Earlier this month The Economist magazine hosted a lively debate on its site about the future of branch banking.
Brett King, author of Bank 2.0, argued that bank branches are obsolete. He wrote:
“Just like the publishing and media industries, a place is simply no longer a vital, necessary component of day-to-day banking. Bankers would have no more luck getting customers back into the branch than Borders might have getting customers back into a bookstore.”
Opposing this motion, Mark Weil, head of EMEA financial services at Oliver Wyman, argued:
“Far from killing the branch, new technology is revolutionising it. It means banks can do simple transactions via the ATM, phone and internet and turn their branches into places where customers have space to talk about their big financial decisions.”
Jonathan Rosenthal, banking editor at The Economist, moderated the debate. The discussion raised important points about banking trends, customer demographics, and technology. Readers were not shy about chiming in: twice the debaters’ statements garnered about 70 comments.
But readers rendered their verdict early. About two-thirds of voters opposed the motion on the first day, and that majority barely budged in the two weeks the debate was live on the site.
That said, the back and forth was instructive, and between Mr. King and Mr. Weil’s statements and the comments of readers, one can find a wealth of information and opinions about retail banking in 2012.
Dragnet Solutions’ View
What’s our take on this question? Are bank branches really obsolete?
Branches are changing, but they’re hardly obsolete. The rise of online/mobile banking concurrent with the closing of over-abundant branches should not be construed as indicative of the demise of the branch; they are each largely driven by different business objectives. Based on our conversations with banks large and small, and based, too, on our review of market, including financial results from major financial institutions, we believe that most banks will continue to operate branches indefinitely. The technology inside branches will undoubtedly change. ATMs will evolve, and video tellers might outnumber people at certain locations. New products and services that are appropriate to provide through physical locations will emerge. But branches, in one form or another, are here to stay.
Why? Two reasons: sales and security.
Let’s start with sales. Studies show that consumers like having branches near where they live and work, and that they choose banks based in part of the proximity to branches. Mobile banking might be convenient, but lots of people still want the choice of being able to walk into a branch for a face-to-face discussion with a banker. Online-only banks won’t win these accounts. And they’ll lose an opportunity for long-term profits.
Look at the impressive results a major U.S. bank is achieving through its growing network of branches. According to its recent investor reports, this bank has 5,500 branches in the U.S. and is opening about another 150 this year. New branches break even at around 30 months. Once “seasoned,” the branch delivers $1 million on average in annual pre-tax profits. The 1,250 or so branches the bank has added since 2001 are projected to contribute roughly $1 billion in pre-tax profits over the next 8 years. Affluent customers visit them 4 times a quarter. Far from considering this channel obsolete, this bank is planning on adding more branches in the coming years.
As for security, most bankers are expecting fraud to get worse, not better, in the foreseeable future. Most banks will not want to dispense with at least an initial face-to-face initial meeting with a customer to ensure compliance and to stop fraud. If trouble strikes in the form of ID theft or other types of security breach, both bankers and customers are likely to appreciate the opportunity to talk in person to assess the situation and to rebuild trust.
Bottom line: If you build branches in the right locations and deliver the right kind of services, customers will visit branches. They’ll trust branches and use them, and branches will deliver profits to the shareholders.