Banks’ branch closures point to need for new business model

Standard Bank recently announced it would be closing 91 branches and retrenching up to 1,200 staff. This was a sad day for a country riddled with one of the highest unemployment rates in the world.

But, at the risk of trivialising a sensitive issue, this is only the beginning of, at the very least, the reduction of branches. From 2012 to 2015, the big four South African banks reduced the total number of branches by approximately 5% and in recent years have continued this trend.

Absa, FNB and Nedbank, for example, reduced their branches (or derivations thereof) by 44, 31 and 173 respectively between 2016 and 2017. The news by Standard Bank is therefore nothing new, except that in the past banks have been able to absorb the lower reliance on staff in branches within the organisational structures of the bank.

Clearly, though, the Fourth Industrial Revolution is on our doorstep and it is starting to manifest in the form of banks re-assessing the viability of their branch networks. Brick-and-mortar is more expensive than technology-based banking.

One only has to consider how the floor plan for branches has evolved in especially the last five years. Gone are the information desks and predetermined queues for specific queries; now waiting areas with comfortable couches are becoming more prevalent; one consultant assists with every aspect of your banking needs, rather than in days past where two or three different people would assist; and, branches are smaller and fewer.

The reduction of branches is however part of a broader strategy to migrate clients to digital platforms. This is known as the so-called relationship banking paradox – where we traditionally understood relationships between banks and customers to be defined along personal interaction typically in a branch setup, this is changing to a relationship defined along remote interaction via technology.

Branches will then be used in the future primarily as a means-to-migrate where customers can consult bankers on the workings of bank products, only to eventually migrate to technology-based applications. The branch will therefore take on an entirely new role in the future.

For those who still want personal interaction with their bankers, it will still be possible, but the extent of it being a default offering will be reduced substantially.

Personal interaction may also take on a new meaning; rather than consulting a physical person in the branch, the person may be communicated with via satellite link on a computer screen from the head office. The bank of the future will therefore be driven primarily by digital and competitors such as Bank Zero, TymeDigital, Discovery Bank and the launch of banking services by Post Bank are set to redefine the South African banking landscape.

Branches will still exist, but will not be as we know them today. Rather, they will be smaller, have less staff, and offer digital-based functionality. This environment addresses our human desire to interact with a person, but still re-enforces digital transaction platforms.

The youth of today do not care if they ever visit a branch. They are content with doing their banking on tablets or their cellphones and would rather interact with artificial intelligence such as ‘servicebots’ on the websites of institutions.

An indicator used to assess the efficiency of institutions is the cost-toincome ratio. Although South African banks compare favourably to global banks in terms of their cost-to-income ratios (averaging at around 54- 56% compared to countries such as Germany and Italy close on 80% and Norway at around 40%), the reality is that in an economy that is struggling for growth (and thus revenues), the alternative is to reduce costs.

Reducing the number of branches and thus the staff complement is the logical next alternative. The way banks deal with this inevitability, however, raises opportunities for scathing attacks on the business models they adopt due to the potential job losses.

As a country characterised by high unemployment and a shortage of skills, the debate on the nationalisation of banks in the broader political narrative especially increases the pressure of banks to either upskill staff or employ those adept at dealing with the rigours of the Fourth Industrial Revolution.

This responsibility, however, lies not only with banks, but also with custodians of providing education. The announcement by Standard Bank is therefore indicative of a time that requires all stakeholders in South Africa to focus on a changing work environment going forward, to ensure that when the inevitability of branch reductions occur, job losses do not occur simultaneously.

Dr Johan Coetzee is senior lecturer: banking and finance at the department of economics and finance, University of the Free State

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