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An article relating to this blog post on Finextra:

Bank branches will save banks from digital challengers - Botin

Banco Santander intends to use a combination of old-school bank branches and a $3 billion global IT budget to beat off competition from cash rich technology companies intent on invading its territory.

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What Jack Ma can teach Santander about the role of branches and growth

I know there's been considerable debate about the Santander press coverage today where they 'intend to use old-school branches, plus a more aggressive IT budget to beat off competition' from tech start-ups, platforms and pure-plays. Here's the thing - the attackers are attacking the distribution model, so a plan that articulates doubling down on a model that is already showing itself to be inefficient or that is being challenged is problematic. Herein lies the problem.

When confronted with massive behavioral shift, the industry reacts like every other incumbent industry before it - rather than change it's primary mode of distribution, they rush to defend a model that has worked successfully for decades, but is no longer relevant. 

Banks like Santander need to understand that the ECONOMICS of banking are fundamentally changing, and doubling down on branches is investing in indefensible modality. Listen to this sage advice from Alibaba's founder Jack Ma at the World Economic Forum (see the video here)

The message is a simple one. If WalMart wants to get 10,000 new customers they have to build a new warehouse, a number of new storefronts, etc. What does Alibaba do? It adds two servers to its technology stack.

Jack Ma already understands this for banking. His Yu'e Bao Mobile Money Market Fund took in US$93Bn in deposits in just 8 months. No branch network in the world has ever come close to that performance in deposit taking. In fact, if you take the top 20 banks in the world with their branch networks collectively, they've never come close to that performance. Ergo - there's no branch network in the world that could compete with AliPay when it comes to deposit taking today.

This is fundamentally a distribution problem. Very soon it will become clear that the economics of branches for acquiring, servicing and onboarding customers is obsolete and expensive. When that happens the market and customers will punish brands that don't offer their best foot via digital-first. The stock market analysts will put a sell rating on these brands so fast it will make your hair stand on end, and this is why:

Branches are inefficient and expensive at acquisition

What Jack Ma knows and what companies like Moven, Square and Apple know is that acquiring a checking or current account customer through a branch network is hellishly expensive compared with digital acquisition. Banks like Santander, Chase, BofA, Wells typically pay somewhere between USD$180-350 CAC (Customer Acqusition Cost) on a core account. They have to offer incentives like free toasters or $50-150 opening deposits to get you into a branch. 

At Moven we've got our CAC down to $10-12 per customer and believe we can improve on that significantly. Additionally, our conversion rate on downloads is as high as 77%. I bet no branch network in the world can come within shouting distance of those metrics. You could argue that there are still some customers who would prefer to come into a branch to open an account, but you'd be crazy because based on those numbers it's just bad business.

The largest banks in the world are all downsizing branch networks both in number,  and in footprint. The reason given is that digital is changing consumer behavior at a rate never before seen and it means branches simply aren't being visited. 

So let's invest more in branches? In what multiverse reality does that make sense?

The reason branch networks are failing is because they are inefficient at converting capital into revenue. That doesn't change with redesign of the branch, because it is the underlying processes that hinder the effectiveness of the branch. When you optimize the acquisition process around digital it becomes clear that branches are not sustainable in the long-term. Sure the transition will take years and branches will never totally disappear, but if you are dependent on your branch network for revenue it is only because you haven't optimized your business to deliver revenue anytime, anywhere and you still have to force customers into your space.

Humans are bad at advice

Bankers often argue that humans are better at giving advice and that's why branches need to remain, because bank products are so complex that you need a human to translate those complexities so you can make the right product choice. But here's the rub. Humans are bad at giving advice. We make mistakes, no matter the amount of training we have, and we're inconsistent from one human to another - especially when it comes to advice on asset classes, investments and the like. Our personal belief sets influence our advice, and if it doesn't you get product pushing which isn't advice at all.

The next phase of disruption of businesses is coming through experience design and the incorporation of artificial intelligence or algorithms which can understand you and advise you contextually on what you best need.  

