Dr. Mohamed Ramady
The pace of closure of retail bank branches has been accelerating around the world, as financial institutions face cost rationalization and a rise in technology has centralized many branch functions.
Other factors not seen in the past are playing a role in this trend, especially with banks offering increasingly complex investment products that require highly trained personnel, whose skills are underutilized in branches, or even unavailable.
Technology advances have led some customers, especially the younger tech-savvy generation, away from the need for bank branches. Electronic transactions are replacing visits to deposit checks or pay bills.
The ubiquity of ATMs is making it unnecessary for clients to visit branches, while remote cash machines are even rendering branches inessential.
With the increasing use of cards and mobile apps, cash use in advanced economies and major developing countries is declining.
The same trend is also seen in the Saudi banking sector, where branches have been on a steady decline, falling to 1,945 in December 2021 for both Saudi and foreign banks, compared with 2,029 in 2016.
Not surprisingly, the largest Saudi financial institutions such as Al Rajhi — traditionally focused on remote banking — accounted for 521 branches, followed by the merged NCB and Samba Saudi National Bank with 506 branches, Riyad Bank with 237 and Arab National Bank with 131 branches.
Foreign bank branches totaled a mere 28 branches or 1.4 percent, which is unsurprising as their focus is mainly on big-ticket investment banking activities rather than retail banking.
In terms of regional branch distribution, Riyadh took the lion’s share with 588 branches, followed by Makkah (406), Eastern Region (371), Asir (123) and Qassim (113).
It is surprising to notice that the decrease in bank branches was combined with a similar fall in ATMs, having declined from 17,887 in 2016 to 16,544 in December 2021.
This was coupled by an increase in the total number of cards issued, which rose from 26.5 million to 39.4 million over the same period, indicating that cards are being used at points of sale rather than for cash withdrawals.
Saudi businesses were therefore inclined to adapt to these new financial behaviors, seen by a huge increase in point of sales terminals from 267,827 in 2016 to 1,013,141 in December 2021.
There has also been a rise in popularity of phone apps, especially among the younger generation, and thereafter across the age spectrum following COVID-19 lockdown restrictions, which saw transactions using phone apps reaching 205,000 in December 2021 compared to 106,000 in 2016.
How have the commercial banks faced this trend?
Up until the present time, the mainstream belief indicated that a bank’s strength was determined by its network of branches, an image reinforced by tall buildings in classic styles aligned with each individual bank’s identity. In essence, a bank’s presence on popular streets and cities was itself a form of advertising.
Branch managers knew their customers well before Know Your Customer checks became an imposed compliance requirement rather than a genuine personal human relationship between bank managers and their clients. This also offered an opportunity to cross-sell other bank products.
Those of a certain generation in the UK will nostalgically remember some bank TV adverts such as Midland Bank’s Vector Account and another iconic one showing a suited bank manager popping out of a closet with the slogan “your friendly bank manager is always at your service.”
Today’s TV bank adverts are more likely to warn of the dire consequences of sharing credit card pin details, and might advertise having someone permanently on call to show customers how to use a computer.
Spurred by mergers and acquisitions within the banking sector, some banks ended up having redundant branches in several areas. In such cases, the closure of branches would be considered as a means for commercial cost reduction and increase in capital efficiency ratios.
Banks, however, face a dilemma. A well established or “national bank” must try to serve all of its customers in many different locations. To justify their overhead and capital investment, they need to increase income by offering more value-added services, such as investment banking, which paradoxically means more staff in branches.
Banking newcomers, which do not carry the social burden of having the “national bank” brand, are better placed to choose their niche markets, mostly younger, tech-savvy or affluent groups that do not inhabit specific geographical clusters.
Technology advances have provided opportunities for banks to upgrade their ATMs into ITMs — Interactive Teller Machines — performing a range of 24-hour services from money transfers to card issuance and recycling cash deposits.
There is also an imaginative aspect of using a combination of ITMs and personal banking advisers, who would be available onsite ready to offer varied financial advice or sell new services such as SME companies, and who can access offsite expertise through branch video-conferencing rooms.
Premium banking customers with complex financial advice needs are directed to upscale lounges, something that many Saudi banks have already implemented.
An inventive use of branches might just possibly delay the demise of branch banking in a digital age, with some banks investing in cutting-edge technology to be able to have facial recognition of their incoming clients and data analytic reviews of their finances, highlighting what services they might be offered, whether it is a mortgage or a new car loan.
Extending the usefulness of branch networks will only be limited to lack of imagination. In the UK, a North Yorkshire town which currently has no banks will be one of the first places in the UK to build a new “banking hub,” offering basic cash services on high streets. The proposed hub would see the major banks offer their services on different days of the week.
In Saudi Arabia, the same cooperative bank spirit could also work to the benefit of all, in sharing costs and yet serving communities with no branches.