What does the balancing act between physical and online financial services mean for competition, the provision of financial advice and financial inclusion?
The way we manage our money is changing fast. With smartphones becoming more powerful and more ubiquitous, innovations allowing us to manage our finances on the go are likely to keep coming. But, despite phenomenal growth in online banking logins and banking app downloads, branch transactions are declining only slowly. In this report, we look deeper into how consumers manage their money today, and will do so in future, using brand new consumer survey data. We find that although consumers are increasingly happy to manage day-to-day financial transactions online, when it comes to big decisions we continue to value the security provided by a bank branch.
The way we manage our money has been transformed by technology. We have a growing range of ways to spend our money, from traditional cash through contactless cards to wristbands, watches and our smartphones. And through this mobile technology, we’re increasingly able to communicate with our banks on the go. This growing choice in how consumers interact with their financial services providers is strengthening competition, but has also made it difficult for some banks to sustain the costs of high street branches, leading to consolidation and closures.
But, in financial services as in other markets, we continue to rely on a mix of ‘bricks’ – physical buildings – and ‘clicks’ – online and mobile communications. This report considers how we manage our money; how this has changed; and what financial services are likely to look like in future. We examine how far we have moved towards managing our finances online, and ask whether there’s a continued role for physical financial services. We focus on consumer financial services, though it is important to realise that this is only part of the story and access to physical financial services is also vital for many small- and medium-sized enterprises (SMEs).
Managing money online
Most consumers (70%) are happy to carry out simple, day-to-day tasks like checking their balance or paying bills online. A majority are also willing to apply for and manage familiar financial products, like credit cards and insurance, online. But when it comes to big financial decisions, like taking out a mortgage (47%) or seeking financial advice (51%), half the population still prefer to visit a branch.
- Older people are most likely to carry out all their financial tasks through branches, but physical financial services aren’t out of fashion yet. Younger people are particularly keen on the support they find in branches when they’re faced with big decisions.
- Four in ten (38%) UK consumers now carry out all of their financial transactions online – from simple day-to-day balance checks to applying for mortgages or seeking financial advice.
- But more than half (56%) of the population still use a range of different ways of contacting their financial services providers, depending on the task at hand.
- Nearly two-thirds of consumers (63%) would prefer to talk to someone face-to-face when making a big decision, and nearly half (47%) of all those who visited a branch in the last 12 months said this was for reassurance and support with complicated transactions.
- Only a third (32%) of UK consumers would consider using a bank which had no branches as their main financial services provider and more than a third (37%) couldn’t think of anything that would stop them from using branches to manage their money.
- While many consumers have downloaded mobile banking apps, evidence suggests that although they’re completely changing the way a small number of people manage their money, helping them to log in and check their finances every day, most people don’t make much use of them yet.
Our findings show that new technologies are complimentary to, rather than a substitute for, face-to-face contact. Consumers use mobile apps, online banking and branches for different tasks.
What do the financial services of the future look like?
Having assessed how consumers are managing their money today, we look ahead and anticipate how the balance between online, mobile and in-person banking may change in future.
We think in the coming years financial services providers are likely to develop specialist apps for particular transactions, which may try to mimic some parts of the in branch experience using functions like live or video chat.
While mobile-first and online-only providers will grow slowly, we can expect one of these providers to gain a significant market share by 2020.
We’re also likely to see the emergence of aggregator platforms which help consumers manage products held at different providers and budget thoroughly. For consumers, this should mean stronger competition in financial services, bringing innovation and better value.
Branches will become places we go to have conversations, rather than undertake transactions, and will be redesigned to make consumers feel comfortable. The higher overheads of this model, which would require skilled staff on the floor of branches, spending more time with each customer, means the trend towards branch closures is likely to continue. If most of us use branches less frequently, we may be willing to travel further to reach them. But the proximity and ease of access to physical financial services will remain important for some time to come as we continue to use cash. Rather than branches, these transactions could take place in community settings like supermarkets and Post Offices. Security will remain a concern, because in the online world we have only limited control. Financial services firms will continue to develop the security features of their online tools, but branches will remain important as a way of ensuring security.
Stronger competition should encourage innovation; but we need to ensure incumbents aren’t able to block new models they find threatening, particularly around account aggregation. The Post Office could increasingly act as a physical aggregator, building on its current partner banking model to ensure that consumers who prefer to manage their money in person are able to access a variety of financial services from a wide range of providers even as branch numbers fall.
Regulation of advice needs to be revised to ensure that high street financial services providers are able to offer the type of support that consumers desire on a flexible basis, although consumer interests must continue to be safeguarded. Financial services providers should also work more closely with third-sector financial capability organisations to ensure that consumers are signposted to relevant services when purchasing products, in the same way they are currently directed to debt charities in troubled times.
Access to physical financial services is likely to become the main barrier to financial inclusion, as the less affluent, those with only basic (GCSE-level or lower) qualifications and the unemployed are particularly likely to rely on branches to manage their money. We will need to consider alternative ways that these consumers can be provided with access to financial services and appropriate guidance.