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Why Branch And Digital Channels Will Coexist Forever

I noticed a huge crowd during a recent visit to my bank branch.

I happened to spot the bank’s Head of Relationship Banking - let me call her Sonia - in the branch.

I asked her how come their branch was so full when finsurgents have been predicting the death of branches for so long.

Sonia told me that, let alone die, their branches are growing. Despite the fact that branches are expensive - think mounting real estate costs - her bank is opening new branches and expanding many of its existing branches. As a matter of fact, there was a vacant space right below where we were standing and the bank was negotiating a deal with the landlord to rent it for expanding the branch in which we were having this conversation.

I then quoted her bank's nearest competitor's claim that 60% of its transactions were happening digitally and ribbed her by asking if her bank wasn't so successful with its digital banking initiatives. She shot back saying 90% of their transactions were happening on digital channels. While she didn't mention it, I know for a fact that the help desk at the entrance of the branch pushes many customers out of the branch, telling them to use ATM, Internet / Mobile Banking for carrying out balance inquiry, statement printing and other routine transactions.

Despite all that, this bank is growing its branch network.

What gives?

According to Sonia, the key reasons for her bank to expand its branch network were as follows:

  • Many branches were seeing rising footfall of customers who walk in to open new accounts, apply for a credit card and inquire about car / home / business loans
  • New account holders prefer to learn their banking ropes in a branch before moving to digital channels
  • Heavy use of cash and cheques in business banking, both of which involve branch visits. In fact, I'd visited the branch that day to withdraw petty cash from my company’s bank account. (For the uninitiated, unlike a personal savings account, it's quite painful to get a debit / ATM card for a company's current account, so I've not bothered to get one).

Now, before some financial zealot predicts the imminent death of this bank for its continuing use of branches, let me assure you that this bank is the most valuable bank in India and is also the #1 brand across all industries in India.

From what this banker said, it follows that people prefer a branch when

  1. They’re totally new to banking
  2. They’re new to a certain financial product (even if they're familiar with the basics of banking).

i.e. when they're considering "new banking products".

Going by the following reports, the above inference seems to be universally true:

  1. According to an SMF study, over 60% of people would go into a branch when making a big decision.
  2. As Jeffry Pilcher, CEO/President & Publisher of The Financial Brand, points out in Branches Refuse to Die, "While the majority of consumers prefer online or mobile banking, ... a surprisingly high number of consumers still visit the branch. It might be tempting to dismiss the findings and assume these branch visits were triggered by consumers who were frustrated that they weren’t able to accomplish some financial task in digital channels. But that would be a mistake."
  3. According to McKinsey, while customers want digital, it's not to the “exclusion of other channels, which remain critically important."

For reasons highlighted in my blog post Secret Of Survival Of Bank Branches, banks also prefer a branch for selling new banking products.

So, branch is the mutually-preferred go-to channel in the "new banking products" scenario.

In every part of the world, there will always be

  • People who will enter the banking system to open new bank accounts
  • People with bank accounts today who will want a credit card tomorrow, a mortgage five years from now, and a retirement product ten years from now.

The number of people in each of these two categories will depend upon the demographics of a country - or even the specific geographic region of large countries with heteregeneous demographics like USA, China, and India. However, there will always be a market for new banking products.

In short, customers and banks both prefer a branch for "new banking products" scenario and the market for "new banking products" is inexhaustible.

Ergo, branches will never die in the forseeable future.

This long-held belief of mine was reinforced recently when I read that payment banks were opening branches. This new category of banks in India are licensed to operate solely on mobile phones. But they’re still setting up branches. One of them is PayTM, which has a valuation of $9 billion. The near-decacorn is a pure-play fintech without any bank DNA, so it hasn't suffered from legacy thinking when it decided to open branches.

That said, branch networks won't be immune to growth of digital channels. But the churn in branch count driven by digital channels will be specific to individual banks rather than being a secular issue that sweeps the entire banking industry. In other words, some banks will open new branches whereas others will close existing branches.

