April 14, 2016
Digitization is forcing retail banks to undergo a transformation. The rapid increase of smartphones and tablets, the ease of using apps and social platforms, and the exponential growth of mobile Internet have all contributed to the mobile device being the most preferred communication channel for customers. Furthermore, though branches help banks in attracting new customers and cross-sell to existing ones, they also add to the bank’s financial costs. Therefore, it makes sense for a bank to work with a minimal number of branches to reduce costs and have profitable returns especially when the economy is weak. We have heard that banks such as Citi and JPMC have closed down branches across North America and other developed economies. However, the trend is not the same in developing economies such as India and China. There is no noticeable closure of bank branches—largely due to a vast rural and semi-urban customer base. Although, the growth of bank branches in these regions have slowed down in some areas compared to previous years, especially in the urban areas.
The growth of bank branches in India and China was pegged at 15% and 5% respectively. However, the growths of ATMs were higher at 60% for China and 70% for India. This indicates that though banks are opening up branches in the region, the focus, however, has been more on delivery through alternate channels. In August 2015, the Reserve Bank of India allowed banks in India to shift, merge or close down urban branches without seeking prior approval from the authority. However, prior approval is required for banks to close down/shift branches in semi-urban and rural areas. RBI had also asked banks to ensure that the needs of their customers in rural and semi-urban areas are met through mobile vans or business correspondents if the bank decides to shut the branch in those areas. As emerging economies have a large unbanked population, banks in the region have not opted to close down the branches.
The primary reason for banks to shift or merge branches in the urban regions is due to growth in digitization and increase in the cost of managing a branch. Initially, bank branches were the sole touch points; however, with the rise of the mobile and Internet, bank branches are slowly taking the backstage, complementing other modes of interactions. It is expected that over a period, bank branches would end up supporting other channels and would be used only when a face-to-face interaction is required.
Late last year, Standard Chartered Bank had come up with a restructuring plan to do away with many bank branches in India which were unprofitable. On the same lines, Federal Bank has also remodelled its branches which were about 1,500 square feet earlier to 800 square feet now. According to Chanda Kocher, CEO and MD of ICICI bank, banks would continue to reduce size as well as the number of people working in the branches. However, she feels that banks would also continue to open new branches in underserved areas.
Other large banks in India have also taken similar steps. Last year, State Bank of India (India’s largest bank) had planned to open 250 InTouch Lite branches as part of its digital initiative. InTouch Lite is a lighter version of the bank’s full-fledged branch. Similarly, HDFC Bank is playing with the concept of bank aap ki mutthi mein as the digital revolution has shrunk the size and time for banking. In order to improve customer experience and enhance value for customers, Axis Bank opened a 24x7 Express Branch in Bangalore last year. These branches offer cash withdrawals, instant cash deposits, cheque deposits, instant account opening, Internet banking, instant issuance of gift & foreign currency cards, online buying of insurance and advisory services all at one place. Such branches would be opened in metro cities across the country. IndusInd Bank has even launched a video conference service called Video Branch. This enables customers to get on a video call with the bank’s staff; customers can schedule video calls with branch managers, relationship managers, etc. The facility is available to new and existing customers of the bank. The Video Branch service has been made possible via a dedicated app which is available on Google Play Store and Apple App Store.
The trend of digitization is not just seen in India but also China. Between 2012 to 2014, the number of banks branches in China just increased from 204,000 to 215,000 while the country has seen a growth of more than 10% CAGR for the previous years. According to a survey by Mckinsey, nearly 70% of the Chinese consumers were open to bank with a digital-only bank. In order to keep pace with the changing consumer demand, Bank of China launched a digital branch in partnership with IBM. Similarly, EverGrowing bank has also invested in digital capabilities in China.