Embracing branch closures can deliver new paths to faster and smarter innovation
What is happening with branches?
As consumers increasingly use digital and self-service technologies to conduct their everyday transactions, foot traffic into branches is falling. This leaves financial institutions (FIs) with a difficult problem of how best to balance their brick-and-mortar presence against falling customer demand. Inevitably, this has led to branch closures. But it’s not something that sits well with consumers. The media often cites outrage from local communities who worry about what amenities will be left available and small business owners are left confused about how to deposit daily proceeds from their cash-intensive trade.
Between 2015-2021, more than 4,300 UK bank and building society branches have closed their doors. In Spain, 11% of branches closed in 2021 while the US hit a new record last year, closing 38% more branches than the previous record year (2020) with more than 2,927 branch closures.
In this article we look specifically at branch closures in the UK and the initiatives taking place to combat the impact this has on consumers.
Why are branches closing?
There are several drivers that lead to branch closures in the UK.
Firstly, there is the cost element. The Financial Conduct Authority (FCA) estimates that a typical branch costs £590,000 a year to run. With over 4,300 branch closures, that sums up to a rather significant £2.5bn [$2.76bn].
Secondly, customer demand for branches seems to be declining. In 2017, business consultancy, CACI, predicted that a typical customer, who, at the time, visited a bank branch seven times a year, would only set foot in a branch four times a year by 2022. We have seen this prediction come true as major FIs reported customer footfall has declined over 50% since 2017.
The declining footfall isn’t surprising. We are seeing natural demographic shifts coupled with the increasing popularity of card and contactless payments and ever more advanced digital banking services whose adoption was accelerated by COVID-19. The speed, ease and convenience of online banking means that, for many people, visiting a local branch is simply no longer desirable. The rise of pure-digital fintechs is proof of this.
Closure challenges
Branch closures give rise to a number of challenges.
The most obvious one, for many people, is access to cash. While many banks have digitalized this service through more intelligent kiosks that allow customers to both withdraw and deposit cash, oftentimes these kiosks are located within a physical branch while simple cash withdrawal is somewhat assisted by a network of free-standing ATMs based in retail outlets or transport hubs. But the number of ATMs is also declining from its peak of over 70,000 machines in 2015, to circa 53,000 machines in 2021. Despite this, there is talk about hundreds of ‘ATM deserts’ across the country where access to cash is spasmodic.
While many would argue cash is dead, that is not the case. There are still significant numbers in society that don’t have bank accounts and rely on cash in their everyday lives. In the UK, the Access to Cash Review estimated that while cash is only used for three in every ten transactions, down from six in ten a decade ago, we still have around 8 million adults (17% of the UK population) who are primarily cash users. Interestingly, the recent ‘cost of living’ crisis seems to be turning even more people into cash users as many naturally tend to find cash-based budgeting a lot more intuitive and easier to stick to - you can’t spend cash that you don’t have.
The other challenge is the effective provision of banking services to those who simply do not wish to or are not able to engage digitally and those who may be vulnerable customers. Vulnerabilities may be permanent, such as physical disabilities or impairments, or transient, such as low financial resilience. It is estimated that 24 million UK adults have characteristics of vulnerability, and with the current cost of living crisis with energy prices, inflation, and interest rates placing a significant financial burden, it is likely that this percentage will increase in the coming years. Financial institutions must act with appropriate levels of care towards these customers – something that most naturally lends itself to a trusted, face-to-face relationship with a branch employee with the necessary skills and capabilities to understand and act on the needs of vulnerable customers.
Another concern for financial institutions is maintaining the customer relationship, especially in situations that require advisory input or during the provision of more complex, high-involvement purchases, such as mortgages. Many customers still look for face-to-face contact and reassurance during key financial decisions and life moments; how will customers engage with their bank if they don’t see the brand anymore? Without branches, established financial institutions are at risk of becoming ‘dehumanized,’ faceless commodity providers. Out of sight, out of mind, means the brand value seems set to take a hit.
