Visiting the local bank branch used to be an integral part of our daily lives, like going to the baker, the newsagent and the post office. Many transactional services, such as cash withdrawal, paying-in, account opening, have been automated, and most of us will pause a moment to think what life was like before ATMs.
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
Branch networks were growing until the financial crash of 2007-08, and today we see that there is less appetite for them, to the point where the closure rate is exceeding the opening rate. A fall of 74k branches has being registered in Europe since 2008, which represents a reduction of 31%. Last year France overtook Spain as the major European market with the highest number of branches per capita, according to new analysis by consultant McKinsey for the Financial Times.
However, France is also tentatively moving in the same direction. SocGen, which has closed 390 of the 2,186 branches it had at the end of 2015, has mergered with one of its subsidiary bank networks, Credit du Nord, which could involve more branch closures to boost digital operations.
Up until the 1990s-2000s most bank branches had an in-house credit officer who would prepare credit and mortgage requests, and together with the branch manager have much discretion on which ones to accept. This role progressively moved to regional banking centres which benefited from economies of scale to serve their local area. That's perfectly understandable and works well as long as the quality of service is maintained. And in many cases, it is exactly the quality of service, or rather decrease of it, that is making many people think twice. Not just for credit requests, but for many other banking services as well.
We also have seen a negative reaction to banking in general since the 2007-08 crisis, which helped to accelerate the penetration of FinTechs in the financial services marketplace. Technology being seen as a force of the future, and a way to challenge traditional market practices, was the go-to choice of many consumers put off by bankers' reckless behaviour. At C-Innovation we see this as a knee-jerk reaction, because not all banking is to blame for the crisis. Investment banking and its toxic sub-prime mortgage products are a world apart from the simple branch banking for individuals and businesses, which provide an essential service to society as a whole.
Branch Banking in the USA
One market to watch carefully is the USA. Despite being hot on FinTech and technology in general, cash is still a major part of people's lives. Perhaps "American Exceptionalism" has something to do with this? The question we are asking ourselves is: what is the minimal viable branch network? The old saying "bigger is better" might no longer be true. So the branch closures will reach a stable level at some point and then trail off. What's your opinion?.