The Taiwan Banker

Technological innovation in finance is challenging the traditional banking model reliant on brick-and-mortar branches to serve customers. The rapid evolution of digital banking (in addition to increasing cost pressures) necessitates that banks transform their branch networks to better serve client needs.In recent years, advances in technology and increased internet availability have changed how we manage our day-to-day lives. When shopping, customers in some countries can opt to use self-service counters to check out their purchase. Immigration controls in some airports include e-gates that scan the passport information and compare it to the traveler’s details. Technological innovation is affecting financial services too, with European banks feeling acute pressure to evolve their business models to capture opportunities in the digital economy. With simple transactions, such as cash deposits and bill payments, just a few clicks away banks have started to reconsider the relevance of bank branches in the digital age and the role that they play in their customer interaction models. Successful operation of internet only banks intensifies the pressure on providers heavily invested in the physical branch network. According to the Financial Conduct Authority – the United Kingdom’s financial watchdog – the volume of branch interactions in the UK fell by 42% annually between 2011 and 2016. On the other hand, customer use of mobile applications rose a staggering 354% year-on-year between 2012 and 2017. The trend is clear: Customers increasingly use digital channels for their day-to-day banking needs as they look for convenience and speed. To stay competitive in this environment, banks that operate branches are re-thinking and re-purposing their offices. The first sign of changeIn the UK, the first significant challenge to the traditional banking distribution model came not from technology but from a different vision for customer service, particularly with regard to what a bank branch should look and feel like. Metro Bank, the first high street bank to receive a banking license in over 100 years in the UK, opened its first store (it avoids referring to its offices as branches) in central London in 2010 and instantly challenged what had been previously accepted as universal truth. Certain things were just common sense. For example, Metro Bank’s opening hours go well beyond the traditional operating model of nine to five on weekdays and even shorter hours on Saturday. This recognizes that most customers would like the option to visit a bank branch in the evening or at the weekend. Metro Bank’s branches offer services, such as safe deposit boxes for customers’ valuables, which traditional banks have long withdrawn from and they have the capability to print bank cards during the customer’s visit. The bank advertises its child- and pet-friendly environment. It even re-introduced a drive-thru bank in the UK market where customers can undertake some simple transactions from the comfort of their car with the help of the bank’s cashier. Metro Bank says that face-to-face interaction remains a valuable asset in the banking industry to this day and it’s working to respond to what their customers say is important to them. Metro Bank’s operating model is not new, however, and is based on the success story of Commerce Bank based in the United States. Vernon Hill, who founded the US bank in 1973, wanted to apply the same customer service principles – to which branch network is an essential element – in the UK market. In a strange twist of fate, however, Metro Bank’s co-founder Anthony Thomson subsequently left the bank in 2014 to establish Atom Bank, a UK lender that provides services through digital channels only. This marks a significant shift in the banking industry landscape that happened since Metro Bank first opened its doors in 2010. Commenting on relevance of bank branches in the digital age, Thomson was quoted by The Telegraph to say that ‘the world has moved on’. It seems that what represented cutting edge thinking in customer service in 2000s does not address the challenges or use the opportunities that inhabit the digital world of 2018. Going digital in the branchIndeed, many banks in Europe now face the question: Is branch network an asset or a liability for their operating models? Reduced numbers of customer visits to local branches threaten their long-term viability, triggering some soul-searching at the boardroom level. How do branches fit into the evolving business model and is there a role for them in the world where you can make bank transfers and pay your bills from the comfort of your home? Response differs between banks, but one trend is clear – the number of bank branches across Europe is on the wane. The FCA estimates that the number of bank and building society branches in the UK fell by 22% between 2012 and 2016 to 8,981 branches. According to KfW Research, a research arm of the German development bank, one in four branches in Germany have been shut down since 2000, a decline of 10,200 locations. Similar trends are evident throughout Western Europe including the Netherlands (66% of branches closed between 2000 and 2015), Denmark (53%) and Belgium (48%) experiencing even more severe changes. Most banks with established branch networks continue to believe that branches remain an asset to their organizations, but their functionality and operations require transformation to reflect the changing environment and offer services that cannot be fulfilled through a smartphone or a tablet. More often than not, changes to