The news that HSBC is considering floating its UK arm– the high street bank formerly known as Midland – is a further sign of banks returning to the past. As they try to repair their damaged reputations, old names such as TSB and Williams & Glyn’s are reappearing and the talk is of restoring virtues such as trust, integrity and reliability.
So will such “completely clean” banks (in the words of António Horta-Osório, chief executive of Lloyds Banking Group) revive the old-fashioned branch, with the manager behind a desk reviewing loans and deposits? Will there be an army of bankers such as George Mainwaring, the branch manager at Walmington-on-Sea who doubled as commander of the Home Guard platoon in Dad’s Army?
The answer, despite the rhetoric, is no. For good or ill, the classic high street branch is not going to return to what it used to be. There will be fewer of them, with fewer decisions made by humans and more by computers. The staff may smile more and the branches may become nicer places, but Captain Mainwaring is the ghost of banking past.
Branches are banks’ public face and best form of promotion – “money is intangible and branches are a cultural symbol of trust”, says Shaun French, associate professor of economic geography at the University of Nottingham. But many functions have been stripped away by technology and changes in society, leaving expensive shells.
Banks will not go back to devolving decisions to branches – that role has been subsumed by automated credit scoring. “Credit decisions are not taken in branches and won’t be,” says David Nicholson, group director of Halifax Community Bank, the former building society owned by Lloyds. Local managers are there to explain the decisions to customers rather than change them.
The rise of the automated teller machine and others that can count notes and coins and take deposits has undermined another of the branches’ former roles. People used to visit branches often to cash and deposit cheques but electronic payments have heavily reduced this foot traffic, especially in cities and middle-class suburbs.
Nor can banks plunge into “bancassurance” – selling insurance and mortgages – without great care. Lloyds was fined £28m this week by regulators for “serious failings” in how it operated. Its staff were offered bonuses to “sell” as many of them as possible to customers, whether or not they were suitable. Along with other banks, it has scrapped these incentive schemes and insists that the era of high-pressure sales is in the past. What does that leave? Not enough activity to support so many branches has been the banks’ view for the past two decades. The number of main bank branches peaked in 1988 at about 16,800 and has fallen to half this number, according to Bernstein Research. HSBC has been the most aggressive in trimming, as it has focused on the “mass affluent”, cutting 14 per cent of UK branches between 2009 and 2011.
There are still a lot compared with countries in southeast Asia and Scandinavia which have switched faster to online banking. “If you walk down Tottenham Court Road, it is bizarre how many branches there are,” says Chirantan Barua, an analyst at Bernstein in London. “If KKR [the US private equity group] were running Lloyds, I would bet my pension that it would have 30 per cent fewer branches.”
In practice, Lloyds is still partly state-owned, which introduces another complexity for such banks. They are so unpopular – and so indebted to the taxpayer after the 2007-08 crisis – that they cannot slash networks too fast. Not only would it damage the effort to present a customer-friendly face, but it would alienate politicians.
Indeed, critics such as Mr French argue that such state-supported banks have a social responsibility to keep branches open, even if they are not very profitable. “Given that all the banks have been bailed out in one way or another, the quid pro quo should be that they cross-subsidise branches.”
He wants them to retain branches in towns with high unemployment and public housing hurt by the shrinkage of manufacturing and blue-collar occupations. Two-thirds of closures have come in such districts, with the slack being taken up by payday lenders and pawnbrokers such as The Money Shop, which has expanded to 550 branches.
Others are betting that closures of branches and changes in how they work leaves a gap in the market. Metro Bank, billed as “Britain’s first new high street bank in 100 years”, yesterday opened its 24th “store”, in west London. It was founded by Vernon Hill, an entrepreneur who pioneered his customer-friendly approach to branches at Commerce Bancorp in the US.
“If John Lewis said: ‘You cannot come into our stores because it is too expensive and you should use the internet,’ it would be ridiculous. No other service industry would tell that to its customers,” says Craig Donaldson, Metro Bank’s chief executive. Metro opens until 8pm and offers instant account opening as well as branch managers who “can overrule the computer”.
But branches are expensive. McKinsey has estimated that the average cost for a bank to attract a new current account customer at a branch is about $330, while an online customer costs less than half of that. Richer customers, who tend to be more profitable for banks, are more likely to bank online than go into branches, which further tips the financial balance.
Banks walk a fine line in keeping enough branches open to retain a physical presence while shifting toward digital. The rise of mobile has made the line even finer – the number of counter transactions in Halifax branches is now falling by 5-10 per cent a year. “Our staff’s role is increasingly going be to teach customers to be active users, so they can do things easily for themselves,” says Mr Nicholson.
One thing is clear: no matter how the new breed of high street banks present themselves, putting the old name above the door does not mean returning to tradition inside. Captain Mainwaring was pompous but he wielded power in Walmington-on-Sea. His successors will be more pleasant and they will take their marching orders from a computer.
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