By now, the words “new normal” have taken on a life of their own. They have extended far beyond wearing masks and social distancing. For the banking and finance industries, creating a “new normal” is synonymous with branchless banking, mobile banking, and reducing physical touchpoints.  

As a consequence, bank branches are closing at record numbers. And while many Fintechs cheer at the prospect of branchless banking, is the dissolution of physical branches truly the future? It’s a question being asked by bankers, founders, and digital leaders, as well as anyone else interested in the future of finance. Let’s delve deeper into this topic to see if we can find some insights into branchless banking. 

Branch Closings Started Pre-Covid 

For years, banks across the globe have been closing at unprecedented rates. In the United States, branch closures have picked up speed since the housing crisis of 2008.  

According to the National Community Reinvestment Coalition (NCRC), more than 4,400 bank branches closed across the US between 2017-2020. That is a 5.1% decline. Tough economic times often lead to branch closures. Since the onset of the COVID-19 pandemic and with the rise of digital banking and Fintech, banks worldwide have only increased the rate at which they shut down their physical branches. Six European Union-based banks rank amongst the top ten when listed in terms of branch reduction. Mirroring these statistics, Chinese and Australian banks also rank high when it comes to reducing the number of physical branches. In Spain, heavy hitters such as Banco Santander are getting ready to close nearly 1,000 branches. German heavyweight Deutsche Bank plans on closing 150 additional branches. 

What Do the Numbers Say? 

In a survey conducted by the Economist Intelligence Unit, over 65% of 300 global banking executives consulted believe that branch-based banking will be a thing of the past within five years. And over 95% of the participants think that the last bank branches will close within ten years.  

These banking industry insights corroborate customer spending patterns. In the Asia-Pacific (APAC) region, more than 90% of consumers are using contactless payments. More than 80% of the respondents of a Mastercard survey said they saw contactless as a “cleaner way to pay”. In Africa, nearly $500 billion were paid using mobile money accounts. Over 50% of eCommerce shoppers in the Gulf Cooperation Council (GCC) area preferred digital payments in 2020, making it the first year in which digital payments exceeded Cash on Delivery (COD) in popularity.  

However, branch-based banking continues to be important in parts of the world where the fintech ecosystem is still maturing. In India, 83% of people prefer cash on delivery to digital payments. That’s the equivalent of over one billion people. Pakistan is another country where cash payments remain relatively popular. In Vietnam, for example, estimates show that nearly seven out of ten adults remain unbanked. And while branches still have a role to play in the financial ecosystem, Fintechs and digital banking are quickly leap-frogging to address the issue of financial inclusion for the unbanked and underbanked through technology. When posed with the questions of where a financial institution should invest their budget, more and more the answer appears to be in digital rather than in brick and mortar branches. 

How Banks Can Move Forward 

Banks need to address three customer segments: migrators, engagers, and aspirers. Migrators are willing to switch to digital products. Engagers lean towards switching, and aspirers have not yet switched. For most banks, their customers will broadly comprise a mix of these three segments. 

While digital seems the obvious choice of strategy for most banks, branches and physical locations still have a role to place, at least for now, for customers who might get comfort out of visiting a physical branch. In particular, older customers might feel more at ease banking at a physical location with a person to speak to in case they have any questions. For these customers, who are not as at ease with technology as Gen Zers or Millennials, there is still a place for branches. A great case study in this practice is Mashreq Bank in the UAE: the bank has a physical network of retail branches under their Mashreq operations and also a separate digital-only operation called Mashreq Neo. In fact, multiple banks across the world are adopting a hybrid approach with branches in key locations whilst still incorporating a digital strategy within their portfolio. This could be by offering key services digitally or by launching a completely digital arm of their brand. Another example of this is Jazeel, launched by KFH-Bahrain, which exists in parallel to KFH-Bahrain’s strategically located branches. Customers have a choice, open an account and bank online or visit a physical branch. 

Is digital the answer? 

While the obvious answer is yes, a recent study has found that while digital is making waves in banking, even millennials and Gen Zers have opted to visit bank branches in certain circumstances. In a study conducted by the Fintech Snark Tank on Gen Zers and Millennials, “half who opened an account in the past three years dealt with a bank branch employee during the process.” 

The key reason for visiting the branches was to resolve a question they couldn’t find the answer to online or through the bank’s mobile app. 4 in 10 respondents said they couldn’t find what they were looking for online and that it would be easier to speak to someone. A quarter of respondents said their bank’s website or mobile app didn’t support what they needed to do. This trend was mirrored by those looking to resolve a dispute or report fraudulent activity on their accounts. However, we have to be clear in that this does not indicate a need for branches per se, the data merely highlights the fact that digital banking still has room to grow and whilst customers don’t necessarily want to visit branches, they do want the ability to engage with people when an issue arises with their banking. This trend further supports the phasing out of branches through a hybrid model rather than outright closure of all physical locations. 

Conclusion 

Banks and financial institutions can’t escape the transition toward branchless banking. However, the true value lies in helping customers through the transition and enabling those who are ready with the best digital banking propositions possible. Banks can’t necessarily do this themselves. Instead, the fastest, most efficient way is to embrace fintech companies as strategic partners and lead digital banking in the region and beyond.