branches involve integration of physical and digital capabilities so that customers can use in-branch technology for basic services, a kind of extension of their smartphone functionality, but also have access to an adviser for more complex enquiries. This becomes part and parcel of the so-called omni-channel model where customers can access services through all media available (including digital, online, in-branch, on the phone, at the ATM etc.) and sometimes even for the same transaction. Barclays, an international bank whose reputation for innovation goes back to 1967 when it launched the world’s first ATM in north London, has been revamping its UK branches over the last few years. In the new model, there are no customer counters. Instead, the customer is greeted by the Barclays’ Community Banker with an iPad who quickly determines what service the customer needs and directs him or her to the most appropriate channel. Simple transactions can be handled by the so-called Assisted Service Counters, which can accept deposits and cheques, process bill payments and deal with cash withdrawals. Where customers come to the branch to discuss a more complicated service, such as a loan or mortgage application, they will have an option for a face-to-face meeting. Doing away with customer counters is not immediately popular since this removes an important element of customer service – human interaction – as clients are forced to deal with soulless technology. It’s not just that they wouldn’t ask how your day has been; they can be also prone to faults and errors. Most importantly, customers may feel daunted by the need to operate technology for tasks they previously relied on bank cashiers to do for them. To respond to these concerns, Barclays launched a Digital Eagles campaign in which its staff members help customers to navigate digital tools so that they can develop proficiency in digital banking and eventually be able to handle it on their own. Code Playground also teaches children how to code and stay safe online, recognizing importance of digital education from the young age. Still, some customers prefer to have a face-to-face contact when handling their basic finances. Elderly people might struggle to use the in-branch technology because of poor eyesight or reduced ability to operate a touch screen. Full financial inclusion will depend on how banks address these concerns. Industry analysts note a pattern of how banks structure their branch operations in Europe and around the world. Bigger offices offer a full range of services whilst smaller outfits focus more on straightforward tasks, some of which are handled through self-service capabilities. Erste Group, one of the largest financial services providers in Central and Eastern Europe with over 2,500 branches across the continent, applies similar approach to its branch transformation. Its Austrian business Erste Bank Oesterreich deals with simple transactions, such as opening a bank account or making a deposit, in service centers located in busy areas frequently visited by customers (e.g. shopping malls or railway stations). This is complemented by more in-depth advisory services at the larger branches. As bank advisers spend less time on processing straightforward transactions, they can focus on what customers want most: financial advice. The new model is being rolled out to other markets, including Slovakia and Hungary. Other banks across Europe classify their physical presence in similar terms. For example, BBVA, the second-largest bank in Spain, designed ‘convenience’ branches equipped with self-service technology and also operates larger locations offering a full range of financial advice and services. UniCredit, Italy’s leading bank, has articulated its transformation strategy along three formats: a FULL SERVICE Branch with 360 degree service, a SMART Branch with partially automated operation and a CASH-LESS Branch which offers basic products and remote advisory service only. Talks about complex financial transactions remaining strictly within the realm of face-to-face interaction do not fully reflect the reality as financial innovation encroaches into something so personal as financial advice or mortgage interview. Some banks have successfully experimented with the in-branch conference facilities which enable customers a speedy access to advisors located elsewhere and allows banks to manage their workload between offices more effectively. Nationwide, the world’s largest building society based in the UK, says that over 400 of its branches now use the video call technology it refers to as Nationwide Now. Clients and bank advisers are not in the same room but the discussion outcome is unlikely to differ from that of a more conventional scenario. Experiments with technology to make a branch visit more memorable take place across the whole of Europe. Sberbank, Russia’s largest bank with about 14,000 branches in the country, is trialing interactive technology that ‘scans’ the customers’ image and highlights the most relevant products to them based on their profile. The Lloyds Bank’s concept branch in south London operates a large screen where customers can browse the neighborhood map to check the local housing prices, presumably in preparation for their mortgage application. This digital branch has another differentiating feature – a fragrant smell meant to grab the passing customers’ attention. ‘The branch is the bank’Erste Group is certain that direct customer interaction which branch network facilitates, is an asset to its business and should be safeguarded. It insists that a balanced