Another half-year set of bank financial results, and another set of branch closure announcements. UK-based Lloyds Banking Group, for example, has just announced that another 200 branches will close, doubling its existing reduction target. The reason given? Digital banking. Customers are voting with their feet (or perhaps indeed their fingers) and shifting their banking activity to mobile and online channels, leaving the branch as an expensive, little-used physical legacy. However, the reality is somewhat different.
While branch transaction numbers are typically falling, value – not volume – is key. Most banks have been at pains to advertise their digital presence in recent results to demonstrate that they have large online and mobile user bases, and that transaction volumes are shifting to these channels. Indeed, Lloyds Bank claims that 60% of all customer needs are being met digitally. This is now having a notable impact on branch volumes, with Lloyds also claiming a 15% year-on-year fall in branch usage, with a worsening deceleration trend in recent years. However, usage statistics mask the difference in importance of servicing versus sales transactions. While digital channels are becoming significant in some product areas (e.g. credit cards or unsecured loans), the branch remains crucial for a number of banking products, particularly mortgages.
Millennials get attention in digital strategies, but assets are owned by older generations. Digital banking interest has also been catalyzed by a number of new market entrants (such as Atom Bank and N26 Bank), which have led with digital-only or mobile-only propositions. A core value proposition is a strong user experience that is easy to use, intuitive, and "frictionless," in line with the best modern mobile apps that the social network world provides today. With this, the core customer target is often the millennial generation that has grown up digitally native, comfortable using mobile as the primary (or indeed only) interface. While this segment is important for the long term, for high-street banks, the real money lies with older generations, who have assets to invest or are able to get mortgages. Here the focus needs to be omnichannel, with the branch remaining important in a mix of telephone, digital, and even mail communication.
Branches remain key assets for mid-tier banks. While branch number reduction has been an ongoing trend across Europe, this has been driven heavily by the large-bank segment. For example, the top five UK banks have seen close to a 25% reduction in branch numbers over the last five years. In contrast, growth of branch numbers for the mid-tier, challenger-brand segment of the market in the UK has been effectively flat. Given that it has a small network to support in the first place, the mid-tier sector has been able to use the digital channels to expand, but importantly has kept its branches to maintain a brand presence and particularly to allow it to target the SME banking segment. This is an area of banking that still enjoys relatively high profitability, but where the need to support cash and have a local presence remains important.
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