Importance of bank branches in the face of technological change

The impact of technology on brick-and-mortar businesses can be seen in almost all industries.

In the United States, the number of bookstores declined from about 38,500 in 2004, to about 22,500 in 2018. Some industries that don’t sell physical goods, like travel agencies, have had their physical stores disappear almost entirely.

In 2021, consultancy firm Roland Berger predicted that there will be an 18 per cent net reduction of retail bank branches in Southeast Asia by 2030, with nearly 600 branch closures estimated in Malaysia alone.

In reaction, the National Union of Bank Employees (NUBE) urged the government and Malaysia’s central bank, Bank Negara Malaysia, to do more to protect employees who will be affected by the transition to digitalisation.

So, is branch banking going the way of bookstores?

The US Federal Reserve, America’s central bank, tried to explain bank branches’ continued existence in a digital economy in a research paper ‘The Branch Puzzle: Why Are There Still Bank Branches?’.

The authors found that although the overall number of branches had slightly declined, local bank branches continue to exist across the US, even in areas of expensive real estate prices, and in the face of increased use of information technology.

They suggested that this was due to depositors’ and small, and medium enterprises’ (SMEs) continuing to value the services provided by local branches.

These customers were typically older, wealthier, and preferred to handle their SME banking, face-to-face. An older customer may appreciate the comfort of a patient, face-to-face explanation by a banker, rather than reading through the long and tedious terms and conditions, filled with legal jargon.

An informed and cautious wealthy customer may need to know more about a particular unit trust that an online fact sheet or prospectus just cannot provide. And for an SME owner, banking is not just transactional, but a long-term relationship that enables the business to grow in good and bad times. This handshake and look-in-the-eye relationship has been put under the microscope in the aftermath of US bank failures this year.

Between March and May this year, Silicon Valley Bank (SVB), Signature Bank of New York, and First Republic Bank, collapsed. In an academic paper recently published, the authors highlighted that these three banks shared a business model that was turbocharged by technology – highly volatile deposit flows enabled by the internet, and a very low number of branches.

In a well-regulated jurisdiction, banks make a significant portion of their profits from lending households and corporations, big and small, using their customers’ deposits.

The inherent fragility of this model lies in the fact that the borrowings (customers’ deposits) by banks is short-term, while their lending is typically long-term (think business, car, and housing loans). The risk of short-term borrowing fleeing is managed by a combination of good banking practices, deposit insurance, and bank regulation.

So, for a bank, it pays to invest heavily in customer relationships and good balance sheet management. But how can you establish trust and confidence in a bank if its relationships are purely transactional over phone apps?

For SVB, even its lending was transactional in nature. Traditional banks acquire assets by extending loans to households and corporations, a process that requires due diligence, and collection of “soft” information, usually done through branch bankers.

But SVB skipped all of that hassle for the convenience of acquiring assets through the purchase of securities, which can be done easily over the internet.

The transition into new technology and economy has always been marked by irrational fear and overhype. The former is held by practitioners of the old way, while the latter is driven by product pushers and supporters suffering FOMO (the fear of missing out). In the local context, we must be able to differentiate these two extremes and use technology to improve our financial services without sacrificing service to households and SMEs.

The views expressed here are the personal opinion of the writer and do not necessarily represent that of Twentytwo13.

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