For many years we have had discussions about bank branches and a branchless future.
One might think the digital revolution taking place in banking could mark the end of branches. During the last several months, it probably accelerated the trend that is already happening which is the reliance on traditional bank branches towards digitalization. Nothing could be further from the truth-some believes bank branches will remain a lynchpin of the banking system.
Change is an inevitable process in any dynamic and a futuristic organization in this VUCA world. The financial services market is going through many changes. New challengers have appeared and are looking for a slice of the market. In addition, customers are more demanding and more informed, expecting convenience and simplicity when it comes to financial services.
In this backdrop, the objective of this article is to review the branch banking system taking into consideration the views of various aspects of good and the bad in the global and local context.
Global Vs Local position
 Jagath Gamanayake |
The fact is that banks around the developed world have generally been reducing the size of their branch networks in recent years. In the US, while there were some branch openings overall, the net effect has been a reduction at the rate of 2% annually. At the end of 2019, the total branch network was recorded at 76837, the bank density of 31% (31 per 100,000 people). Europe has seen a near 20% reduction from 2015 to 2019. (188,851 to 163,265). With the reported density of 23%. In the UK, around a third (3,300) of the total branch network closed between the beginning of 2015 and August 2019. In Australia, around 5 percent of banking outlets closed in the year to June 2019, however, both UK and Australia bank density was reported at 25% and 28% respectively. Which is still a significant network of branches.
The banking industry has undergone significant restructuring over the last three decades. The number of banks has declined since the mid-1980s. Before the financial crisis, much of this decline was due to merger and acquisition (M&A) activity rather than bank failures (Janicki and Prescott 2006). But after the financial crisis, bank failures and a collapse in the entry of new banks also became prominent reasons for the decline. However, according to the World Bank statistics, it is revealed that World Bank density increased from 10.9 in 2010 to reached 13.59 percent during 2019.
Which gives an indication of developing or less developed countries believing in the option of opening branches.
In Sri Lanka, bank density reported; 18% whilst, India-14.6%, Pakistan-10.4%, China-8.9%, Korea-15.1%, Bangladesh-8.9% and Japan-33%. According to the CBSL, Sri Lankan banks opened over 55 new branches during the last 5-year period, totaling to 3604.
Branches -Dying?
Digital Darwinism
Banks don’t need branches anymore. They’re not transactional centers, as they used to be; Transactional activities have largely migrated to mobile and online solutions, lowering branch traffic consistently, they’re not even service centers, as customers can do most services in-app; they’re not even advisory centers, as who would trust a bank to give a customer decent advice that is in the customer’s interest?; they’re not even business centers.
Many of the statistics from “The World Branch Report 2019” address the questions of branch banking. The 62-page report, a collaboration between Think Digital and The Financial Brand, is based on surveys of nearly 500 executives from banks and credit unions worldwide and about 9,400 consumer users of financial institutions worldwide.
The World Branch Report, however, does not portray a branch love-fest, by any means. Three out of five bank executives acknowledge that branches are less important than they once were.
Transactional activities have largely migrated to mobile and online solutions, lowering branch traffic consistently, the report states. Seven in ten retail banking professionals report branch traffic has declined over the past ten years with more than a third (37%) reporting a decline of between 10-25%, and just over a quarter saying traffic is down by 25-50%.
Branch visits are projected to decline 36% through 2022, so the future branch channel is either an asset to a financial brand — a critical touch point with consumers who may not come in very often — or a liability because many banks have deferred maintenance significantly.
Pandemic impact
The rise in popularity of online banking in the last several years had already precipitated a downward trend in branch banking and had forced financial institutions to start adjusting their networks. The disruption caused by the global COVID-19 crisis did not cause the trend but has certainly accelerated it. In short, COVID-19 could prove a significant catalyst for the acceleration of the trends we’ve already been seeing towards the digitization of money and money management
The ongoing COVID-19 pandemic related quarantine and lockdowns that resulted in the closure of physical banking services has prompted many customers to seek online access to the banking facilities. These lockdowns have resulted in a fundamental change in the way consumers interact with the bank. While most governments have continued to allow access to bank branches, the combination of social distancing requirements, lack of commercial activity, and customer hesitancy mean that branch usage has reduced dramatically. As a result, many banks have closed branches temporarily.
An eye-catching headline posted in the Financial Times recently titled “When the banks closed in Wuhan, nobody cared” makes it ever so visible how important the bank branches is today. For several months this year, banks across Hubei province, an area home to 60 million people, shut their doors to retail customers. Most people in the region did not notice. ATMs remained functional and most banks in the area offer some form of online banking. But many people in Wuhan said the payment applications they use — Alipay or WeChat Pay — were enough to get them through the crisis.