Current initiatives to address branch closures
The UK is working hard to combat the challenges and there are a number of initiatives in the market:
The Access to Cash Action Group (CAG), formed in May 2021 and comprised of all major UK banks, the Post Office, the Federation of Small Business, Age UK and Toynbee Hall, is a representative body that gives stakeholders across the communities a voice in proposed branch closure plans, with a key focus on rural areas and other underserved locations. As a result of its efforts, from January 1st, 2022, any proposed branch closures must be reported to CAG and will be independently assessed by LINK (which already fulfils this role for ATMs) on CAG’s behalf. CAG then has the power to commission services to meet community cash needs. In addition, CAG also negotiated the roll out of shared banking hubs (now also known as OneBanx) in multiple locations across the country with extended pilots until at least April 2023. CAG has also established more free-to-use ATMs, cashback services without purchase at more than 2,000 retailers (up from 13 retailers) and enhanced Post Office services as part of the UK Post Office Banking Framework.
The UK Post Office Banking Framework is another initiative intended to combat the effects of branch closures. Through 30,000 counters, the Post Office allows customers of most UK banks to conduct cash and check transactions at their local post office and consequently settles more than £430m transactions every day. For consumers, it offers important access for simple banking needs, as 99.7% of the UK population lives within three miles of one of the 11,500 post office branches across the UK. Unfortunately, this only solves for simple transactional services and often delivers a suboptimal experience and is set to become even more expensive to run, with the next 3-year period up to December 2025 set to cost the banks £800m [$883m] (up from £600m [$662m]).
Where are the opportunities?
While initiatives so far have focused on preserving branch-based services as we know them today, the key opportunities lie in reimagining the provision of personalized, face-to-face banking services and supporting the cash-based economy in the world of tomorrow – after all, consumers and technologies are evolving, and we must think forward rather than hold onto what we know from yesterday.
Let’s start with cash. Cash is often associated with ATMs – and it should be. Cash withdrawals and deposits are simple transactions; rarely do they require intervention from branch staff. But the ATM has evolved, and today’s technology enables us to provide more intelligent machines, not only servicing cash withdrawals as well as deposits, but also able to print, scan documents and issue debit cards. Customers can also connect to a financial institution’s call center via phone or to a financial advisor via videocall. These intelligent machines, often referred to as interactive teller machines or ITMs, provide opportunities for the provision of self-service or assisted banking transactions as well as simple servicing without the need for a branch. Furthermore, These ITMs could be available to customers any time of the day and any day of the week. Infrastructure modernization could completely redefine the way we deal with the cash-based economy and simple services, without the constraints of a branch’s physical space or opening hours.
When it comes to face-to-face banking for more complex transactions and to support vulnerable customers, this can be achieved via in-person appointments at branches or through virtual video calls that can take place from a branch or even from the comfort of a customer’s home. However, most traditional branches in the UK are set up to deal with transactions and complaints, rather than focusing on value-adding private conversations.
With investment in branch transformation, the branch network could be optimized to create different branch formats (hub and spoke model, with pop-up branches as and where required). The physical footprint of each could be shaped for customer intimacy, community and cost, and the entire operation could be supported by the appropriate technology, such as tablets and more, to create a more seamless, interconnected digital experience.
As a financial institution, imagine a lean paperless operation, integrated into your back office, including digital risk management with full visibility on in-branch activity and tech enabled controls - with a flexible staffing model across branches and remote working that uses data and analytics to provide next best actions for each and every customer interaction. This means fewer ongoing branch expenses, increased customer acquisition, better customer and employee satisfaction, and higher productivity.
For customers, this would mean walking into a branch, undergoing a quick and seamless digital ID check and verification immediately followed by a quality, personalized conversation with a financial adviser who knows them, their financial situation, and their future aspirations. The financial adviser would offer relevant and timely advice in an environment that is intimate, and any service or product customers wish to take would be provided then and there - no longer a need for financial institutions to frustrate customers with a “please could you return with your last three pay slips and a proof of address”.
This is the banking of the future we should be aspiring to. Seamless. Convenient. Cost effective. Digitally enabled, but not digitally only, to ensure it remains inclusive and accessible to all. This enables financial institutions to preserve presence in our communities and support customers through moments that matter while developing a business model that’s cost efficient and effective.
