Financial institutions are constantly under pressure to deliver profits. While long-term strategies could be developed, an easy solution is to cut existing costs. This leads to the shuttering of bricks-and-mortar branches and a reduction in headcounts. But is this the right strategy? Patrick Brusnahan reports
Branch closures are nothing new. Even in realms outside of banking, many firms employ the cost-cutting manoeuvre of closing down property.
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Derek French, director of the Campaign for Community Banking Services (CCBS), speaking to RBI, says: “Branch closures go further back than [the banking crisis in 2008]. We started in 1998 when branch closures were also at a high level and we succeeded with a lot of help from the press to slow them down for 7-8 years, but it took off again. We’ve been telling banks that the need for branches will be there for a long time.
“Our strategy was always to try and slow down branch closures to make banks think about strategy.”
The tactic of lowering branch numbers to increase profits seems to work for some, but not for others.
Take Barclays in the UK. According to Retail Banker International’s data, Barclays’ branch presence dropped from 2,000 locations in 2006 to 1,488 in 2014. Meanwhile, average profit per branch rose from $0.86m to $2.15m in the same period.
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By GlobalDataIn addition, close to all of the Italian banks surveyed by RBI saw profit per branch rise as the number of branches closed.
However, HSBC dropped its number of branches from 1,518 to 1,079 between 2006 and 2014. Average profit per branch dropped in a similar fashion from $824,000 to a loss of $0.9m per branch.
There doesn’t seem to be a clear trend. Nobody seems to be finding one.
John Dunlop, design director at allen international, tells RBI: “It’s a fascinating topic and one of our biggest debated subjects. People are looking to rationalise their branch networks. There is a big trend to close branches and go digital or online.
“The big digital push has been phenomenal, but a lot of banks that have rationalised their branch network have seen their profits drop off because, first of all, their acquisition has started to dry up and, secondly, they have seen their product sales drop off. While their margins have been quite good, they’re not seeing product sales.
“We’re still hearing that a lot of customers, especially when buying a product, still want to see a consultant, a face, and are reluctant to purchase online. Closures are not the way forward because they lose that client contact and a lot of banks are now reviewing their retail strategy and saying that ‘it’s not one thing or the other’. It’s the combination of bricks-and-mortar and a digital presence. They’re not mutually exclusive.”
“You’ve got a choice, either keep the bricks-and-mortar there and make them more interesting and much more diversified so people actually want to visit them- some have tried that and failed or start cutting them out,” French adds.
He continues: “They started withdrawing from branches the services that people went into branches for, apart from transactions. You reached a point where all you could do in a branch is something you could do online or at an ATM. You couldn’t get more from a branch so why would you go?
“They seem surprised that the footfall has been dropping, and quite severely in recent years, hence the acceleration of reducing the branch network.”
Will there be a slowdown in branch closures?
French concludes: “No, I don’t think there will. I think there will be a hastening of it.”
For more on this, check out Retail Banker International’s Data tab
