“My bank’s been turned into a trendy wine bar.”
Fifteen years ago, NatWest ran a series of ads featuring a pensioner whose bank branch had been shut down.
Fast-forward to this week, and most papers are reporting that RBS (which owns NatWest) is going to shut down 5% of its remaining branches.
And RBS is not alone. Lloyds has outlined plans to create a ‘digital’ bank – or in other words cull a lot of its high street branches.
It’s all part of the digital revolution. But will this wave of change really destroy the old banks? Or are we writing them off too soon?
Online banking has been around for longer than you think
Online banking has been around for nearly 20 years. Yet until very recently, the idea that it would entirely replace bank branch networks was closer to sci-fi than reality.
Indeed, the internet banks that managed to survive the tech bubble and bust were those that offered access to physical branches as part of a regular bank. People could go online for routine services, but they still wanted to be able to speak to someone face-to-face. And even then, the big high street players continued to dominate banking.
So it seemed that the main banks would get away with adding a small amount of online functionality to their services, while keeping their core model intact.
The financial crisis in 2007 and 2008 helped to shake this, by trashing faith in the banking system as a whole. And now the rise of smartphones is really shaking things up.
My colleague Dominic talked about the impact on developing nations yesterday. But it’s had a huge impact in developed nations too. The convenience of being able to carry out transactions on the train or while waiting for the bus has made people much more open to using online banking for a wider range of things.
As one speaker at a recent conference I attended on European retail banking put it: “When [customers] had to log in on their computers, they typically checked their balance every week at most”. But now “some check their balance after every transaction”.
What’s more, this change is taking place much more quickly. He reckoned that it took eight years for online banking to become widely accepted. But use of mobile banking – which is after all, just an extension of desktop-based online banking – has surged in the last two years. For example, Barclays launched its mobile app just before the Olympics. It already has more than three million customers.
Why banks are worried
Banks are afraid of many things, from regulation to fines to changing technology. But all of these threats boil down to one word – competition.
In some ways, the crisis was good for big banks – the ones that survived. Thanks to bailouts and mergers, the mainstream banking market is even less competitive than it was before the system collapsed in 2008.
Between them, Lloyds, RBS and Barclays now control around half of all current accounts and two-thirds of small business services. Throw in HSBC and Santander, and the five largest players account for 70% of current accounts and 95% of business services.
This wouldn’t be so bad if they all were vigorously fighting each other. But they haven’t needed to. Customers have historically been very apathetic about comparing deals in the banking sector. Some studies suggest that people are more likely to switch their spouse than their bank.
But mobile banking threatens this dominance in three ways. Firstly, it makes it far easier to see how much your bank is charging you, and compare that with the fees levied by other banks. You can then use this information to switch your account if you’re not happy, or simply want better value.
Mobile banking also lowers the barriers to entry. Having to build a network of physical branches is very expensive. New entrants either have to raise a huge amount of money or just operate in a few areas.
But ditch the need for a physical bank network, and suddenly it’s much easier for new banks to start up and challenge incumbents. And the big banks can’t do much to deal with this growing pressure. Even if they avoid falling behind the technology curve, transparency and lower barriers to entry will erode both their market share and their profits.
Don’t write off the big banks yet
At least, that’s the general view. However, it’s worth looking at what’s happening in practice. Finland, like other Nordic countries, is further ahead of the trends in this sector.
Experience there suggests that although income per transaction falls as customers go digital, the overall number of transactions goes up. Costs also fall. As a result, the overall impact on even traditional banks’ earnings hasn’t been too brutal so far.
So at the right price, the traditional banks could be worth a look. On that front, Barclays (LSE: BARC) looks interesting. It seems to be taking the threat of mobile banking seriously, putting money into developing its own system. And the new chief executive seems to be succeeding in his quest to build up the balance sheet.
In any case, it currently trades at a discount of nearly 25% to tangible assets. This puts it on a par with the banks in Europe and is a big enough ‘margin of safety’ to overcome any long-term fears.
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