What will be the bank branch balance in the digital age?

Bank branches have been written off by many, which is hardly surprising given the rapid rate that they are disappearing from our high streets.

Vegan restaurants and estate agents are taking sites on high streets across the country as banks cut their costs and encourage people onto digital channels.

According to a report in June by the Economist Intelligence Unit (EIU) for financial services software firm Temenos, 65% of executives believe the branch-based banking model will be dead in five years’ time.

More recent figures from independent price comparison site NerdWallet revealed that 60% of Brits would consider using a bank with no physical branches. 

The study showed that 40% are prepared to have a digital-only bank as their one and only provider, with 23% preferring both a digital and conventional bank with branches. But perhaps the most telling figure here is that about 60% of people still want access to a branch.

This begs the question: at what point will the big banks feel their branch networks are optimised?

The direction of travel has been clear for years and banks have been closing thousands of branches across Europe.

HSBC, Lloyds Banking Group and TSB have announced the closure of nearly 300 branches in the UK on top of hundreds already shuttered, as banks accelerate their plans.

The Covid-19 pandemic might have slowed economic activity, but it has accelerated bank branch closures. It has acted as a showcase for digital services, moving more people onto digital channels. During the pandemic, branches closed and had a reduced service when they reopened, like many other business premises. This forced people to use other channels.

The use of cash dropped and contactless payment methods skyrocketed as people tried to avoid physical contact with other people and things. But this is also set to have a lasting effect, with many people who were traditionally reluctant to use digital channels moving to them in droves during the pandemic.

Contactless payments accounted for 88.6% of total UK card payments in 2020 as restrictions on contact-based payments drove people to contactless, according to data from Barclaycard. This type of trend contributed to a decision earlier this year to lift the limit on contactless card payments in the UK, with consumers now able to spend £100 in a single payment after the threshold was almost doubled.

This has not gone unnoticed in the banking sector. In January, when HSBC announced that it was closing 82 branches, it said the pandemic had “crystallised its thinking” in terms of reducing reliance on its branch network to serve customers.

Gareth Lodge, financial services analyst at Celent, said there is no simple answer for banks. “While the pandemic has moved the industry significantly further forward in terms of digitisation of processes like opening an account, there remain groups in society that still prefer branches, especially the elderly,” he said.

Lodge said the pandemic has added a new dimension for banks to think about, with staff who have been working from home during Covid demanding that remote working policies continue and bosses are actually realising its benefits.

He said the banks could rethink their use of properties to reflect these demands. “At the same time as reducing branch networks, banks are rethinking their staff working strategy as well as their estate portfolio – should they downsize large offices, and use branches as satellite offices instead?”

Then there is the regulatory element, with some of the banks’ decisions on branch closures potentially out of their hands.

The Financial Conduct Authority (FCA) is considering regulations that could give it the power to block the closure of bank branches to ensure people are not left without easy access to cash.

Lodge added: “And of course there is pressure from the government not to close the last branch in more remote towns and villages. The UK already has one of the lowest number of branches per head of population. It feels that this will continue to shrink, but it needs to be managed to ensure neither banks nor customers are penalised.

“I imagine most banks will have a different viewpoint and it will vary by location. I think that’s perhaps the bigger issue. I can’t see, say, the centres of big cities losing branches any time soon. But at what size does it no longer make sense? And how do they balance being a business with an increasing pressure to be more socially responsible?”

Denise Ko Genovese, a personal finance expert at NerdWallet, said the shift to digital banking is a contributing factor in bank branch closures. “There is also an expectation, as everything becomes more digital, for banks and other service providers to evolve to meet the modern needs of the public as well – 24/7 and remote access, immediate transactions, and ongoing budget tracking are just a few benefits online banking provides,” she said.

“But we are in a time of transition and there is clearly still a role for physical branches on the banking landscape.”

Germany-based fintech entrepreneur Matthias Kroener, who set up early digital bank Fidor in Germany back in 2009, said there will be a massive acceleration in the closures of branches. He believes the only thing holding this back is banks’ rental and lease contracts.

Kroener said there will be a limited role for physical branches in the future, adding: “Branches, or at least physical meeting points, might be seen where there is a customer paying for it, maybe wealth management. But in mass market retail, I don’t see a future for branches.”