A decade of innovation in the high street has left many banks’ retail branches looking tired and out of touch. While other retailers competed for the attention of customers, banks and building societies (mortgage banks) seemed oddly content to sit back. Many even made the mistake of thinking they knew best. Fed up with being pushed around, many of their customers deserted them in favour of Internet start-ups that promised to listen and do as they were asked.

Belatedly, European banks are waking up to the fact that their branches are not just cost centres but sources of new business and potential profit. In a survey of 190 senior banking executives, conducted by the Economist Intelligence Unit, nearly one-half of respondents say their companies expect to increase the number of branches they operate over the next three years. This is a significant turn around compared with a decade or so ago. Then, most banks regarded their branches as little more than cost centres. As a result, many were closed, even though customers were inconvenienced.
This BT briefing paper highlights the changes underway in the European retail banking sector. Among the key findings of this report are the following:

• Nearly half of all banks are expanding their branch networks, while just one in five are consolidating. Fully 46% of survey respondents expect to increase the number of bank branches they operate over the next three years, compared with 21% who expect a decline. More than one in ten banks polled expect to grow their branch networks by more than 30%, whereas just 3% anticipate a decline of that proportion. About three-quarters of executives believe that investment in their bank branches will either stay the same or increase – and one out of five believe investment will increase by more than 20%.
• The Internet is the dominant growth channel, but branches are playing a key role in handling more complex transactions. Fully 94% of respondents believe that online banking will increase over the next three years, highlighting its importance to the business. Ironically, however, it has taken the maturing of the Internet age for banks to realise that bricks and mortar are no longer simply cost centres but, if managed imaginatively, conduits for value-added business. Sixty-three percent of executives surveyed say that their company’s branches are operated as a profit centre, compared with just 19% who say it is run as a cost centre. While online banking is an important means of facilitating better customer service, customers still have a strong need for physical branches to do their business, which provides banks with a major opportunity for cross- and up-selling.
• Many banks are prioritising self-service,enabling more tellers to become sellers. More than 70% of survey participants say that their firms plan to increase the proportion of advisers engaged in selling products and services, rather than focusing on transactional processes. Different banks favour different models to do this – some have no tellers or cash machines and focus entirely on advisory services; others use self-service technology heavily to automate mundane transactions, thus releasing time for staff to focus on value added activity. Fully 75% of respondents agree that they plan to automate more transactions within their branches, for increased customer convenience. Some 61% of participants expect the number of self-service machines (for withdrawing and depositing cash and cheques) to increase over the next three years. However, overall staff numbers in banks are likely to fall as this new technology encourages more customers to serve themselves. About one-third of banks are setting up branches targeted at specific customer demographics, as banks finally embrace proven retail techniques. Along with the rise in the number of branches, banks are also finally trying to improve the atmosphere within branches. The styles of branches are also varying, with specialist advice centres springing up alongside bigger self-service-oriented branches. For once, banks also profess to be listening to their customers. More than 60% of those questioned in our survey say their firms are responsive to shifts in their customers’ needs. For instance, while the majority of firms still say they do not have branches that are specifically customised for a certain customer demographic, such as 18- to 25-year-olds, 36% say they either do have such branches or plan to introduce them soon.
• Banks are setting up shop in more convenient locations, but rural users are losing out in the rush to capture new business. Just as retailers aim for the biggest footfall, so too are banks. The number of branches in shopping malls, along the high street and within inner cities is expected to rise, with at least 30% of respondents expecting an increase. However, people outside of metropolitan areas are being hit by a double whammy: a decline in the number of available branches, along with a rise in the number of fee-charging cash machines. Fully 29% of respondents expect the number of branches to decline in small towns or rural locations.
• Technology is playing an important role, but the emphasis is on easy wins. Bank branches are finally embracing technology, but few are doing so aggressively. Along with more cash machines and self-service kiosks, about seven out of ten banks already have or are soon to install customer relationship management (CRM) tools. Also, 49% provide or plan to provide mobile-phone phone-based text message alerts for their customers. As new technology relieves bank tellers of the drudgery of handling basic transactions, many will be re-trained in order to advise customers on new products and services. Tellers will become sellers– or so their employers hope. For this to happen, however, banks will need to do more than spruce up their branches. They must embrace new ways of working as well as new technology, so that they respond to customers’ needs. And they must marry their new-front offices with the software that manages their relationships with customers, so that they can anticipate what their clients want.