The shrinking bank

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The really important question raised by the new wave of job cuts and branch closures at banks is whether personal banking will eventually become almost entirely a telephone business. It is a fact of life that much financial service business can be done without the expense of high-street premises; face-to-face meetings are time-consuming and managing a large number of small officies is an administrative burden. Sadly for many bank employees, it is also a fact of life that doing business over the telephone requires fewer people.

The possibility that the telephone will replace the bank counter is not yet accepted by the mainstream banks and building societies. Midland's Firstdirect and Royal Bank of Scotland's Direct Line insurer are among the hottest properties in financial services anywhere in the world. Yet even the enthusiasts for them do not expect their market penetration to move much beyond 30 per cent.

The mainstream view is that telephone banking will will not supersede the bank counter: many people, probably most people, will still want to go into a bank.

In simple numbers of customers, that is probably true, at least for one more generation. But the danger, if that is the right word, is that the more sophisticated and richer customers will shift the bulk of their financial dealings to the telephone, leaving what is inevitably less profitable business to be handled at the branch.

The obvious parallel is not mail-order shopping, which has never made significant inroads in the UK and is in any case rather inconvenient, but the out-of-town supermarket. The experience of operations such as Firstdirect and Direct Line suggests that the sort of market to which telephone-based financial services appeal is at least as attactive as the mainstream one.

If, in addition, the 'manufacturing' and distribution costs of the services are lower than the conventional methods - which they are - it is hard to see how conventional financial services can survive at all. Unlike the corner shops, they cannot compete by being open for longer hours.

It is perhaps more helpful to look at what types of financial service cannot be supplied over the phone. There are really only two main services that will inevitably involve a bank branch: cash collection and selling products with a high service element.

The first will probably continue rather longer than many people involved in banking expect or hope. True, there are embryo schemes that will do away with cash - for example the smart plastic card announced last year. But it is hard to see money transfers becoming illegal, and while money exists in some form many people will prefer to use it. While people hand over hard cash, someone has to collect and recycle it.

That is not likely to be particularly profitable business, however. Nor need it require large-scale premises staffed by expensive people, as the building societies have shown. Barclays has had great success in Spain and Portugal with minimalist branches, providing only a bare cash-transaction service. We will keep high-street kiosks, but we may not need them to be branches as such.

The real future for the high street office is in selling services with a substantial added-value element. The added value can come in a number of ways.

At the very top of the personal banking market (and in medium-to-large commercial business) the service can almost be a stroking function: the assurance that the client is a wise and wonderful person and has made a very sound decision in entrusting his or her financial matters to such a secure, charming and efficient financial institution. Already the clearing banks are setting up specific divisions to provide such a service for their high-net-worth customers.

The interesting thing here will be the extent to which this service can be made profitable with a slightly wider clientele: the BMW market as well as the Bentley one. The answer is probably that the upper-middle market segment is both larger and potentially more profitable than the banks think, provided they can genuinely supply the quality of service.

Quality, in this instance, largely means accurate, disinterested advice on what financial services to buy - something not available from the door-to-door sales staff of most financial institutions.

But between the kiosks and the old-style banking parlours there may be little room. Some people will always want the assurance of the high-street office to know that their money is safe. Others will like the feeling that they are able to hand cash over a real counter to real people. Further, natural inertia will protect the banks and building societies, for most people do not willingly change habits unless change is forced upon them.

But it is beyond dispute that the branch networks of banks and building societies will be hollowed out over the next generation. The only issue is how far the process will go.