“We don’t need the banks anymore. If they close down, we don’t pay attention,” said one Wuhan resident who works as a driver. Another resident, a woman in her late 20s, said in early April: “I can’t remember the last time I went to the bank.”
It’s a stark contrast to the experience in Europe, America, and other parts of the world where the banks have been the central intermediaries between government intentions and citizens and small businesses’ reality.
Profitability pressure
In the face of profitability pressures, the growing regulatory compliance cost and revenue growth difficulties, banks need to reshape, by paying more attention to cost-cutting mainly by way of operational improvement. Banks know that branches have a value and that it’s important to have a physical presence, but nevertheless, they are expensive to open, staff and maintain. In an age where efficiency is the golden ticket, having a huge branch network arguably pushes in the opposite direction. Latest KPMG Sri Lanka Banking Report November 2020, indicated that branch networks will be slimmed down in the future, which are also likely to become smaller and more digitally enabled.
The still-valuable branch
The overwhelming view of bankers is that branches are not going away anytime soon.
(The World Branch Report 2019) A bit more than half (54%) believe physical facilities are either critical to the institution’s retail strategy. Just 4% labelled the branch “dead or dying
Despite that, nearly nine in ten (88%) either agreed or strongly agreed that branches add value for their institution’s customers. Much of this relates to complex, high-value services such as mortgage origination, retirement planning, and wealth management.
What do consumers think? Just about two-thirds of them say that having a convenient branch nearby is important to them in choosing a new banking provider, In a recent survey, over 98% of customers who switched banks last year in the UK chose to move to a bank with branches. It is not just older people. And also found that over 95% of UK students also chose a bank with branches. And the in-branch experience matters, the biggest driver of customer satisfaction with their bank in the UK is not the digital experience, nor the overdraft fees. It is the branch experience.
Financial access
Access to finance is an essential driver for economic growth in developing and transition economies, where it stimulates markedly the social inclusion of certain groups of the population.
It empowers people, gives them the opportunity to have an account, to save and invest, to take a loan-in many cases-to breaks the chains of poverty. Sri Lanka has achieved a higher financial access rate of around 73 percent but still ‘Financial usage’ remained subdued. Financial usage is measured through manifold matrixes such as access and use of credit, number of transactions performed during last year, debit cards and mobile banking. Further, despite triumphing one of the highest print literacy rates in the world with over 93 per cent, Sri Lanka’s financial literacy rate stands at around 30-35 per cent, which leads to one of the highest gaps between print literacy and financial literacy. Regulators and banks are engaged in a plethora of initiatives to boost the financial literacy through customer education which is a key part of customer protection. SME and Micro sectors are acknowledged to be crucial for the growth of any economy, a loss in bank branches is potentially problematic because it may reduce local customer’s access to financial services as well as small business access to credit.
Marketing investment
Branch as a distributional channel has a set of functions that they perform. Promotion, Contact, Matching, Information provision and Risk-taking are some of them. Where the bank has a physical presence, they gain three times more assets under management than where they don’t. Further, it gives the most important aspect of trust in bank businesses.
If banks feel that they, need not need branches, but customers on other hand need them to feel reassured on the fact that the bank exists. The bank actually exists and there is somewhere they can go to see the money. It’s a psychological thing. Money is emotional. It’s one of the most important and most secretive things for most of us. We would rather talk about our sex lives than our financial life.
Through bank branches, provide an opportunity for banks to show that they understand their customers’ plight and are committed to supporting them through this pandemic crisis. Clients will remember for a long time how they are treated during such bad times. Building trust and confidence relationship is of paramount importance to any bank.
For example, Brands eye reckoned that digital-first banks lost a lot of customer sentiment during the pandemic because they don’t have a branch.
In this pandemic environment, a lot of bank staff are relearning or getting used to work from home. Bank of England Chief economist says “lockdown arrangements benefited some but not all workers.
Work from home is damaging Britain’s creative potential and could harm personal wellbeing and the economy if it is maintained long after the COVID 19 pandemic has receded.”
Digital Readiness
Despite the fact that there are legal frameworks in Sri Lanka centered with respect to electronic transactions; covered under the Electronic Transaction Act No. 19 of 2006 and its amendment (Act No. 25 of 2017), Payment and Settlement System Act No. 28 of 2005, The Computer Crime Act No. 24 of 2007, Evidence (special provision) Act 14 of1995, stakeholders who are concerned about the digital readiness are not aware of such legal frameworks in place protecting the consumer interests which is seen as a major drawback in the digital banking businesses.
Thus, banking and finance businesses should take steps to boost customer trust and confidence, hence the creation of awareness on legislation shall be considered critical in building publics digital trust and confidence.
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