Let me elaborate this by using a metric called "Ideal Branch Count" or IBCO, which is the number of branches required to service the market for new banking products. I'm using the term "service" a little broadly - it includes the execution capacity required to fulfill demand and the marketing efforts required to generate the demand in the first place.

If a bank has fewer branches than IBCO, it might open new branches. If a bank has more branches than IBCO, it might shut down some branches.

IBCO depends upon the individual bank. Other things being the same, higher productivity will lead to lower IBCO.

IBCO is also impacted by the country - or even specific geographic region of large countries with heteregeneous demographics - because of the link between demographics and size of market for new banking products market.

I doubt if IBCO is affected too much by the size of the Millennial population in a given demographic. While people of this generation like to do many things on mobile phones, buying new banking products is not one of them. I anticipated this in my blog post titled Will Millennials Bankrupt Neobanks? published two years ago. I'm convinced about this from recent personal experience and research findings e.g:

  1. The Millennials I saw in the branch were glued to their smartphones but they'd still come to a branch.
  2. The aforementioned SMF study reports that "72% of those under 30 would go into a branch when making a big decision, versus just 61% of those over 50."

There could be other factors that shape IBCO.

But whatever be the factors, IBCO will not be zero for any bank.

*Even I* can't believe that "71% of US bank customers visited the branch 14 times last year. (https://twitter.com/GTM360/status/867764912826834944)

If I were to take a wild guess, IBCO will be around 60% of current branch count for overbranched banks and 150% of current branch count for underbranched banks. In other words, overbranched banks may slash their branch network by 40% whereas underbranched banks may grow their branch network by 50%.

Even if all banks in the world turn out to be overbranched - which is impossible IMO - there'll be enough branches left for a long time.

Digital channels aren't going away, either.

Therefore, branch and digital channels will coexist with each other forever.

Optimizing the channel mix is an area of opportunity for fintechs to partner with banks. More on that in another blog post.

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Comments: (14)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 27 June, 2017, 11:251 like 1 like

Looks like branch and digital channels are not the only two old-new things that will coexist with each other. South Korea is widely acclaimed to be years ahead of the ROW in mobile payments. But it still has the highest ATM density in the world! (Source).

Dharmesh Mistry
Dharmesh Mistry - Temenos - Reading 02 July, 2018, 11:45Be the first to give this comment the thumbs up 0 likes

A really good post ! However "forever" is a huge call, but by the time you are proven wrong neither of us will care ;o) 

Whilst there is a huge rise in the use of Video and things like chat/voice, I suspect the real transformation on online banking will be with 5G/IOT/Ai.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 02 July, 2018, 15:591 like 1 like

iPhone X has come. Still plastic is alive and kicking. When people can get away with their prediction that iPhone 5 will kill plastic, I don't see much risk in predicting that branch and digital channels will coexist forever:).

Dharmesh Mistry
Dharmesh Mistry - Temenos - Reading 02 July, 2018, 17:47Be the first to give this comment the thumbs up 0 likes

So cash will exist forever too?

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 02 July, 2018, 18:501 like 1 like

Nope. Cash will last only for 185 years.  

The Death Of Cash Is At Least 190 Years Away

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 04 July, 2018, 14:08Be the first to give this comment the thumbs up 0 likes

Sigh I think I'll be proved wrong there. When digital payment-only new-age companies start accepting cash even in western markets after finding that 2/3rd of the world still uses cash regularly, cash probably won't go away in 185 years. 

https://www.compelo.com/uber-cash-payments-uk/

Dharmesh Mistry
Dharmesh Mistry - Temenos - Reading 04 July, 2018, 14:52Be the first to give this comment the thumbs up 0 likes

Indeed. There was someone talking about the end of candles, another about the end of books, vinyl records,... I am sure..

A Finextra member
A Finextra member 05 July, 2018, 10:04Be the first to give this comment the thumbs up 0 likes

Quite relevant.  While an 'increase' in bank branches might not be a global phenomena and I assume its very specific to the bank in context, high-touch products would always keep branches as the go-to place around it staring from acquisition to onboarding to servicing. With constant pressure on interest margin, payments revenue and compliance cost, banks can't afford to fuel growth in branches unless their top-line look really glamarous, which is not so-common these days. 

