor, Steve Hewitt, who headed the protest, saying “These big banks are driving us into a cashless society.”
Equally, small businesses across the UK are feeling the pain. In Oct 2016, the Federation of Small Businesses (FSB) published a major new report, “Locked out: The impact of bank branch closures on small businesses,” which found that financial inclusion and small business productivity is being damaged by branch closures. Small businesses preferring cash payments are most severely impacted due to the reliance on ageing, limited technology to support these types of transactions.
The FSB wants greater consideration to be taken whenever a branch is closed. “In the unfortunate event that a closure takes place, customers must be redirected to appropriate banking services,” said the FSB’s chairman Mike Cherry. But what are the most appropriate alternatives?
The Post office
The UK’s largest high street banks made an agreement with the coalition government in March 2015 to provide basic banking services through the Post Office’s branches. However, Business and Personal banking services provided at most Post Office branches and franchises are either inconsistent or too limited in their offering. As the future of the network moves away from full-service post offices to franchises there is concern about the impact on small business access:
- Some services appear to be processed more slowly than in bank branches (e.g. Cheque). Funds will normally be available to use 6 days after the deposit was made
- Cash deposits have a maximum limit of £20,000. Some Post Office branches only allow cash deposits up to a limit of £1,000 which would not be feasible for many SMEs
- Other services, such as inter-account transfers and currency exchange, are not readily available.
Challenger banks and other financial institutions
Some of the newer challenger banks hold branch distribution at the heart of their customer proposition. Metro Bank, for example, has a marketing strategy ‘LOVE YOUR BANK AT LAST’ and it’s ‘store’ proposition is to open 7 days a week, early and late. It has opened 41 branches in the last six years, with a further 59 expected by 2020.
The world largest Building Society, Nationwide, are also seeing positive results. Its strategy is focused on becoming a ‘modern mutual’, adapting to the changes in consumer demand towards evolving digital services, whilst maintaining their commitment to their branch network. Nationwide are the UK’s second largest mortgage and savings provider, and their customer satisfaction results have increased from 4.5% in 2015 to 7.7% at the start of 2016, putting them firmly in the lead of their high-street peer group.
G4S, a world leading global integrated security company has announced its plans to expand its business to include the management of Bank Branches. The service provider is in talks with the main banks across several European countries including the UK, the Netherlands and Belgium. G4S already deals with £300bn a year or 30 per cent of all the cash in Britain through its handling services and its staff are already working in some Dutch bank branches. The security giant sees this as a valuable business opportunity at a time when many banks are consolidating their high-street presence. Graham Levinson, European CEO for the company, said “It is clear from the number of closures that banks don’t want tellers to be counting cash inside branches. It is simply uneconomic for banks to keep staffing bricks and mortar buildings but it makes sense for us.”
Possible future for Branch distribution
Whilst there are alternatives to traditional branch banking, the offering is not always ‘like for like’. Some challenger banks and building societies are taking advantage of the ‘big four’ reducing their footprint, however, this will only support customers and businesses that have access to one of these branches in their local area. In our view, challenges banks and building societies are unlikely to expand into more rural area’s due to profitability concerns, therefore not a credible alternative for the entire population.
The Post office, while today not a viable offering, has an extensive branch network exceeding 11,000 and therefore there is potential for further development in the future to improve consistency and broaden the product offering in branch. However, information obtained through the Post Office network report indicates a decline in the overall number of branches in the UK, the largest decrease taking place in rural areas. In the long term this will not provide a viable solution for the whole population.
Although G4S presents an interesting concept, at present it is not clear whether there is appetite to maintain an extensive branch network in areas where customer interactions in branch are limited. An alternative model to consider is similar to the offering provided by NatWest’s ‘Mobile Branch’ where basic banking facilities are offered to rural locations during weekdays. Could G4S utilise or expand their existing cash collection service to offer support in rural areas?
In our view, the current branch distribution model in the UK, even with alternative offerings such as the Post Office, is wide open for further disruption.
Stephanie Crane and Sebastian Anderson, Senior Consultants at Axis Corporate.
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