A catalyst for change for bank branches

in Industry Insights, 13.05.2020

The article was originally published on kpmg.com by Judd Caplain, Leadership, Global Head of Banking & Capital Markets.

The COVID-19 pandemic is changing many things: the way people shop, the way they work, the nature of social interaction. It is also having a profound effect on businesses, who are having to configure their workforces and operations very differently to cope with lockdowns and supply chain interruptions.

Although banks haven’t had to close all their branches given the essential nature of their services, bank operations have nevertheless felt the impact of the pandemic in most countries. Staff shortages and the safety of employees, combined with less commerce occurring in general, have meant that around a quarter of bank branches have shut during the outbreak in many countries and territories. Of the remaining 75 percent, many are open on reduced hours and with reduced staff.

There is no doubt that, as the crisis passes, bank branches will open again and business will continue.

But will it be the same, in the long run? I believe that the pandemic could potentially be a significant accelerator of trends that were already starting to gather.

The fact is that banks around the world have generally been reducing the size of their branch networks in recent years. In the US, while there remain some branch openings, overall the net effect has been a reduction – nearly 2,000 net closures in 2018 for example out of a total network of around 90,0001  In the UK, around a third (3,300) of the total branch network closed between the beginning of 2015 and August 20192. In Australia, around 5 percent of banking outlets closed in the year to June 20193. It’s a similar picture in most countries.

Banks know that branches have a value and that it’s important to have a physical presence, but nevertheless they are expensive to open, staff and maintain. In an age where efficiency is the golden ticket, having a huge branch network arguably pushes in the opposite direction.

But the key driver behind closures is that customer demand for branches is falling as banking behavior changes and consumers move increasingly to online and mobile channels. Now that it’s so easy to manage money through the web or an app on your phone, making that trip to the branch to do something in person loses its appeal.

In this COVID-19 world when movement is so restricted for so many, there is no doubt that remote banking will be seeing huge levels of growth. Those who had already adopted it are carrying on; those who are new to it are learning how to do it and finding that it’s surprisingly easy, simple and quick. In any case, most people won’t want to go to a branch even if they can as it means coming into proximity with others.

It’s part of a wider pattern that we are seeing played out across many countries as we are all forced to do more and more online, seeing that we can’t go out or congregate physically.

When the outbreak is over, we can expect something of a rebound in physical activity – people beginning to go out to shops, malls, restaurants and other venues, although they may still be cautious until a vaccine is widely available.

But some activities, like banking, may see a more or less permanent change as customers carry on embracing the digital methods they have been adopting to a greater extent during the crisis.

This is something that banks, in the main, won’t be unhappy about. The ideal model for a bank is that their branches are for selling products – like a store – rather than dealing with transactions such as cash withdrawals or transfers between accounts. The sweet spot for a branch is the sale of wealth management products, mortgages, auto finance, loans and credit cards, and the servicing of business customers with high volumes of deposits or payroll needs.

Allied with these factors, and reinforcing them, is another trend that has already been taking hold – the move towards a ‘cashless society’. The use of cash is already in decline as contactless payment cards and smartphone payments gain in adoption. This rise has been notable across countries, including particularly major emerging economies such as China and India where new technology platforms have enabled them to leapfrog the legacy systems in place in the big Western economies.

During this outbreak, cash has been recognized as a potential infection source. Some retail outlets have actively been encouraging payment by card rather than cash.

In short, COVID-19 could prove a significant catalyst for the acceleration of the trends we’ve already been seeing towards the digitization of money and money management. Branches won’t disappear, because there is still a business model for them. They will also continue to be important to sections of society such as older customers who may not be online, rural communities, and also casual workers and the ‘unbanked’ who still need a physical place to come in order to cash checks or make payments.

It will take time for the full effects of this pandemic to play out, in banking as elsewhere. But if I were a betting man, I would place my (digital) money on a branch landscape that looks quite different in a decade’s time, in most countries, to how it is today.