model incorporating digital and physical presence ensures that loans in the overseas markets are funded by the deposits in the relevant local currency. In his interview with the Financial Times in July 2018, Erste Group’s CEO Andreas Treichl also pointed out that simple transactions might be taken over by technology firms in the future. To remain relevant, banks will need to ensure that they can add value that technology cannot. Operating a branch network appears to be an integral part to this attempt at differentiation. Handelsbanken, a Swedish lender with operations also across Denmark, Finland, Norway, the UK and the Netherlands, considers that branches will remain an essential component of the banking service in the future. Its famous ‘the branch is the bank’ remains the company’s motto even in the digital age. With the 800-strong branch network, the de-centralized model which leaves it to the local branch to determine the best way to achieve the growth strategy stands out. The bank believes that its local presence allows it to remain relevant by better understanding the customer needs as they continue to evolve. It utilizes this direct customer access in developing its business and integrates the digital proposition into what it considers the core of its business – the branch network. As a result, it makes use of the digital capability but also maintains the capacity for face-to-face interaction in the local branches. New thinking for new eraIndustry observers note that branch transformation is one of the most complex and demanding projects that banks can undertake given that it touches on nearly every aspect of the banking business, including staff training and IT system upgrades. A report by BearingPoint, a management and technology consultancy, highlights the importance of banks understanding what customers actually expect and need when they come to the branch in contrast to simply offering the existing range of products in a more modern looking setting. Fresh thinking is needed, particularly on what the future banking will look like and how banks can support the emerging trends or try to establish new ones. Deutsche Bank now operates Quartier Zukunft in Berlin as an attempt to test various ideas and possibilities in what it describes as four dimensions: innovation, coaching, inspiration and community. Customers can meet financial advisors in the branch, attend a lecture, a coaching session or even a cultural event, engage in a discussion with other businesses or make use of the co-working space. The in-branch activities are not necessarily limited to financial topics. They also include an event programme with a workshop on how to be a Berliner to help those new to the city. Customers can conduct their discussions over a lunch or a coffee at the in-branch Q Café, a concept successfully used now by a large number of banks. Bank of Ireland’s branch in its home market advertises similar services, including free work spaces, meeting rooms, conference and event areas. Businesses can showcase their ideas and products as well as obtain financial advice from the bank specialists. Creating a sense of community – something that a lot of customers would say has been lacking in their interaction with banks – appears to be at the heart of this new vision. It strives to promote opportunities for networking, facilitate ideas sharing and provide financial advice input. Business customers, particularly start-ups and smaller enterprises, stand to benefit most from this new setting as their needs go beyond the banks’ standard online and offline service that works well for retail clients.Some branches transform, but most disappearOverall, banking industry remains committed to the ‘branch’ as it offers access to new customers and keeps an eye on the customer trends. There is no getting away from the fact, however, that branch numbers are falling fast across Europe as banks are busy reducing their physical footprint to respond to the increasing cost pressures and reflect changes in strategy. Banks with branch networks at the heart of their business models also do not expect significant expansion in the future. Metro Bank revised down its original plans to open 200 ‘stores’ by 2020 to just 110. Local communities and financial regulators are understandably concerned as branches tend to close in the areas which already have limited access to banking services, for example in rural and small town locations. According to UK Parliament’s research, about 1,500 communities in the UK have now lost all their bank branches. This is becoming a significant social, not just commercial, issue. Mobile branches are a partial solution to this problem as some banks operate travelling vans that go to certain locations at scheduled times to perform some basic banking services. The idea is not new as National Bank of Scotland (now part of the Royal Bank of Scotland) in the UK first launched the service in 1946, but it has been brought again into prominence in light of branch closures. High street banks in the UK also operate partnerships with the Post Office allowing their customers to perform some straightforward tasks through the nationwide network of around 11,500 branches. These models alleviate a number of concerns, but it is becoming increasingly obvious that a physical bank branch will soon be a thing of the past in the less wealthy and less populated areas. Branch innovation that uses the latest technology and customer oriented thinking will be restricted to metropolitan areas and larger towns where banks can benefit from a wider and more affluent customer pool.