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.