The Strategist

Online banking kills retail bank branch model

12/19/2016 - 14:13

British research company Which?, calculated that more than a thousand bank branches have been closed in the country during the last two years as popularity of online banking jumped.

Jason via flickr
Jason via flickr
Which? notes that from January 2015 to January 2017, British branches of international banks have closed or will close 1046 branches. Among the institutions are HSBC, RBS, Lloyds, Barclays, The Co-operative Bank, Santander and TSB. About a third of these offices (321) accounted for HSBC, followed by Royal Bank of Scotland - 191 and Lloyds - 180 units.

The report's authors analyzed geography of the shut offices and concluded that rural areas were affected the most. These regions are distinguished by lack of broadband Internet, which would allow local people to use online services.

In a number of rural areas, consumers could use post offices for simple operations, but 41% of respondents said they did not know about such a possibility. A survey, conducted by Professor Russel Griggs, showed that only 11% of people in rural areas are beginning to make greater use of post offices due to closure of banks in their local area. 

This trend goes far beyond the UK.

This week, Italian bank Unicredit announced shutting down about a quarter of all 3800 branches in the countries where it operates. In July, Deutsche Bank announced its intention to close 188 of its German branches in order to reduce costs by the end of 2017. In late November, Brazil's state Banco DO Brasil, the largest bank in terms of assets in Latin America, announced dismissal of 400 branches to further dive into digital services. 

According to Juniper, number of mobile banking users for the first time reached 1 billion in December 2015. Level of penetration of mobile devices in emerging markets exceeds that in many developed market. Some of countries, such as in China, have approximately 20% of all portable devices in the world. In fact, we can say that approach in most markets is gradually shifting from focusing on mobile devices to working exclusively with mobile devices. 

Traditional banks are increasingly concerned that their position on the market is undermined by other players, including operators and small digital banks. Development of technology allowed them to enter the market and start providing banking services. For example, the UK has already presented a number of digital-only banks, such as Atom, Starling and Tandem. As for other countries, there are BankMobile and GoBank in the United States, NAB in Australia, Nubank and Banco Original in Brazil; WeBank in China and Digibank in India.

Combination of digital branchless banking and mobile banking technology makes financial services universally accessible to all categories of clients. The main advantage of these small digital banks lies in their ability to provide higher efficiency of its activities as compared to big players, adhering to the traditional approach.

Previously, to obtain banking license has been a very difficult process, yet today governments and central banks recognize benefits of mobile financial services. They are rushing to demonstrate their flexibility and are very actively adopting new legislation for branchless banking. Mostly, new laws are meant to facilitate access to the market for new businesses, in particular for financial institutions offering digital services. Thus, bank Number 26, provides only digital financial services, increased number of its European customers from 100 thousand in 2015 to 160 thousand people in eight countries in Europe for the first quarter of 2016, and became one of the fastest growing European banks.

Many traditional banks agree with Juniper Research, which says that solely digital strategy carries too many restrictions. Currently, experts observe demand for various channels of digital banking services, so it’s not a surprise that service departments and customers of banks actively use all kinds of services. In fact, a large proportion (22%) of British non-mobile users of banking services do not trust online services when dealing with their money.

Young online banks now are facing one main challenge. They struggle to gain a critical mass without resorting to services of numerous partners to provide banking functions (for example, transfer money, dealing with investment, etc.). At the same time, they don’t want to limit their ranges of customers with only hi-tech fans. 

To survive in this dynamic and competitive market, digital banks need to constantly innovate their products and services in order to minimize their administrative unproductive costs. Traditional banks are also facing serious problems, which are related not only to digital banks, but also to actions of technology companies such as PayPal, Apple, Google and Amazon. In fact, according to Accenture's report, every fifth client would be happy to receive banking services from PayPal, which is not a traditional bank. In part, this indicates an increase in customers' willingness to allow players like Amazon, PayPal or Apple store their data for a longer period of time in exchange for extras. "82% of retail banks agree that in the next five years mobile banking will become the main channel for interaction with millennials and other younger customers", says EIU’s Survey.