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Are We Seeing the Demise of Physical Banking?

In recent times we’ve received mixed messages from the market about bank branch operations.

The gut feeling in many boardrooms today is that the branch is under threat from changing customer behavior, even in the coveted wealth management and private banking space.

It seems like everywhere we turn the effects of mobile devices, tablets and the Internet are being felt on traditional businesses that have long relied on a physical presence. But does that correlate with banking and the metrics around branch activity?

This year Bank of America announced it was closing up to 10% of its branches (up to 600 possible closures), HSBC USA said it was selling off 195 branches to First Niagara, and as JPMorgan Chase digested the acquisition of Washington Mutual, we saw 300 branches go the way of the dodo.

In the United Kingdom, Royal Bank of Scotland, Northern Rock, Lloyds and HSBC are all reducing branch numbers. Lloyds has been trying to sell 632 of its branches now for close to 12 months at the asking price of approximately £4 billion, but has been unable to find serious interest. Back in the U.S. meanwhile, JP Morgan Chase announced in June it was planning on opening some 2,000 branches. It was no surprise, given the continuing economic malaise, when Chase backpedaled on those plans in its earnings call last week.

Banks are not immune to changing consumer behavior. Today the biggest seller of books in the United States is Amazon. The biggest distributor of music is Apple. Ten years ago this would have been unthinkable. Record labels, movie studios, booksellers, video rental stores, and others that relied on physical distribution models have been decimated. Borders, Blockbuster, MGM, countless newspapers, video post-production companies, and photofinishing facilities have been rendered obsolete.

The argument I hear about why this can’t happen in banking is that banking is a regulated sector, protected from threats like Amazon and iTunes. You need a banking license, right?

Yes, you do, but this won’t protect you from the fact that consumer behavior is shifting as a result of better, faster, simpler distribution methods.

Firstly, consumer choices are not driven by whether or not you are in a regulated industry. If Borders were in a regulated industry, do you think you could force consumers to keep coming into bookstores? The RIAA and the MPAA tried with all of their legal might to stop competitors in the movie and music businesses (starting with Napster) and hundreds of millions of dollars later they had little to show for it.

Are there people who still prefer going into a bookstore? Sure, but that didn’t save the economics of book sales.

Secondly, the facts are brutal when it comes to declining branch activity. The American Bankers Association reported in 2008 that the Internet had surpassed the branch as the channel of preference for day-to-day banking, and the branch’s decline has sped up since then in favor of mobile and Internet, with no signs of slowing.

Novantas reported this year that average transactions per branch per month dropped 25% from 2006 to just 8,550 in 2010. Extrapolate that out to 2015 and you’re looking at 56% decline in monthly average transactional activity in the branch aggregated across the continental U.S.

Combine that with the effects of the Durbin rule (including new fee regimes) and the presence of alternatives like PayPal, Google Wallet, BankSimple, my company Movenbank and prepaid debit cards, and it becomes clear that it’s unrealistic to expect the branch decline to be arrested.

Let’s be brutally honest. The economics of “physical” retail banking have been under threat for some time. With that 56% decline in transactional activity from 2006 to 2015, we’re realistically looking at a reduction of teller staff by at least 50%, likely resulting in branch closures to the tune of 30% to 50%. Additionally, technology improvements are making tellers more efficient, so there’s even greater pressure to reduce staff in branches. At a minimum, the current economics of branch banking are simply defenseless, and investing in expensive real estate is simply not going to bring in new customers or revenue significantly enough to pay. It’s just not how banking works these days.

If you are skeptical, try this simple exercise. Find out the average number of visits per customer to your bank branches in 2000, and compare that with 2011. Exclude ATM visits. That will tell you everything you need to know.

You can argue that your branches have a mix of transactional banking and cross- or up-selling. You can talk about the quality of customer experience or cite demographics. But the conclusions are unavoidable. Branch banking is economically unsustainable.

When I’m asked “How do we get customers back into the branch?” my answer is simple. How would you get them back into a Borders or Blockbuster?

It’s not just branch activity that is a victim of this change. In 2000 59.5% of retail payments were made using a check. Today that number is less than 4%, according to the Federal Reserve, NACHA and the National Retail Federation. We’re also using hard currency less with a 17% decline projected between 2010 and 2015, as debit and credit cards increasingly change our behavior at the point of sale. The emergence of the mobile wallet will only accelerate this shift.

The bank is no longer a place you go. Banking has becoming something you do. It is now contextual, and measured in terms of utility – how easily someone can use bank products or services to accomplish a task like shopping, traveling or buying a car or a home. The more a bank insists on physicality, the more it risks becoming irrelevant to customers who no longer cherish the traditional processes and artifacts. In just four years, that will be the vast majority of your customer base – not a marginal demographic, as some would prefer to believe.

