Historically, bank branches have been synonymous with banking. For years, branches filled with tellers, security guards and long queues were the only way for customers to access banking services. Over time, however, technological developments and changes in customer behavior have forever altered that depiction of retail banking.
According to strategy consultancy Roland Berger, the shift away from the traditional model is ushering in a fundamental change in the sector, putting under discussion the whole future of the retail banking branch.
Further acceleration in branch network consolidation
The latest study by Roland Berger, titled “Branching out – The future of retail banking networks“, estimates an 18% overall net reduction in the number of bank branches in Southeast Asia over the next decade, which implies over 11,000 branches to be closed. Reductions are expected in six markets, including in Malaysia with almost 600 branches to be closed, while increases in four.
In Singapore and Brunei, the number of branches has fallen since 2010 and this trend is expected to continue with a further decline of more than 20% in both markets between 2020 and 2030.
In Thailand, Malaysia, Indonesia and the Philippines, where some of these countries have experienced a growth phase over the past ten years, the number of branches is expected to start falling or continue falling for countries already on the downward trajectory.
Indonesia, Thailand and Malaysia will see a significant branch consolidation as their economies continue to grow, government regulations/ incentives facilitate more digital banking activities and banks speed-up their efforts to adjust their existing large branch networks after having been slow to do so in recent years.
In Vietnam, Laos, Cambodia and Myanmar, the number of branches has been steadily growing over the past decade and is expected to continue increasing until 2030. As a consequence of their relatively underdeveloped banking sectors, these countries currently have the lowest branch densities in Southeast Asia.
As such, an increase in branch footprint and an associated increase in financial inclusion are expected as the banking systems in these markets further develop.
Structural shifts demanding different banking distribution strategies
The paradigm shift of the bank branches is expected to further accelerate over the next ten years. It will be driven not only by technological advancements but also by broader, more important structural factors such as changes in demographics, the growing pervasiveness of digitalization, easy access to information and greater financial education.
Looking at Southeast Asia, the nations are at different stages of economic and technological development, as well as have very heterogeneous banking markets. However, across the whole region, a major shift is taking place along four key drivers that influence the future of retail banking branch networks: increased access to technology; shift of demographics in the banking customer base; significant overall economic uplift; and increase in government digital economy policies and incentives.
Particularly, by 2030, the banking customer base in Southeast Asia will look profoundly different. More than two-third of the banking customers will be digital-first people and prefer digital banking channels over physical branches.
“So, while the past ten years have witnessed an acceleration in the transformation of retail banking, the next ten years will see a tsunami of changes hitting retail bank networks,” says Mr. Philippe Chassat, senior partner at Roland Berger and co-author of the study.
With the development of digital banking, retail banks have shifted their client engagement model toward an omnichannel strategy, aiming at seamless interactions between digital and physical channels. However, most banks have kept the same structure, size and format of their existing networks. Only a few innovations have been introduced so far, mostly in the form of concepts and pilots.
Trimming of the most unprofitable branches has only recently begun. These marginal initiatives will not be enough to prepare banks successfully for the next decade. The financial contribution of such a large asset will increasingly be questioned.
The number of branches, the type of formats, the localization, the level of interaction between different formats and ultimately the purpose of the network will have to be revisited to a significant extent.
A different, higher value-add branch role
With the speed and convenience of digital services now offered to banking customers as a given, banks will need to evolve branches from housing transactional activities, to providing customers with a personal touch and experience that they will return for.
In more mature retail banking markets, such as Thailand, Malaysia and Singapore, routine teller services such as cashing checks, depositing money and processing withdrawals are increasingly being used by only a subsegment comprising older, less technologically savvy customers.
Based on current trends, large bank branches with numerous tellers dedicated to executing simple transactions will soon be a thing of the past. As such, the role of bank branches will continuously evolve over the next decade toward handling a more focused set of activities.
“Bank branches will continue to play an important albeit different role”, states Dr. Luca Turba, principal at Roland Berger and co-author of the study.
“Future bank branches in Southeast Asia will likely move away from offering simple transactions and focus on higher value-add services, such as bancassurance and investment products. There will not be a one-size-fits-all solution to the role that bank branches should take in the future. Exact roles will need to be tailored to each branch model and to local needs.”
Looking ahead to the next ten years, the socio-economic and technological conditions in many regions are ripe for the continued transformation of branch networks. Given the radical changes happening in the banking sectors and beyond, banks across the globe are now required to accelerate their branch transformation journeys further, optimizing their footprints and models.
These journeys are characterized by an extensive scope of actions and significant complexity, and must consider the still critical role of branch networks on both revenues and costs. Therefore, banks must adopt structured and holistic transformation frameworks to ensure success and long-term sustainability.
Key areas to consider are where to best locate branches to maximize customer service and revenue generation, how to increase branch productivity to maximize profits, how to enhance customer experience to improve service levels to compete with more innovative retailers, and how to change mindsets and embed new technologies in the organization.
“Banks must be prepared to radically rethink their branch networks for the next ten years”, Chassat emphasizes. “They need to address the upcoming challenges of the decline of the branch role sooner rather than later, preparing for a redesigned, repurposed and reduced network. Failing to do so will profoundly impact retail banks’ profitability, leaving oversized branch networks underutilized.”