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Bank Branches Have a Future

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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Predictably, reports this week that the French bank Societe Generale would close 20 percent of its branch offices were met with anger by a union representative, who said the plan was "scandalous and profoundly shocking because nothing justifies these branch closures." This sounds like the statement of someone still fighting a long-lost war, but even in the age of tech disruption, it contains a kernel of truth.

Traditional branch banking only appears to be dying. In fact, it's probably undergoing a transformation that eventually could force Societe Generale to reopen some of the retail offices it now wants to close.

The number of branches is falling everywhere. Yet, in the U.S. for example, more people still use physical branches than the Internet or mobile phones when they need a service:

According to the Federal Reserve, 85 percent of mobile banking users -- the most advanced bank clients -- still use branches from time to time. 

From a purely technical point of view, this doesn't make sense. Simple operations such as payments, transfers, deposits, blocking and reissuing credit and debit cards are now so reliably automated that there's no reason to use physical infrastructure for them. According to the Global Banking Annual Review published Wednesday by McKinsey, a small business in Europe is 4.5 times more likely to choose a bank with a good online platform than one with a branch nearby. 

Yet people still visit the branches to talk to tellers. They may do so less, but the need hasn't disappeared. The reasons are entirely psychological. It's not really easier to resolve an issue while looking a teller in the eye than on the phone or via e-mail. And a bank with a lot of nice-looking branches may be no better than an online bank without any bricks-and-mortar infrastructure -- in fact, it may have more problems because of higher costs -- but its physical reality provides a sense of safety.

People like things they can see and feel. That's why pure online banks now have negligible market share even though they provide the same services. The contact is necessary, though perhaps it should be of a different kind than what the banks provide today. 

The McKinsey report says big chunks of banks' revenue and profit from traditional retail businesses could be wiped out by fintech start-ups by 2025:

McKinsey believes some banks will need to turn into infrastructure providers for fintech companies. Others will exit the businesses in which the newcomers excel, concentrating instead on, say, corporate banking that is personal by nature. Others will acquire the start-ups. Then, it will be tempting to drastically cut physical networks. That wouldn't necessarily be wise: The offices can be put to better uses.

In its report, McKinsey advises bankers to bet on building an emotional connection to customers, the way successful tech companies such as Apple do. The advice often sounds banal, but it involves training customer-facing teams to be nicer, less concentrated on providing purely technical assistance or selling a product. Customers using technology for simple tasks will probably appreciate service of the kind they get at Apple's retail stores: friendly and a little nerdy and unpolished. 

Apple doesn't really need its physical network -- it can sell its products through other retailers and online -- but it chooses to keep the stores open because they are its human face. Figuring out how to lure people into bank offices and keep them there is worth the effort, if only because, according to McKinsey, banks earn a 22 percent return on equity from origination and sales -- pure customer interaction -- compared with 6 percent from merely providing credit.

Branches aren't an old-style alternative to good technology, they're a misused opportunity.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net