Get ready to downsize – fast.

Brett King is the author of “Bank 2.0” and the founder of Movenbank - a direct mobile banking start-up that plans to launch in 2012. 


(6) Comments



Comments (6)
We all remember the launch of a mobile-based direct bank, Jibun Bank (probably, Mr King would have drawn some inspiration from this venture while announcing his Movenbank venture). 50% partner in this initiative the KDDI Group's annual report states - In the year ended March 31, 2011, equity in net loss for Jibun Bank was Yen3.0 billion. I am curious to know about Jibun Bank's performance in gathering deposits?
Posted by | Saturday, October 22 2011 at 1:13AM ET
The demise of the branch network is a popular headline these days. I would suggest that a much better term would be evolution rather than demise. Furthermmore, that evolution is likely to take significantly longer than the alternative channels bandwagon make it sound.

1) Most of the branch closing examples in the article are about large institutions that probably did over build. However, the majority of these branches are being purchased by mid-sized or community banks, so they are not actually going away.

2) Checks are a good, but double-edged example. Check volume is finally going down, but it is 15 to 20 years later than what the checkless society bandwagon was expounding in the mid-1980s. Check volume continued to grow past the millenium even though ATMs, credit cards and debit cards were all available and actively marketed since the mid to late 1970s.

3) The first impact of alternative channels tends to be an increase in overall transactions versus direct replacement of existing transactions. Replacement eventually happens, but it is gradual. Again consider checks relative to ATMs and cards.

4) While I would 100% agree that the role of the branch is, and must change, that is an entirely different statement from demise. Branches are still the primary presence and face of financial institutions. It is where the relationship for most customers starts and grows. The role of the branch as a transaction generator is trending down, but again not as fast as many people contend.

Societal changes take time and that is what the industry is in the midst of.

David Basri
Posted by DBasri | Friday, October 21 2011 at 3:45PM ET
Methinks there is spin here from an interested party.
Look at what has actually happend within the Mega banks: They are losing business to local community banks. Look at the history of Internet banks over a 15 year period: High failure rate!
What is the largest part of the population?: Baby boomers! and what do they want? That which they have always had; convenience, all the bells and whistles, but also face to face , hand touching communications and where is most the wealth and business? The nice piece but slanted to fit your needs.
The community bank, the old fashion, convenient friendly bank is back and will tak over the market, if they are run well, and do the right things.
Posted by tfer | Friday, October 21 2011 at 3:34PM ET
The death of the branch was predicted a generation ago. It was wrong. So, after closing 1,000's of branches, banks opened even more. Now, there are too many.

Banks need a strategy for their delivery channels: ATMs, Branches, Call Centers, Mobile and Online. They (delivery channels)do not exist in a vacuum; they should be supportive of one another. Whereas in the past, branch was king, now the ATM and Online are, and in the future it will be mobile. But, that does not mean that any of the channels that are "not king" are dead.

Branches are still needed, but their role is changing. Just as major retailers do not have mega-stores every 5 miles apart, banks will not need mega-branches around the corner of every city block to process transactions. But, they will still need physical locations (sales centers) to meet with customers and gain new business.
Posted by Yaldez4FSI | Thursday, October 20 2011 at 1:41PM ET
Thanks for an insightful article on branch banking. I think as you have pointed out internet and mobile technology have greatly changed customers' banking experience. Yes , there has been a big drop in customer traffic as also banks have closed a lot of their branches.
But I am not sure that this is due to customers moving away from branches. Here are some of my thoughts -
a) BoFa, HSBC and JPMC have closed their branches or have put off plans for branch expansion; this is largely due to the economy ; Branches are the first casualty in cost reduction;
b) In Europe and UK in particular, the conditions are not that different. Overall bank profitability is in the dumps.
c) Overall branch activity in the last 3 years or so has been on the decline due to a variety of reasons - most important being credit contraction. It is
d) Branch traffic is also geographical; warmer states see more people going to branches to transact business
e) As you have pointed out, branches continue to provide great cross sell opportunities to the banks.
I think given all this, I certainly do not believe branches will be history; Yes , banks will continue to close them in poor economy; Will they open more branches if the economy improve - well I don't know; But certainly we have not seen the last days of branch banking;

Posted by naagesh | Tuesday, October 18 2011 at 10:31PM ET
Simply put, seniors are dying along with their old ways. I can envision banks setting up ATMs much like secure telephone booths. There you can withdraw and deposit. You can also chat with a customer service rep via video chat (or chat for disabled) in the language you prefer. I'm sure Cisco will be happy to help with video conferencing built into every ATM using private secure data networks.
Posted by sunk818 | Monday, October 17 2011 at 6:14PM ET
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