JPMorgan Chase recently held their investor day and grabbed some of the fintech headlines when they stated that Apple Pay has been activated by over a million cardholders since its launch in the U.S. in October. Chase also announced a closure of 300 branches as customers move to digital.
Yet, what stood out for me, is that Chase has found through experience that customers are more engaged and satisfied if they have digital services. When they do visit a branch, customers want a face-to-face engagement for the things that really matter, such as investments, savings, mortgages and more.
The Right Mix
These details were announced at the same time as Britain’s newest retail bank, TSB, released their first set of results showing that they had exceeded their target numbers for gaining customers switching accounts. TSB is a near 700-strong branch-based UK bank spun out of Lloyds under European competition rules that forced the IPO of the new/old bank. They made it clear that they’re getting good customer acquisition – half a million new accounts in 2014 – but that this is because they have the right mix of customer access, particularly including branches.
In the release of their first year results, they also released a report entitled, “Why Branches Matter in a Digital Age.” In the introduction Paul Pester, TSB’s CEO, says this: “Some argue that … emerging digital-only providers – be they from the banking industry or elsewhere – will make branches redundant … TSB believes the future of banking lies in branches and technology – enabling customers to bank where they want, how they want and when they want.”
The report points to research that substantiates this point: “New data from ComRes shows that 69% of people believe that it is important to have a bank branch close to where they live. Branches also remain TSB’s most used service channel, with 72% of customers who use any channel using a branch in the past three months and 36% solely using branches to access their accounts.”
Metro Bank CEO, Craig Donaldson, makes the same point in a recent interview: “I think it is important that the customer is given the choice as to how they wish to interact with the bank, they are the customer! But there are times when people really do want face to face service no matter what.” In fact, most banks claim that account openings are most influenced by having access to a local branch. That may change but, today, that is still the case.
Finally, there are some other factors in play. For example, Atom Bank, the UK’s first digital-only bank, makes clear that the customers who are most satisfied are those who don’t come into branches; they are also the most financially confident and competent. If you are confident with money, you want to control it yourself. You don’t want someone talking to you about it and, in this case, the most satisfied customers are those whom you never see.
However, most first account openings will be with people who are not confident with money. They are young, have never had a mortgage or deposit account, are probably getting their first salary checks and, in many cases, struggle with debt. For these young market account targets, as well as those nervous with money, the branch plays a critical role. The targets for digital-only banks are people who are account switchers, over 30 and confident with money; the rest want serious banking in serious bank stores.
Some will argue this case, but I always remember Deutsche Bank opening a funky branch in Berlin and telling me that they built it with millennials and seniors in mind. They had two rooms in the branch: one designed for millennials and one designed for seniors. The millennials’ room was all white plastic (like the iPod at the time) and looked very cool and futuristic. The seniors’ room was called the Senator Room and featured red leather chairs and oak wood panels. It was a serious room. When the new bank branch opened, the youth all rushed into the Senator Room to have serious discussions about serious matters while the seniors all went to the iPod Room to recapture their youth and feel funky.
Having said this, there are some clear demographic differences when it comes to use of branch and paper. Older people prefer branches and checks, while the young prefer mobile and apps. Now that seems ageist but research bears it out. For example, the Social Market Foundation performed research into preferences for access among UK consumers last year and found: “The affluent and the young (25–34 year olds) have a weaker preference for the branch than others, with more than half of these groups preferring other channels. This trend in their attitudes is significant because the affluent, by way of their higher deposits, contribute the most to banks’ net interest income; and the young acquire the highest number of financial products and services in these years, contributing the most to banks’ fee-based income.”
In other words, the financially competent and confident and the digital natives are the non-branch lovers, which means the financially less well-off and digital immigrants are the branch users. Part of the reason the elderly are not going to want to lose their branch access is that they’re not online at all. A recent survey by UK Government offices of internet usage in the UK found that “over eight in ten (83%) of adults now go online using any type of device in any location. Nearly all 16-24s and 25-34s are now online (98%), and there has been a nine percentage point increase in those aged 65+ ever going online (42% vs. 33% in 2012).”
So, 17% of the UK are not online, rising to 58% of people over 65, the majority.
Too Much Accomodation
Now, the point I’m making here is actually not about age and demographics. I’m focused on a thoroughly different but important point: that we, as an industry, are too accommodating of too many choices for too many people.
Each time we introduce a new access service to the bank, such as mobile, we don’t close down an old one, such as the branch, because some of the people use some of the services some of the time. As long as some of the people use some of the service, we keep it available.
It is similar to the idea the UK Payments Council floated a few years ago to get rid of checks. There was a huge outcry because the elderly use checks, so the action was revoked.
This reinforces the branch access point: we are purely continuing these outmoded services from the last century because a small group of citizens want to use it. Meanwhile, we introduce new services that are absorbed rapidly by digital natives and immigrants and find ourselves stretched.
So, what we really have going on is banks offering services and trying to be all things to all people. Banks try to please all of the people all of the time, and it just doesn’t wash. There’s a cost overhead that the digital natives and immigrants are paying to cross-subsidize the costs of the branch and paper users. Will we see a digital divide opening in banking? Will the digital crowd migrate to cost-efficient pure digital plays, leaving the oldies and poor using the physical networks?
It’s a good question and a very pertinent one to ask. After all, it builds on my discussions the other day about insurance. What is more likely to happen is that the old will have to get their kids and grandchildren to do their banking for them, while the poor will use mobile financial services for inclusion in the network somewhere. However, during this transition, there will be some blood on the floor with the most likely change being the pure-play digital companies gaining the most affluent and savvy customers, leaving the incumbent banks with an even bigger dilemma on their hands: close down too many branches too quickly and they get called foul; don’t close branches fast enough and they can’t compete.
Regardless, the fact of the matter is that we can opine for everything digital, but there is still a strong role for physical and always will be.
Mr. Skinner is chairman of the Financial Services Club, CEO of Balatro Ltd., comments on the financial markets through his blog the Finanser, and is the author of Digital Bank. He can be reached at email@example.com.