The inevitable reduction in bank branches has taken effect. A recent report by American Banker has confirmed the pattern of branch closures in the U.S. is increasing. While this day was expected, the decline in network numbers could have far-reaching consequences for the industry. Shrinking branch volumes have the unintended consequence of lowering a major barrier to entry for new competitors. With branches accounting for more than 95% of new account openings as recently as 2012 and location proximity a key decision factor for customers, the channel is still performing a role. Instead of digging their own graves, banks should reposition branches to protect their ground.
Physical branches, along with regulation and capital requirements, have always been considered one the three key barriers to entry for a bank’s competitors. Put simply, even though customers are using the channel less, to be a mainstream player, you need a big branch network. In the U.K., these networks are considered so influential the government has stepped in. U.K. legislators have forced two of the country’s major financial institutions, Lloyds Banking Group and Royal Bank of Scotland, to sell off a significant portion of their branch networks in part to increase competition in the industry.
It’s quite ironic actually. For years, banks invested heavily in digital channels. They believed that serving customers online would result in a more loyal and valuable clientele. Digital channels would pick up the slack when branches died. But banks are no longer competing against only each other. Adopting new technology has actually played right into the hands of their non-traditional competitors. With competition coming from the likes of Google, PayPal, Simple and Square, the game has changed. And, in case you hadn’t noticed, these guys do digital and mobile better than banks could dream.
Without realizing it, branch networks have slowly become the only thing protecting the industry from mass-scale disintermediation. A healthy branch network equals a healthy banking industry. Just imagine for a second that the branch was still a critical element to a consumer’s banking experience. Imagine customers wanted to go to the branch. Imagine also that there were some things you could only do at a branch because of certain regulatory requirements. Game over. All the new competitors wouldn’t stand a chance.
With this in mind, the longer banks can cling to the relevance of the branch network, the longer they can retain their one core advantage, the one thing they do better than anybody else – retail banking.
I understand all the arguments against this view, and I mostly agree with them. I have been a strong advocate of digital and mobile banking for years. I will admit that changing market forces and consumer behaviour mean that the tipping point has probably already passed. I do, however, want to present a different perspective. If you operate in a purely virtual existence, your barriers to entry are much lower. If banks could retain the relevancy of branches, they stand a chance. If they become completely digital, or close to it, they don’t. If I was in charge of a bank, I would get creative and try to figure out a way to get customers back into my branches to defend against the inevitable onslaught.
As someone in the industry, I have major fears for the millions employed in the sector. The collapse of branches doesn’t just mean that branch employees will lose their jobs; it could also equal the demise of retail banking as a whole. So do customers need branches? Probably not. Do banks need branches? Yes, which means they need to find a way to make them relevant again.
Michael Nuciforo is a mobile and digital banking consultant and the founder of Keatan who previously worked at Australia and New Zealand Banking Group Ltd. on the ANZ goMoney application and more recently was head of mobile banking at Royal Bank of Scotland managing the U.K. retail portfolio. You can follow him on Twitter at @TheBoldWar.