What the future of retail banking looks like and why the industry still needs to maintain practices of the past
A consequence of globalisation is that as technology advances, innovated products and services flood the market and competition increases. However, the basic services of the retail bank remain the same. That is, a customer deposits cash and that cash is used to make more cash. In the advent of globalisation, however, more customers carry out their transactions online with relative ease. The outcome of this is that branches, like many businesses have become less visible in the high streets.
According to a report by ‘Winning with Branches’, more than one third of adults in the UK now execute daily transactions online and as more branches are removed from the high street, there are fewer visits to our once highly regarded face to face relationships. ‘Winning with Branches’ regard this online phenomenon as not the best practice, rather, the best method of establishing customer relationships is the high street bank. This has always been the method by which long term relationships are built – a critical necessity for the industry. Nearly two-thirds of consumers would not choose a bank that did not offer access to a branch, and the UK’s 13,000 branches generate profits of over £3 billion per year for the banks. With three-quarters of consumers having a preferred ‘regular’ branch and fewer than 1 in 10 of the population never using a branch, the branch is in a stronger position than direct banking to create deeper customer relationships.
The study believes that the industry has approximately 5 years to transform their branches before it loses out to the advent of direct banking. Banks currently resemble the age in which we live, however, there is no better relationship than a face to face encounter with a specially trained advisor. The study also estimates that the UK’s bank branches generate revenues of £13.7 billion per year, at an annual running cost of around £10.5 billion. Branches essentially have fixed costs and while they are clearly carving out a profit, improving revenues could drive up branch profitability considerably. This is essential for the industry and if branch revenues increased by 10 per cent, profitability could be increased by 40 per cent. This is a compelling argument for the re-energising of the branch. The study continues to say that too often, financial institutions have viewed the branch network as a significant cost, with the balance shifted towards extracting savings, rather than revenue generation. The branch remains the key point of customer contact, despite the rapid rise of the internet. By changing the basis of competition and leading on service rather than price, banks can transform branches from a perceived burden into a highly profitable network.
Therefore, in order to gain access to a profitable future, banks must be able to create a cost effective proposition whilst giving their customers a memorable experience. It must not be forgotten that 9 out of 10 accounts are opened in house, that is, at a branch. This surely gains ground in emphasising the power of the branch network. Retail banks face two key challenges – to create a proposition for which customers are willing to pay and to increase revenues from branches without pushing up costs in the process. Simply refreshing the brand and refurbishing the branch network is unlikely to be enough.
Other findings also suggests that, only 17 per cent of people would be happy for their bank not to provide a branch at all if it led to better interest rates or a cheaper service. Almost one quarter (23 per cent) of consumers would use their branch more if it was open at more convenient times and over half (55 per cent) of adults would not open an account or arrange a loan or mortgage without personally visiting a branch. These findings are a starting point for thought in the branch versus internet race.
Dr. Victor Chukwuemeka
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