The last two decades have seen a steady stream of new and imaginative branch concepts developed by Britain’s retail banks and building societies.

Paradoxically, despite this steady flow of innovation the UK banking sector has also led the world in the extent to which it has cut back its branch networks. British Bankers Association (BBA) figures show that the banks and building societies operated around 20,000 branches at the beginning of the 1990s, and today the national network has shrunk to little more than 12000 on a like-for-like basis. A reduction of nearly 40%!

The solution lies in the deployment of the shared, ‘brand neutral’ branch seen in the USA

Some level of reduction has also been experienced in many European markets, largely through consolidation. However, the current situation in the UK still contrasts badly with the largest markets in Europe, where there remain many more branches per head of population. For example, whilst the population of Germany (at 82 million) is only one third greater than that of the UK, the national bank branch network is over three times the size.

Options

The difficulties caused by reductions in branch numbers were recognised ten years ago. And they were investigated on behalf of the BBA by Elaine Kempson and Terry Jones (of the Personal Finance Research Centre at University of Bristol). Their report entitled Banking Without Branches was published in January 2000 and discussed the four options for the alternative delivery of banking services which had proved to be the most acceptable to customers. These were:

• The cash machine (or ATM)
• The self service branch
• The shared branch
• Agency arrangements with the Post Office

Of these, the branch sharing model found greatest favour amongst consumers and was overwhelmingly the choice of small businesses.

The new and emerging delivery channels are still unable to take over many critical branch functions – not the least of which is money transmission. And despite mounting problems caused by further network reductions little has been done to properly explore the role that shared branching might play in alleviating the hardships experienced by customers in the UK.

Shared branching – but how?

A reversal of the trend to cut branches in the UK and the reopening of a significant numbers of closed outlets seems unlikely. But even the most optimistic virtual banking scenario will see a continued need for local counter-based money transmission facilities for many years to come. Against this background there is a strong case for a rigorous examination of the feasibility of introducing a shared branching scheme.

Most of the 7,966 credit unions operating in the United States at the end of 2008 provide their members with a full retail banking service. And by 2009 the members of an estimated 1,700 credit unions were able to access the services of their chosen institution through over 3,500 shared outlets across the USA. The programme has run for over 30 years and at its heart are management and systems structures that closely resemble the collective arrangements driving the operation of the UK clearings and ATM sharing schemes. However, if UK banks are unwilling to allow their customers to use the facilities of a competitor, the solution lies in the deployment of the shared, ‘brand neutral’ branch seen in the USA.

Brand neutral

A British branch sharing system might well be developed and operated through a management company, under the auspices of UK Payments Administration Ltd. UK Payments would be particularly well suited to tackle the issues of governance, day-to-day operations, clearing and settlement. The services could be offered through ‘brand neutral’ branches, within premises that are no longer required by the banks. The new company could progressively assume the management of a broadening chain of shared branches, taking over full responsibility for the necessary staff and premises from the previous operators. The transfer of staff and premises between organisations, under outsourcing deals, is now a well established practice within the UK financial service sector.

Such an arrangement would also provide the option to outsource all or part of the operation of a new shared network to a third party provider, if considered appropriate. Third party service companies operating ‘brand neutral’ branches in the USA also generate income by allowing the customers of other types of organisations to use their counter services for a fee. In turn, this makes a contribution to ensuring the continuing viability of shared outlets. There are many service providers in the UK that would be well qualified to operate such an arrangement.

A win-win situation

The need for a shared branching scheme is greater now than it was when the BBA sponsored the research by Kempson and Jones ten years ago. Customers have been offered few satisfactory alternatives to the services of a branch teller, and closures have continued. And it is ironic that many of the new wave of ‘direct’ banks still rely on the branches that they are daring to challenge and ultimately supplant. The overall problem is further exacerbated by the extent to which UK retail banks have failed to take full advantage of self service functionality. The shared branching arrangements operating successfully in other parts of the world would offer a multitude of benefits if implemented in the UK market. And none of the concerns of UK bankers noted in the report by Kempson and Jones are insurmountable.

In addition to sustaining critical customer service, such a scheme would minimise if not avoid further damage to the already depleted reputations of the UK banking community when more branches are closed. Onerous money transmission activities, staff and infrastructure could be transferred to a more positive business scenario under the auspices of a central trade body. And if the operation is outsourced, service levels could be underpinned through the usual approach of agreements, surveys and sanctions. In short, branch sharing looks like a win-win situation (as it has been in other countries!)

So why don’t we just do it?