High street strategies

“The branch is dead. Long live the branch!”

The UK now has Europe’s lowest density of bank branches for its population. Can the network really be savaged further? WILL CAIN finds that news of the death of the branch is greatly exaggerated.

So, the bank branch is dead, is it? Many assume the conventional high street branch is being well and truly buried after a decade of intensive innovation in internet and mobile phone banking. But the truth isn’t so black and white.

If you go purely by the experience of the UK’s Big Four, then the requiem certainly sounds clear enough: with Lloyds Banking Group, RBS-owned NatWest, Barclays and HSBC, net branch closures totalled 183 in 2010, according to research by Campaign for Community Banking Services.

And the closure rate has actually been accelerating, particularly in rural areas. Since 1990, the number of branches in our largest banks has declined 44 per cent; since 2001, it dropped by 16 per cent to around 9,700 by the end of 2010. The UK now has the lowest branch density for its population among major European nations.

But that’s not the complete picture. It ignores two things: first, new entrants are gradually being encouraged into the market, and some of them – like Metro and Tesco – really do prefer the idea of being firmly branch-based. Second, the physical branch is itself going through a conceptual revolution as bankers rethink its role.

In today’s multi-channel environment, the fate of the branch is by no means settled, as ANDREW STEADMAN observes. As the Director for Product Strategy Bank Solutions at banking technology vendor Fiserv, he’s only too aware of the revolution that has already taken place in his own lifetime, since beginning his career working in a Barclays branch.

In those days, he remembers, a bundle of 10,000 cheques would be delivered to his branch to be cleared on-site that day. The premises occupied three storeys of a high street building. “Those days are gone,” he says. “The size of branches has shrunk and some of their overhead functions have been, and still are being, reduced.”

Those three-storey prime sites no longer make sense. Many functions like cheque clearing and other back-office work can be automated and performed in centralised locations. But what remains, he insists, is “the customer space”.

If anything, it’s even more important than in the past, and can be the focus of significant investment. How much of a focus, though, is an issue that divides the industry. Some think that, because many senior bankers were themselves previously branch managers, there’s a nostalgic over-emphasis on branch investment today. Steadman acknowledges the risk of focusing on the branch bricks-and-mortar at the expense of other more efficient service delivery channels, but he argues that the branch has an important and complementary role to the call centre, online and mobile banking channels.

But it clearly depends on how you do it and how your strategy is informed by individual institutional experience. The Danish Jyske Bank, which in 2006 invested heavily in a wholesale “coffee-shop” redesign of its branch network, has recently announced that it’s closing and merging some of branches because of changing market conditions.

The Japanese bank, Shinsei, which started retail banking services in 2000, now admits that one of the key lessons it has learned since start-up is that its strategy of opening large, full-service branches would have been better focused on smaller branches – it calls them “consulting spots” – which become profitable more quickly.

Meanwhile, Metro Bank, which started UK operations in London in 2010, plans a significant network expansion. It has so far this year added seven more branches to the four it had last year. It says it plans 40 by the end of 2014 and 200 by 2020.

In its small way, Metro seems to support the argument that reducing branch networks and shrinking branches sizes may now actually have more force abroad than in the UK. Statistically, the UK now has one of the lowest bank branch densities per head of population in Europe, suggesting that two decades of ferocious rationalisation may already have accounted for most overcapacity here. August 2011 research by the Campaign for Community Banking Services bears this out: UK branch density per million inhabitants is 160, compared with 420 in France, 560 in Italy, 470 in Germany and 940 in Spain.

The corollary is that deposits per branch in the UK are higher than elsewhere. This was a strong part of the rationale given by Metro Bank founder Vernon Hill for setting up that primarily branch-based operation in the UK. Metro sees the opportunity to gain a share of these deposits from consumers disenchanted with the current choice and service available in the UK’s existing banking landscape.

And what Metro Bank has set its face determinedly against is purchasing established branch networks. It just hates the idea of buying a portfolio of customer account migration problems along with someone else’s bricks-and-mortar and prefers to design its own cross-counter relationships – dog biscuits and all – from the floor up.

Tesco Bank falls somewhere between these scenarios. It, too, is determined to roll out its own network in selected supermarket stores and to benefit, it hopes, from the supermarket giant’s sound brand reputation with consumers. But, unlike Metro, Tesco Bank has encountered considerable account migration challenges with the integration of the personal finance operation it had operated as a 50-50 joint venture with Royal Bank of Scotland and which it purchased from that bank three years ago. Others have been undeterred by the challenge of network acquisition.

The 2010 sale of 318 RBS branches to Santander and ongoing sale process of more than 600 Lloyds Banking Group branches – both demanded by the European Commission – suggest some appetite for this route, albeit in a gloomily tightening market for acquisition funds.

In current conditions, the reception from potential investors in these ready-built banking networks has been far from overwhelming. Santander was the only bidder for the RBS assets and there is speculation about whether Lloyds has attracted a serious bidder for its 632-branch divestment.

Even before today’s Eurozone sovereign debt crisis, new entrants to the banking market were almost invariably online or direct banks. Kaupthing, Landesbanki and ING Direct became forces in consumer banking – hoovering up large deposit volumes with attractive rates but no physical branch presence. The bankruptcy of the Icelandic Kaupthing and Landesbanki has seriously dented the credibility of that direct banking model.

From this perspective, you’d be forgiven for imagining that it’s the future of direct banking, rather than branch banking, that’s in most doubt. “What we’re seeing is a shift in the role of the branch,” says Steadman. “The financial crisis has made the role of the branch more important, I think: a physical banking presence conveys a level of security.

“And, even for the larger high street banks, one of the main challenges is simply their abundance of expensive property assets. It’s not so much about reducing the number of branches, it’s about optimising the branch network.”

Branch density
Branches per one million population
160 UK
420 France
470 Germany
560 Italy
940 Spain

WILL CAIN is a journalist specialising in business and financial topics.

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