Dharmesh Mistry
Dharmesh Mistry - Temenos - Reading 05 July, 2018, 10:35Be the first to give this comment the thumbs up 0 likes

@Rittick, but look at Habito.com, they can provide "high touch Mortgage" without a branch just over the phone. The question is whether you physically need to be there...

A Finextra member
A Finextra member 05 July, 2018, 13:05Be the first to give this comment the thumbs up 0 likes

@Dharmesh... I think it depends on what made the product/service high-touch. Lending/mortgage is an area where the requirement of visiting branch is more of a 'push' from the bank; so its upto the bank to make the cycle faster and let digital respond to the speed & changing demand. On contrary, an investment decision is a 'pull' from customer side to visit the banch and talk. Also, cultural difference and availabilty/emergence of eco-system between banks & distribution channels are two deterministic factors on rise/drop of footfalls in the branch.

Dharmesh Mistry
Dharmesh Mistry - Temenos - Reading 05 July, 2018, 13:56Be the first to give this comment the thumbs up 0 likes

@Rittick... you need to read our new Wealth report on the Rise of the Roboadvisor... even investment is changing ;o)

Vijay D
Vijay D - TCS - Chennai 06 July, 2018, 04:47Be the first to give this comment the thumbs up 0 likes

@Dharmesh ... I agree with advent of 5G the neccessity for physical visit might come down.. But if we take into consideration whether 100% of population will have access to 5G 24 x 7, I have my doubts here. 

 

 Here's my take; Branch as distribution channel will reduce in numbers and morph into experience center and/or place where customers go for complex problems.

Please do share your views

@Ketharaman ..Thank for good blog. Guess Bofa shares your line of thought.  According  to Reuters report dated 16 Feb 2016 , Bofa was planning to add 400 new branches.

One of seasoned manager in a MNC bank coined this phrase ..banking will move to "Click&Mortar" banking instead of Branch or digital banking..

 

A Finextra member
A Finextra member 06 July, 2018, 08:01Be the first to give this comment the thumbs up 0 likes

@Dharmesh... I don't have a doubt that assets under 'automated management' is growing and the trend will continue. But, don't see that eroding the need of human interaction for complex investment decision and more so in corporate investment. Growing comfort level in using AI-tools in different aspects of daily life would surely fuel growth of human-less intervention in banking. However, to handle a sensitive financial issue or to manage investment for high net-worths a physical branch still stands very much relevant. There are still a large section of people across age groups whose comfort level lies in speaking with a face in a bank branch and don't see that segment going thru radical mindst shift in near future. Digital would increasingly dominate the exploratory phase of a lending /investment decision; but closing the deal would still keep branches relevant, at least for next 25-30 years.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 06 July, 2018, 10:33Be the first to give this comment the thumbs up 0 likes

@Rittick Banerjee:

You're preaching to the converted when you say branch expansion is not industry-wide because that's exactly what I've said myself in my original post:) That said, I can assure you that the phenomena is not restricted to the said bank. My OP has several examples of other banks that are also setting up / expanding their branch networks e.g. payment banks. Subsequent to my OP, Axis Bank (India) and JPMC (USA) are two more banks that have announced new branch openings as their GTM to enter new markets where their presence is nil / low.

Not sure why you think topline of banks is not "glamarous" (sic). The said bank is hailed for its consistenly-above market topline and bottomline performance. Besides, FINANCIALS is the largest sector by revenues and profits in the latest FORTUNE 500.

I firmly believe that convenience dictates channel preference far more than cultural differences, tech savviness, demographics, which banking activity / product is simple versus complex, and other factors. This is somewhat borne out by what Simple's CEO said in a recent interview: "...the reality is that most millennials, like most Americans, bank at the top four banks".

@Vijay D

TY for your kind words. I knew about JPMC but I missed BofA's announcement about the addition of 400 new branches. Thanks for the info.