During the Covid-19 crisis, even the last holdouts to digital banking were forced to throw in the towel. That means big lenders in developed countries, from Japan’s Mitsubishi UFJ Financial Group to Italy’s UniCredit and beyond, are able to accelerate their plans to close branches. The downside: technology costs may limit savings as a hybrid, branch-lite future arrives far sooner than the industry expected.
Lockdowns and contagion fears triggered a boom in mobile banking and a slide in outlet visits. At Banco BPM, a digital laggard in IT-averse Italy, for instance, up to 65% of transactions are now carried out online against less than half before the pandemic. That trend is here to stay: one in four customers in markets including Germany, Japan and the United States plans to use branches less, or avoid them completely, says Boston Consulting Group. Some bankers estimate that as much as 30% of U.S. banks shut during the lockdown will stay that way.
The global cutback on retail networks began with the 2008 financial crisis. European branches, for instance, have shrunk by nearly a third to 165,000 since then. Hacking a quarter over the next three years, or 40,000 outlets, as consultancy Kearney predicts, could generate annual pre-tax savings of 12 billion euros, assuming a cost of 300,000 euros per bank, Breakingviews calculations show. While small against estimated credit losses of some 400 billion euros in Europe alone from the Covid-19 crisis, those savings are permanent.
The trouble is, the digital shift won’t come for free. Laying off staff may cost three years of salary in countries like Spain. Closing branches also creates customer attrition. And the investments needed to go digital are hefty. UniCredit, which planned to close 500 western European outlets before the pandemic, has earmarked 900 million euros of new IT costs per year by 2023, against 1 billion euros of overall planned savings from staff and branch reductions. Community and second-tier banks may not be able to afford such investments while low interest rates crush their bottom lines, likely pushing them to consolidate.
Moreover, the branches that survive will serve different purposes. As routine transactions move fully online, they will become centres for higher-value advisory functions, like the selling of complex, and more profitable, products, or lending to small businesses. That will also limit the size of any savings. Once the pandemic eases, bank branches will certainly be down, but not completely out.