Branchless banks and the 8 year overdue post update
I was rooting around for data on success and profitability of Direct or Branchless banks and found this report from Bluecap. They are a Spanish based management consultant focussed on financial services. My old post on branchless banks which remains incredibly popular is way way overdue for an update.
State of Direct Banking 2013 | Bluecap
We recently analysed more than 100 direct banks, their past performance as well as future realistic product penetration rates. As a result we believe that direct banks will reach a market share of 25-30% of retail banking revenues by 2020. A look at other low budget industries indicates that this aggressive growth wouldn’t be exceptional. Low-cost airlines are a good example for that – their global market share went up from ~8% to ~26% in only a decade1.
The report references the density of bank branches per capita in a given country as a hold up to Direct Bank success. Spain in particular had an extraordinary number of branches and this is changing for the better.
It talks about the business model decision:
1. Choice of the right business model – fit for purpose but also fit for market
2. Scale, scale, scale
3. Efficient and effective delivery model
The Broker and Deposit led models are well known. There are less of the full service Direct Banks but they are becoming more prevalent as banks such as mbank in Poland storm the marketplace there.
The discussion about scale is interesting. They reference banks with acquisition costs in the 100’s of dollars/ euro’s. But they make point that banks are also exhibiting success with much lower costs because they focus on the disaffected demographic that traditional banks are just not serving.
As Chris Skinner has written at length, the old guard banks are trying to IP enable a real estate network. Whereas properly constituted Direct Banks are developing virtual networks based on internet, and only then determining how to integrate physical locations if at all. Internet first. That is the hard decision because it requires addressing employee fit, location fit, product fit, and even more fundamentally location purpose. Do we require location?
At some point the report points out it comes down to scale and cost per client. The fundamental question is whether the intrinsic attraction of the branchless bank will build a customer base large enough to produce more profit on a smaller footprint of capital employed than a branch based bank. For every dollar of capital employed which model produces greater profit.
It sounds like a simple question; no capital expended on branches would provide more profit. The kicker lies in the attraction of clients sufficient to generate the required profits.
The graphic in the Bluecap report above suggests it has been done by some niche players.
It goes on to speak about addressing the new digitally enabled demographic need by focussing on simplicity and product focus on that demographic’s needs. As an aside it notes that traditional banks typically have 200+ product types. They are product based institutions so of course you get, products. My recollection at a large bank was that number could be multiplied by 10 or 15.
Anyhow a great report and worth the read. It is written very clearly.
Relevance to Bankwatch:
When I read what I wrote in 2006 on branchless banks, which as I mentioned today is the single most searched post on this blog, I cringe. In 8 short years so much has evolved to make that post sound like the dark ages. 5 months after that post Steve Jobs said ‘just one more thing’ and the smart phone otherwise known as your pocket computer changed the world.
Technology today is pervasive and it no longer even feels like technology. This was the beauty of what Jobs did … technology was no longer something which you did at your desk. Technology is now with you all the time. I used to get weird looks in 1999 when I was reading my blackberry while standing in a public place. Fast forward to 2014 and watch on the street .. everyone is looking at their smart phone.
The successful direct banks are the ones that will make that connection with customers on their terms and timing.