When Coutts decided late last year to stop giving leather-bound diaries to all its customers, there was uproar among its traditional British customers. So much so, that the three-centuries-old private bank swiftly backed down.
The rebellion shows how easy it is to get carried away by the hype over the digital revolution in banking. Coutts executives admit it was a “big mistake” to assume that its wealthy clients use smartphones instead of traditional desk diaries.
So, when Lloyds Banking Group presents its new three-year strategy next week, it will include not only cost cuts and branch closures as part of a more digital focus, but also a commitment to keep a strong high street presence.
Branch closures are sensitive for any bank as they typically hit remote areas and can leave people without a local lender. The UK taxpayer still owns 25 per cent of Lloyds, so pledging to keep most branches is politically savvy.
However, footfall in branches is falling by about 10 per cent a year, according to the British Bankers’ Association, while the number of transactions carried out on mobile applications doubled last year. In addition, bank call centres suffered a drop in volumes of more than a quarter last year, as people did more on their smartphones.
Lloyds has been unable to reduce its 2,250-strong branch network for three years – except for floating TSB Bank with its 631 outlets – because of a commitment it made after the takeover of HBOS, which expires in December.
Other UK banks have shut more than 330 branches this year and almost 200 last year, according to figures from the Campaign for Community Banking Services. So Lloyds may feel it has some catching up to do.
Yet these numbers look tiny when put against the forecast by research firm Autonomous that European banks will close 65,000 of their 217,000 branches in the next five to 10 years.
Most closures are expected to happen in Mediterranean countries, such as Spain, Italy and France, which have 50-80 bank branches per 100,000 inhabitants. Autonomous worked out the number of future branch closures by assuming that other countries will “go Nordic” – following the example of banks in Sweden, Denmark and Finland, which have only about 20 branches per 100,000 inhabitants.
Facing weak economic growth and pressure from regulators to hold more capital, cost-cutting is an obvious way for European banks to boost returns. The average cost of servicing a client in a branch is $4 per visit, while at a cash point it is 48 cents – and using online or mobile channels costs only 4 cents.
Autonomous estimates that branch cuts could save European banks €46bn, or 8 per cent of total costs. Some of this is already happening. In Italy, UniCredit this year pledged to close 500 of its 3,505 branches, and Intesa Sanpaolo said it would shut 800 of its 4,611 outlets.
But closures are only part of the story. Speak to most retail banking executives and they will tell you that the branch network is still a big asset, even if it isn’t quite the colossal barrier to entry it once represented.
Banks’ most valuable customers are usually their wealthiest and oldest clients. These are often the least comfortable with doing financial transactions on a smartphone. Leave too many high streets, bankers say, and they risk alienating these elderly, wealthy clients.
Small business customers often prefer to see someone from their bank face-to-face rather than relying on a call centre or digital app. New customers also typically prefer to open accounts in a branch, rather than online.
Therefore, Lloyds’ new strategy will focus on changing the role of branches, rather than shutting them. It will switch from relying on cashiers to carry out simple transactions to having fewer, better trained staff selling complicated services and products. Barclays led the way on this by ditching the traditional bank cashier altogether.
Faced with a growing challenge from technology groups targeting financial services, a bank’s branch network is a rare advantage over the likes of Apple, which on Monday launched its mobile wallet service in the US. The worst-case scenario for banks would be if customers started shifting deposits to the likes of Apple, Google and PayPal, as the Chinese have already done to Alibaba on a massive scale.
Lenders need to raise their game by investing in digital services. But, as shown by the Coutts’ U-turn on diaries, they risk losing what little goodwill they have left with customers if they drag them online against their will.