The great pruning

“WHY can’t I just talk to somebody?” screams an exasperated customer in a 1980s advertisement for Barclays, a British bank. In the dystopian future it depicted, banking is entirely automated. A computer-generated face on a screen is denying all requests for a loan—until the customer smashes it. The camera then cuts to an image of a smiling Barclays adviser sitting in a busy suburban branch, eager to help. “Do you worry the more banks become automated, the more you’ll become just a number?” a kindly voice asks.

Thirty years on, the vision the admen fretted about is coming to pass, while branches of the sort presented as the solution are largely empty. Customers, it seems, are perfectly happy dealing with machines—often their mobile phones—to check their balances or make a payment. Barclays has even embraced video banking: in what it called “a watershed moment”, it recently launched a round-the-clock service that allows clients to speak to advisers on a screen.

For years branch numbers in rich countries have been on a downward path, a trend that shows no signs of abating. In America there are 1,441 fewer branches today than a year ago, and 5,439 fewer than at the peak reached in 2008 (see chart). Banks long seen as brick-and-mortar enthusiasts, such as JPMorgan Chase, have announced retrenchment plans. The decline has been even quicker in the euro zone, which has roughly 160,000 branches, many more than America despite a similar population.

The rise of ATMs, telephone banking, the internet and now smartphones has led to declines of 5-8% a year in the number of visits to branches, according to Ian Walsh at the Boston Consulting Group. That is the sort of slump that pushed high-street video-rental outfits into oblivion. Worse, many of the services once delivered in branches, such as international transfers or personal loans, are now being offered by nimble “financial technology” groups (see this week’s special report). That has dented revenue even while costs remain stubbornly high.

A handful of “challenger” banks with online-only offerings are popping up, too. The newcomers have yet to take much market share, but that may change. At the moment low interest rates leave no bank in a position to pay very much interest on deposits. But when rates start to rise, those that do not have expensive branches should be able to offer higher deposit rates to lure customers.

Branches still have their uses. Older customers, a wealthy and profitable slice of the population, like them. Shops use them to deposit the contents of their tills, insofar as their clients still pay with cash. And politicians berate banks that close branches, particularly in rural areas.

Moreover, argue branches’ defenders, although day-to-day transactions are largely done online nowadays, customers typically still want to come in to discuss more fiddly matters, such as obtaining a mortgage or buying investment products. “There are key touchpoints in your financial life where you want to connect with a person,” says John Flint, head of retail banking at HSBC. Whereas transactions using tellers are expensive for banks—each costs $4 or so, versus 4 cents for its online equivalent—arranging loans and the like is a potential source of revenue.

Banks are thus adapting their branches to do less transacting and more selling. Each refurbishment inevitably results in fewer tellers and more meeting rooms where staff can pitch products. Employees armed with iPads dissuade customers from waiting for tellers, pushing them instead to souped-up ATMs to deposit cheques, for example, or prodding them to download an app to do the same thing via a smartphone. CaixaBank, a big Spanish lender, has taken the next step, sending iPad-wielding salesmen out of the branch altogether, to call on clients at their offices.

Uniform branch formats are being replaced by a range of set-ups, from large flagship “stores” to poky ones with just a couple of desks. Some banks are opening branches in less prominent and cheaper spots. Others are trimming business hours, or staying shut on entire workdays, to save on labour. The aim is to cut the expense of renting and staffing branches from something like 60% of the total cost of running a retail bank to 40%.

Such incrementalism may be insufficient, however. Bank bosses worry that their phone-addicted children have never been inside a branch. That is not surprising: they are the fastest adopters of new technology, and are too young to have mortgages or need investment advice. Whether they will start visiting branches when they get to the “key touchpoints” in their financial lives is the big unknown. Many think not: mortgages and loans can be obtained online now.

Yet even if some branches now have more staff than customers for much of the day, a visible high-street network serves to reassure those who equate physical presence with financial soundness. Some 30-40% of bank clients almost never set foot in one, according to Novantas, a consultancy, yet still stick with the high-street chains. “Twenty years ago, the branch was the bank,” says Kevin Travis of Novantas. No longer. People have gone from being branch-dependent to being merely psychologically attached to them, he argues.

That is a thin premise to justify billions of dollars of cost. After a few good experiences with a call-centre or the video systems all banks are starting to offer, previously hidebound customers may stop caring whether their local branch survives. The most likely outcome is much thinner foliage: if two-thirds of America’s branches closed, it would still have more per person than Norway. Customers who crave reassurance can be comforted with a handful of flagship branches they might visit once a decade, if that. Many bankers hope to imitate Apple, which sells its gizmos online with the help of a few ambassadorial showrooms. Pass the secateurs.