We have seen headlines heralding the ‘death’ of brokers, however perhaps we need to look at the whole financial distribution market and instead of worrying about brokers take an objective view of enterprise, efficiency, and distribution in general. I did some research on this by looking at the American market, talking to other brokers, by looking at operational efficiency planning in other countries and markets, and lastly was by putting up a post on www.thepropertypin.com which is a site where regular folks who are bearish on property (and into economics) hang out.
There are a few sites out there that I like to browse in order to gauge public sentiment, but the ‘Pin’ as its referred to by the folks who frequent it is perhaps the most open and honest, and it tends to have some heavy economic technicians frequenting it. Granted, the tone of the site is not one that perhaps everybody agrees with but the calibre of the posters knowledge is well above the average Internet forum.
Regarding the title ‘Branch Distribution by Banks is Dead’, I will approach this from different angles, to start we need to look at the core activities and costs of the average banking branch. The activities tend to be (by and large) things that don’t actually require the level of staff, space, or cost involved, for instance: Lodging cheques doesn’t require human interaction, I know because I have been lodging cheques by post for years, and RaboDirect have built up a huge level of deposits having never met any of their customers face to face. So that means lodging cheques is stricken off.
Lodging cash: Do you need to have a whole branch in place to lodge cash? Night deposit boxes work perfectly well for many businesses, and if you really need to lodge cash then this could work well. So lodging cash is getting stricken off our list as well.
Withdrawing money: One issue I would have is with ATM limits, I think a person should have some ability to exercise the limit of what they want to withdraw from their own account, indeed I pay a charge to access my own money from an ATM, I pay that charge willingly, but one flaw is that it’s the same price for a withdrawal of €20 as it is for €200 and that is a mistake, or at least one of the few examples of getting penalised for
Coins: Money distribution requires coins and banks normally have a facility for that, however, it’s not a lucrative business and that ties in with the next point.
Foreign Exchange: On a branch level this doesn’t account for much of the turnover at all (except for the airport branch of course!), and if there was a facility online where you could get the money delivered or where you could pick it up at the airport would that work? In any case, one regional branch could cover a very large area and take care of many services that people may want to still do in person.
On that note, it would make sense in terms of efficiencies to have one regional branch do only the work that absolutely cannot be done via the phone or over the web, and to charge a high premium for entering the branch, if you knew it would cost you €5 to walk in the door no matter what you were thinking of doing it would cut down instantly on branch traffic, and that would save banks a lot of money because they wouldn’t have to pay wages for desk clerks. On top of the €5 you would have to pay for whatever transaction you chose, this would help to charge the higher maintenance customers and reward the ones who don’t require personal help.
Through the web, letters, and call centres, they could still promote other avenues of business and if required you may have a meeting at the branch, of course, those meetings would merit free entry!
Aside from this would be how to create a customer experience, and in order to do that one could perhaps have a team in a call centre with a ‘branch manager’ and this person would look after the clients of (for instance) three or four of the branches that no longer exist, along with the team. The bank would give the virtual branch staff performance targets for service and customer satisfaction and gauge things accordingly. One may argue ‘this would never work’ but the fact of the matter is that branches are closing, and it can work, just because you don’t accept it today doesn’t mean it won’t happen.
Even if we don’t move to ‘virtual branches’ the level of staff in branches is likely high compared to the possible efficiencies, I went into a bank branch today during the course of writing this article, and noticed that at least half of the people in the queue were not there to do anything that required a teller, and that is not a productive use of their own time, nor the tellers so an decent charge to speak to a person would likely eradicate this behaviour very quick in the same way that a simple levy on plastic bags has almost wiped out the plastic bag litter that was endemic in this country only a few years ago.
A small well trained team could look after the services that do require a person and people should have to pay more for that, equally, those of us who operate efficiently with the bank should be rewarded with lower fees and other advantages, the current system means that in a way by not using the branch I subsidise heavy branch users.
Another key point will be for banks to merge cash machines, they might complain about branding but in terms of efficiency why not just have a few machines co-owned/operated by banks thus giving them greater exposure and costs split according to the market usage of a particular machine, so if AIB customers used a machine then AIB pay more for the maintenance of that machine, and their customers are charged for using ATM’s so that would be fair.
Worldwide one of the fastest growing areas of financial commerce is MBanking (because mobile phones have penetrated second and third world markets faster than computers/broadband) and this doesn’t require branches either, this could be a case for seeing a market actually develop without a branch focus and arrive on the market with first world efficiencies already in place.
Banks will have to at least face a shifting public paradigm in order to stay put, with all of my Utopian talk one thing holds true, face to face dealings are better, and the web won’t replace that, but that doesn’t mean branches will remain in their present guise. One commenter who I know only by their internet handle BuyHighSellLow talked about seeing ‘lounge style banks’ with couches and coffee machines, and that the reason for this would be to reduce the austere environment in banks, this is already the case with ‘The Mortgage Store’ which are tied agents of ICS. Will it cross over into the standard banks? It’s unsure at the moment, one thing no bank has yet done in the Irish market is to ‘capture cool’.
In order to ‘capture cool’ you need to have a new offering and make it simple and workable, the company that did this best was Apple with thee iPod, iPods are cool, and you can’t really take that mantle away from them, iPhones are even cooler, no bank or financial institution however is ‘cool’ and much as I’d like to dream that here at Irish Mortgage Brokers we are cool, the fact is that we are still finance industry people and nobody in finance is cool. It could happen though, Eddie Hobbs gained public acceptance and popularity via the medium of finance and in the UK Martin Lewis, the Money Saving Expert is considered cool and is widely liked. Both of these men gained notice by being consumer champions, but the real realm of market change will be in the area of Financial Education.
