In the age of digitalisation, do we really need branches anymore?

September 16, 2015

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Photo: Sean MacEntee

Photo: Sean MacEntee

Change in the culture of big banks that dominate the UK market has been slow to non-existent since the financial crisis, with mis-selling, criminal behaviour and ballooning debt – both public and private – near pre-crisis levels.

Even the limited regulatory reforms enacted since 2008 have been so weak, or watered down so much, that they are practically worthless. The “electric ringfence” is in tatters, Britain’s bank levy has been ditched thanks to Osborne’s capitulation to HSBC lobbying, whilst the new regulatory regime has been ineffective at best, and captured at worst.

You’d be forgiven for thinking, then, that Britain’s banking sector is a boorish behemoth resistant to change and reticent to reform, and you’d be right. Except in one area – consumer innovation.

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From the introduction of online banking almost 20 years ago (ironically, by Nationwide Building Society rather than a big bank) to contactless cards, mobile banking apps and mobile payment services like PingIt, the way that we interact with our banks has changed radically in living memory.

To their credit, big banks have been at the forefront of this drive for innovation, and many customers love the ease of using online, instant, and remote access to their money. Perhaps this is why many of the biggest banks have ploughed so much of their sizeable resources into technological “touchpoints” – because they create new experiences between the bank and its customer that engenders deeper loyalty, and therefore ultimately greater profit for the bank.

At the heart of this process lies tangibility. The more ways an individual can interact in an immediate and sensory way with the brand through touch, sight and feedback loops, the more they feel connected with and to the brand, and less likely to move away from it. This has a number of additional benefits for the bank, besides increased loyalty and profit.

Firstly, by placing a technological layer of separation between itself and the customer, the bank has greater control over the image it portrays of itself. This is not only in the sense that it can choose what content is displayed to the user, but also because the existence and creation of these innovations portrays the bank as a forward-looking, modern, and ultimately benevolent institution.

Put another way, it’s much harder to think of abstract and systemic abuse when you have concrete, tangible and positive branding that you interact with on a daily basis – whether that’s through the phone in your pocket or the personalised card in your wallet.

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Secondly, this “digitalisation”, as the industry gleefully calls it, enables far greater data collection, feeding targeted advertising, cross-selling and customer profiling. Whilst all of these things are not bad things in and of themselves, they empower incumbent banks to retain their dominant market position – which they then abuse, with near-complete legal impunity, over and over and over again. The logical conclusion of this form of digitalisation is the move to a cashless society, which is being portrayed as “inevitable” by big banks and other credit providers, and a threat to civil liberties by human rights organisations.

Third, technological separation disempowers both customers and staff from holding bad bank behaviour to account, or from exercising any professional judgment other than rigidly applying “one-size-fits-all” centrally determined policy. The “computer says no” phenomenon is one example of this, as is the difficulty to find helplines on some banks’ websites, or restrictions in the number of words that are allowed to be submitted on online complaints forms.

Ultimately, the more the bank can funnel and restrict the ways you can interact with it, the fewer and less meaningful those interactions are likely to become – for you, at least.

Yet as a result of these innovations, big banks are able to claim that the way we interact with our banks is changing – and with some justification, too. Whilst NatWest/RBS’ statement that their “most popular branch is the Reading to London train” is as risible as it is ridiculous, it’s hard to argue with their claim that online banking usage has risen 300% since 2010. Does this not fatally undermine the need for physical bank branches in the future?

In a word, no. Online and digital services have become an important part of the banking landscape, but they cannot – and should not – replace physical bank branches.

There are a number of practical reasons why not. For example, the fact that you can’t get bespoke advice from an FAQ page, or conduct the full range of services that you can in a branch over the counter at the Post Office. Equally, certain areas of the country can’t access the internet, whilst some people are unable or unwilling to do so. There’s also the point that the presence of a mobile banking van for one hour a week in a rural community is nowhere near an adequate replacement for a full-time branch. In 2015, 399 branches have been closed so far (of which 109 were the last bank in the community). This is despite 58% of the public wanting their bank to maintain a national branch network.

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But there are bigger reasons too, reasons which relate directly to the drive for digitalisation in the first place, and to the very culture and structure of British banks that have been so resistant to change.

Ultimately, Britain’s largest banks are monolithic money-making machines that exist to enrich their staff and their shareholders. They do this by maximising short-term profits, driving up their bank’s share price then reaping significant personal reward.

Such focus on short-termism led to the explosive growth of toxic derivative products that caused the financial crisis, but that doesn’t matter to banks because they are indemnified against loss by the too-big-to-fail problem and their ownership of the payments system. In the end, banks privatise their profits but socialise their losses, whilst being almost entirely immune to legal redress.

It follows, then, that anything that can drive up efficiency and reduce costs will enhance this process. Digitalisation, automation and the removal of expensive human labour then become the rational choice for such mega-banks, because it removes wage and real estate costs, at the same time as increasing loyalty and decreasing accountability from their customers (as described above).

If there is one thing that the financial crisis should have taught us, however, it’s that the over-reliance on this model of “universal” banking (and on finance-capital in general) is doomed to end in crisis.

Image credit: New Economics Foundation

[Image credit: New Economics Foundation]

Instead of a monoculture dominated by universal banks investing in the same types of volatile, short-term and ultimately risky investments, we need a diversity of different types of banks that invest in a variety of different ways.

Not just banks that speculate on financial bubbles, but banks that invest long-term in real economy assets, like renewable energy.

Not just banks that apply blanket criteria to lending decisions, but banks that understand local economies and opportunities, and are willing and able to work with local businesses to develop underprivileged and neglected regional communities.

Not just banks that see customers as numbers on a screen to extract profit from, but banks that work in the interests of their customers and are held accountable by them.

The drive towards digitalisation shows that our current financial system is weighted too heavily in favour of banks’ commercial interests, and not enough towards the maintenance of the essential social functions that banks provide. Therefore, instead of expecting a few enormous banks to be all things to all people, we should acquire different types of banks that perform different types of functions – including the maintenance of branches, and the stable provision of banking services to the public.

Of course, there is a bank that has the reach, resources and branch network available to perform these functions already, and which has the ability to redresses this balance by operating in the public interest. In fact, the public already own this bank – it’s called NatWest in England & Wales, and RBS in Scotland – so why isn’t the government making it work for us?

Branch closures and digitalisation are two sides of the same coin. But until we address what that coin is paying for, we’ll be left counting our pennies and cutting public services, while big banks push us notifications and take off with our pounds.

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