Is Retail Banking Heading Inexorably Toward An Easyjet Model?

I've felt instinctively for a while now that the UK's current Free If In Credit banking model is unsustainable and that we are heading towards a polarised model where customers are charged reflecting the services they use. Branch banking in particular looks inherently difficult to justify on a one size fits all basis now that new entrants are cherry picking the more attractive, digitally savvy with their digital only, smartphone banking propositions.

Branches represent a significant fixed cost, perhaps as much as £1m per outlet, which must be recovered from core revenues in a highly regulated industry where most if not all financial products have become commodities. Against this backdrop it is entirely logical that banks should continue to prune their retail branch estates in order to remain competitive.

Many commentators, often consultancies, have continued to expound possible future models for Branch banking which justify continued investment. They propose branches as customer service hubs, brand outlets, automated service points, even coffee shops. These may all have a place in the end game or progressive exit of banks from UK high streets. However none of these tactical sticking plasters address the fundamental issue that many branches no longer create positive value add for banks when over 90% of front book revenue comes in digitally.

The uncomfortable truth is much of the demand for branch banking comes either from small businesses dealing in cash or more elderly customers, uncomfortable with transacting digitally, often making small value transactions which generate little or no revenue for banks. Many people, like myself, avoid branches preferring to interact by mobile for day to day banking needs. Following the Retail Distribution Review, most banks no longer offer investment advice in branch, which in part justified physical presence, and now even mortgages can be wholly secured without setting foot in physical outlets.

So where does this lead us?

In my view it is only a matter of time, unless the government mandates account level charging, before the large retail banks will start more explicitly exiting segments of the market or applying discrete charges for accessing physical banking services.

Is this discriminatory? Potentially. Is it necessary? In my view yes.

If Starling, Monzo or a.n.other challenger bank can focus 100% on digitally savvy, progressive customers like me, prepared to deal exclusively online, why should HSBC, Barclays, Santander or Lloyds support 800-1000 physical outlets in far flung towns and villages where revenue is negligible and fixed costs are no longer covered? Banks are not immune to the pressures affecting the high street, and contrary to popular conception, they are not public services either.

Political pressure to date has slowed to a degree the rate of closure of branches by established retail institutions. Something has to change (eventually).

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