Emran Mian is Director of the Social Market Foundation
How will culture-change-driven-innovation change retail banking - will the future be branchless; will mobile banking grow fast; and will we get to a cashless future? Today’s Branching Out report answers these questions through a new joint survey with ComRes.
The bank branch definitely has a future. The branch is overwhelming preferred, with 62% of our survey preferring to access banking services through the branch. However despite this preference there was less evidence of a personal tie, with only a minority of people knowing the name of someone at their branch. In the written responses to our research, Head of Personal and Business Banking at Barclays, Steve Cooper, affirmed the future of the branch, and Accord the Union General Secretary, Ged Nichols, said that branch service will be the core of culture change and improved service. We believe that the innovation in automation that is now being rolled out will mean that fewer transactions and more of the complex services will be done in the branch and as a result more people will know the name of someone at their branch. Steve Cooper will be on our panel for our launch event this lunchtime.
However, we also believe that branch is under pressure. In our survey, only a minority of affluent and young people – the demographics that account for much of retail banking revenues – prefer the branch. The branch is also the channel seeing the most innovative entry, from Handelsbanken and Metrobank, making it the focus of competition. The branch is also the most expensive channel of service, fifty times more expensive than mobile service. It’s not surprising, therefore, that Nottingham University’s research showed that branch closures have been falling most heavily in former manufacturing areas. While we do wonder if the Post Office Bank with its 12,000 potential branches could make improve branch access, we are concerned that capping the market share of banks will have the effect of making closures in poorer areas more acute. Adrian Harvey, from Citizen’s Advice Bureau, writes in our report on the problems of financial exclusion of poor branch service. Adrian will be on our panel.
However, our report wonders if a future universal banking service lies in the innovation that ought to be possible in mobile banking; innovations that gives back control of payments to the consumer. Mark Mullen, CEO of first direct (a bank that doesn’t have any branches, but consistently is voted consumers’ bank of the year) suggests in his response, that banks have misunderstood the market opportunity in the online adoption laggards. His view is that they represent the obvious beta-testers for a much better banking service. We are excited by this opportunity and look forward to a much better service, citing American innovator, Moven as an example, and noting that another innovator, Simple, was bought by a big bank last week.
We think the cashless society is very close and is being held back by very high charges – merchant card charges are 25 times cash handling charges. We hope that banks will realise that by reducing merchant charges they will reduce the costs of the cash driven use of the branch. Adam Marshall from the British Chambers of Commerce will be at our event. The cashless society could be driven by future entrants in mobile banking, however we don’t see any on the horizon, and this worries us – that’s why we suggested Oyster card get a banking licence.
Indeed, we worry that nearly all of the entrants into banking are not offering a current account but are only offering lending. The lending market of the last decade was very competitive but it led to Northern Rock’s. We think good competition comes from both from current account innovation, but even more so from the peer to peer and crowd funding innovators. Current accounts contribute a quarter of banks’ revenues, profits that banks that just lend miss out on, making them more vulnerable to losses and going bust. If the FCA’s competition policy is macroprudential then at a minimum it should be easier to enter the current account market than the lending market, and perhaps the regulator should consider restricting lending licences to those offering a current account.
We wonder why the regulator doesn’t like crowd funding and peer-to-peer more. They seem much more macroprudential to us because losses in these platforms will never fall back on the taxpayer. We therefore agree with John Fingleton’s comment that we need a much more support for innovation in competition policy from the FCA. John will be on our panel as well.