Out on a limb: bleak future for bank branches

Banks are out of touch with customer preferences in failing to invest heavily in digital banking and maintaining branches that only low-value customers appreciate, claims new JP Morgan research.

One of the central findings of the JP Morgan Australian Mortgage Industry Report, which was written in collaboration with Digital Finance Analytics (DFA) and published this week, is that the rapid penetration of digital technology means banks can no longer rely on branch networks to act as a barrier to entry.

Martin North, principal of DFA, said banks need to re-align their branch presence and invest heavily in digital capabilities to remain relevant to their evolving client base.

“Branch preference appears to be on the decline for the most profitable customer segments” he said.

In contrast only those with simpler banking needs – battlers, disadvantaged, multicultural and senior – continue to prefer branches. These four segments account for one third of households whereas the remaining two-thirds either prefer online or are strongly aligned to online.

Economics of branch banking challenged

JP Morgan’s banking analyst Scott Manning said it’s similar to the rapid growth of mortgage brokers that now account for 45 per cent of the market. “It isn’t because they are advertising, but it is a customer preference to go to a broker and have someone bid for their business.”

The economics of branch banking are being challenged, in their view.

“It is already hard to make a branch profitable,” said North. “People are saying they don’t want to be in a branch.”

The experience of JP Morgan Chase with bank accounts and credit cards shows it is in the banks’ interests to go digital.

Firstly, it is more efficient, with fully digital bank accounts generating about 70 per cent of efficiency savings versus traditional accounts and 30 per cent efficiency savings from fully digital credit cards compared with traditional cards.

Furthermore, customer retention rates were more than 30 per cent higher for fully digital bank accounts and credit cards than the traditional versions.

ANZ leading branch closures

In the October 2011 edition of JP Morgan’s mortgage industry report, it identified that around 30 per cent of the major banks’ network was at risk of being stranded in locations where customer preferences weren’t strongly aligned with branches. Bankers therefore needed to better identify customer preferences by providing a mix of full-service branches, agencies, kiosks, ATMs and online.

Of the majors, ANZ has closed the most branches since 2008, both in absolute numbers and as a proportion of its branch network. Net, it has cut 30 branches, broadly spread across customer segments and consistent with its target to cut floor space by 25 per cent and reduce staff by 15 per cent through replacing lower-value branch staff with more highly trained ‘super salesmen’/advisors.

Commonwealth Bank of Australia, on the other hand, has added around 30 net branches. However it has also vastly invested in its digital platform and rolled out products such as ‘Kaching’ as it has ramped up its distribution efforts.

According to JP Morgan, this may have supported its leading earnings per share (EPS) compound annual growth rate (CAGR) of six per cent versus its peers’ three per cent EPS CAGR.

National Australia Bank has also closed branches, reducing its network by 25 branches since 2008, broadly across customer segments. “However, overall growth rates have improved due to re-engagement with the broker channel.”

Westpac sits in the middle, opening just five branches, net, adding branches in the segments of young families, multi-cultural, affluent mid- to outer-suburb individuals and suburban white- and blue-collar workers while closing branches in the less profitable rural and disadvantaged segments.

JP Morgan, bank branches, research, Digital Finance Analytics, ATNs, ANZ, CBA, NAB, Westpac
Marion Williams, vteckchandani@financialpublications.com.au
Article Posted:
April 04, 2014

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