Less Branches but not Branch-less
There are regular discussions at conferences about the cashless, branchless future. Visa and MasterCard are huge advocates of a war on cash, as are the mobile wallet providers. Brett King and the Bank 2.0 crowd talk about a branchless world of banking and how branches are all irrelevant to future bank operations.
But let’s be clear: it won’t happen.
There is no such thing as a branchless world and a cashless future will not happen in my lifetime. Much as I would love to see this branchless, cashless future – don’t get me wrong, I’m a huge advocate of getting rid of bricks, mortar and paper – the reason it will never happen is that these forms of commerce and finance are important.
Branches are required for advice, sales and service but, more importantly, trust. Regardless of how irrelevant branches may be in terms of distribution, any bank that wants to get new account openings has to have a branch. That’s why U.S. banks are still on a branch-leverage strategy, and why ING Direct opened ING Cafes. Not sure this is true? Just take a look at the “office” expansion (substitute office for branch) as reported by the FDIC in 2009.
Although the expansion has slowed since the credit crisis hit – more branches have closed (7,809) than opened (6,737) – this is more a reflection of the 418 bank closures by the FDIC than a recognition of the lessening importance of branches.
That is why you can see a similar shift as new banks enter the UK retail banking markets:
- Santander purchased Abbey, Bradford & Bingley and Alliance & Leicester’s branches to become one of Britain’s largest branch-based bank networks, behind Lloyds and Royal Bank of Scotland (NatWest);
- Virgin purchased Northern Rock’s branches to get some form of physical footprint in the UK;
- The Co-operative Bank is buying the 632 branches Lloyds has been forced to sell due to the European Commission’s verdict on UK bank competition after the HBOS merger; and
- Metro Bank is opening their tenth UK branch in High Wycombe, with a plan to achieve 24 branches by the end of this year, and then organically grow to over 200 branches by the end of the decade.
Some people argue that branches are irrelevant. Yet, if they were, why are U.S. banks growing their bricks and mortar space and why are all of these new and expanding banks opening or acquiring branches? Because branches create trust and because it is regularly shown that most people, including and especially the young, want a branch locally if they open an account. Even HSBC’s branchless bank, First Direct, has the backing of HSBC and its ATM network to rely upon if things go wrong – as do Cahoot (Santander) and Smile (Co-operative), our Internet-only banks.
Branches are a core part of community and relating to people with a human touch. This is why branches will always exist. So, we talk about a branchless future, but we should be talking about a less branch future. The same with cash.
We will never be cashless, just less cash. This has been shown in many economies, such as Iceland and Sweden. They get to a certain level of cashlessness and then the cashless process ends. This is because there is no substitute for cash today: cash is anonymous, immediately facilitates a value exchange, fuels the shadow economy and is totally trusted. No other form of currency exchange has the same capabilities. Not yet anyway.
We can talk about a branchless/cashless future but the reality is many years away. I’d rather talk about a less-branch, less-cash future, and see what that means. How far can we push the less-branch, less-cash world? What is the minimum number of branches to be effective (in the UK, they say about 250). What is the minimum level of cash that can be in play to run an economy effectively (in Sweden, they say about 3.5% of the value of GDP, which would equate to about a fifth of the volume of transactions).
Can we push this any further? If so, by when and how? This is something that will be debated for years to come, I’m sure.