A great example of experience design optimization is Uber.  Uber took the problem of getting from A to B and changed not the car, nor the driver, but the experience of the entire journey. From ordering a car where you can see exactly when your taxi will arrive, to removing the need to pull out your wallet or card at the completion of the journey. The best journey experience in the world was designed in an App. For incumbent Taxi companies protesting the growth of Uber, why haven't they responded in kind? Because their process of dispatching drivers, ordering a taxi, paying drivers, getting paid by customers has all been disrupted and it's too hard to change quickly.

The next bank won't be a network it will be an experience

I know that there are many executives aggressively pushing Santander to change and there are some very bright people over there in the Innovation side of the business. So why a press release would double down on branches when the overall message from the bank is anything but a focus on branch business I can't understand. I think it must be purely theatrics for the market, but that is a mistake.

In Spain, Santander's home market between 2009-2013 almost 11,000 branches were closed, making the decline in branches 24% (and 52% of the Euro's total branch closures). This doesn't sound like an economy or a brand that is actually aggressively seeking to support the ongoing viability of branches. It sounds like a brand trying to tell the market it is business as usual while they scramble for a more effective approach to the problem of retail revenue and relationship. 

Ask yourself this question. What was the last major bank brand to launch with branches as their strategy? Metro in the UK. In late 2014 and early 2015 what have the new banks used as their platform for launching a competitive model. Think Atom, Starling, BankMobile, Bankwerx, Fidor, and others - they're all launching on a platform of digital. Why? If you're looking for growth or investment you won't get it launching a branch network today.

That tells you everything you need to know. Investors won't invest in branch-led banking anymore, so if you're a bank - you shouldn't either.


Comments: (7)

David Gibbard
David Gibbard - OmniChannel & Digital Banking - Suwanee 04 February, 2015, 18:321 like 1 like

Brett, what I see is banks are so confined by legacy that they cannot get to the future. Core banking systems that were built 10 to 20 years before the internet, a branch network that drove sales, and banking executives that talk about change and technology but inertia overrides progression.

When was the last time anyone said, "the banking industry is progressive and risk tolerant"? Long live the legacy of banking as they watch their customers move to more nimble solutions.   

A Finextra member
A Finextra member 05 February, 2015, 10:53Be the first to give this comment the thumbs up 0 likes

Old Banks have so many macro problems to deal with of which a legacy operating model is just one.  Their fat retail footprint is just a symptom of this doomed operating model. The model is all stacked up also on un-fixable (hence Santander's "$3bn IT budget") platforms.  They are stuck. Irretrievably. What Apple did to music and Netflix to film is coming down the line, and that train is much closer than they could possibly realise. When the wave breaks, it breaks very fast.  2015?  2016?

James Piggot
James Piggot - Finastra - London 05 February, 2015, 11:15Be the first to give this comment the thumbs up 0 likes

While Metro are opening more branches (sorry, stores) in the UK, they also claim to be a digital disruptor themselves with no legacy core banking systems weighing them down and they are open 7 days a week until 8pm every weekday evening (and their former chairman is now at digital-only competitor Atom).

I like the comparison with Uber who have been successful in challenging the incumbents and the regulators who in many cases have a cosy relationship and no particular interest in reducing costs.


Abhishek Chatterjee
Abhishek Chatterjee - Gartner Inc. - London 07 February, 2015, 09:58Be the first to give this comment the thumbs up 0 likes

@Brett King- well written.. could not agree more..

A Finextra member
A Finextra member 09 February, 2015, 14:00Be the first to give this comment the thumbs up 0 likes

Experiences are disrupting distribution models....very true today as it has always been....the enabling factor is digital as experiences and distribution models scale.......I think we certainly are living in very exciting times as our toolsets are developing very very quickly......onwards!

Brett King
Brett King - Moven - New York 10 February, 2015, 03:56Be the first to give this comment the thumbs up 0 likes

Thanks all for your comments. Things will become clear as soon as the stock market starts to discount banks with large branch networks because they are inefficient at acquiring customers compared with start-ups/pure-plays

Balasubramaniam Gd
Balasubramaniam Gd - DBS - singapore 22 July, 2015, 04:56Be the first to give this comment the thumbs up 0 likes

I loved Jack Ma's view 20 years ago it was IT , now the next 20 years its DT ( Data Technology )

Brett King

Brett King

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14 Apr 2010


New York

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This post is from a series of posts in the group:

Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.

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