Halifax had advertisements that were funny, and that’s the first step on being the next ‘big thing’ but for whatever reason, be it customer apathy or market circumstances, they now look much the same as any other bank branch and indeed they have not seen market share develop at the speed they had hoped. During the last decade there was unprecedented economic growth and cheap money which meant that many banks were actually trying to increase branch numbers ‘making hay while the sun shines’ as the saying goes, but now with deposits growth slowing it not be inaccurate to assume that banks will now go through a phase of taking customers from each other as opposed to enlarging the overall size of the market.
Current accounts and many deposits are an excellent income stream for banks, they use that money and lend it out to other people at higher rates, but there are other factors at play now, such as the interbank rate market and that is squeezing profits, branches are expensive, if the market isn’t expanding then one thing banks and indeed any industry will do is work at cutting costs, bye bye unprofitable branches.
The downside is that there is a certain correlation between bank presence and the wealth of the immediate area, while not tied implicitly they are related, and poor areas will likely see more job losses (if their inhabitants are primarily in unskilled/low end labour market/service sector workers) and thus have less money to put into the bank and those branches will be the ones that close first, however, it will be in neighbourhoods that actually needs a bank the most. Upmarket neighbourhoods have a much higher bank to inhabitant ratio than poorer areas.
You can do your own research on this concept, go to an area you consider posh, then go to an area you consider poor, count the number of banks in the area, and do a comparison, because wealthy areas tend to have larger houses/plots you will find that in neighbourhoods of equal land size that the population of the wealthy area per square kilometer is smaller than the poorer neighbourhood where houses tend to be smaller and closer together, and yet, the wealthy area will have more banks per head of population. Jessie James, when asked why he robbed banks, replied ‘because that’s where the money is’, and it would seem that banks in turn open in certain areas because ‘that’s where the money is’.
We have also seen banks sell on their assets (head offices etc.) in lease back schemes such as AIB and several others did. Is this a sign they could see a dark cloud on the horizon given that it occurred at the height of the boom? Possibly, because financial institutions have the best people in the country in the area of financial forecasting working for them, if anybody could see a turn in the market coming it is them. Another thing that is hurting the deposit market is the reign of internet banks. NorthernRock (who despite turmoil still have great rates) and RaboDirect both operate successfully and never meet clients. The absence of all associated costs (and a good treasury department to get returns for the deposits) means they can out match most of the banks who are supporting high street costs.
There is a contrary argument, that branch banking will make a return, and Bank of Ireland clearly feel that way as they have embarked on a €30m investment in their Dublin region branches. In the 1990’s they were mercilessly chopping branches, so why change direction now? Does an economic slowdown represent an opportunity that the rest of us are not seeing? Especially when the slowdown now is expected to be ongoing for quite some time?
One obvious answer is that banks would close more branches if it weren’t for competition, PTsb has made big inroads in the general banking market and NIB is trying to do the same (although they closed their city centre branch on O’Connell St. in Dublin), and it may be this competition that keeps branches alive, but in a future of cost base efficiencies will the expenses of multiple locations and the higher overheads (in comparison to centralised overheads) be justified? I think not, and I think that like many of the economical shifts in history, the majority of people -myself included- only realise something has happened after they have passed through it and not while they are in it.
Branches, financial institutions, brokers and bank advisors make a living, at least in part, by the majority of the population not being financially literate, and this is the next area of education that will probably face the largest change. Financial education and financial literacy is not taught in schools, you might leave school being able to speak Irish (and I acknowledge the value of that from an educational and cultural standpoint) but unable to understand simple financial transactions that will affect you for the rest of your life.
It used to be the case that a bank would boast about the number of branches it had, and that was a primary indicator of the size, strength and efficiency of the operation, but as more and more people tune in online that will change, if you could log in and talk to a person over a webcam and get the information you need, print off a page with the instructions/order and then go to a common centre and simply drop it into a box or have a person there sign it in then that would create efficiencies for both banks and customers. The same could be done by telephone although the advantage of the online system is that it has the opportunity for more intelligent interaction than a telephone service does.
How would that work? Well, banks would have to open (for instance) a few centres in different areas, the costs of which are shared, it isn’t dissimilar to the idea mentioned before of universal ATM’s except that this would be a place with financial services workers in it, the efficiency for the customer would be that they could opt not to queue (if it was for something that just required a drop off, and for the institution it would be better because people would be arriving in knowing in advance exactly what had to be done if they did require interaction for the transaction.
To elucidate further, imagine you have to deposit cash, then you could log in, and print off your cash lodgement cert, and go to a centre, if you wanted coins you could order them online and choose your pick up point, then print off your order form, once the order is placed a person in a bank could get it ready and for this you’d need to go to the window and talk to who ever takes care of these orders, show them your order form and be gone, with the amount of coin you needed -fast. My ideas may be the biggest white elephants ever mentioned, but the idea that branch banking is in decline is not.
The increased opportunity for information harvesting would also give banks and financial institutions a better ability to market specifically to the right clients, the more that a person enters their information the better able they are to profile a client and then target their specific needs.
The things mentioned in this article are hypothetical, however they are trends that we may see develop eventually, it will require a move from banks perhaps more so than from bank users in order to effect it, but if a move in this direction can create profitability then that will be the onus for banks to embrace the concepts. The time-frame? That’s anybodies guess, right now many banks internet banking doesn’t work on Apple Mac computers! We will need to see a world where every last thing is not tied to certain technologies in order to get the morphing open systems mentioned thus far.
If I had to choose between branches and direct banking I would opt for direct if there were alternatives like the ones in this article, certainly the changing face of the economy will likely flex its influence on how business is done rather faster than the other way around.