As the country’s large retail banks figure out ways to defend their transactional fee margins in an increasingly crowded environment, the question is whether there is appetite to continue supporting a large branch footprint.
Numbers shared during Standard Bank’s annual financial results presentation on Thursday show that its number of local branches declined 11% between 2010 and 2018, but it is the reduction in the square meterage of branches that is more significant (see below).
Group chief executive Sim Tshabalala says branches are getting smaller.
“Over time, as customers transact in a digital way, that trend is going to continue.”
A lot of the activity previously facilitated by the branch network, such as balance inquiries, will be done electronically.
“But it is also true: we believe that the branch is dead. Long live the branch. Branches will continue to exist, but the activity in the branch will be much more solutions and problem-solving type of activity.”
Tshabalala does not envisage a time when branches will cease to exist but says over time branches will become fewer and smaller.
Around 60% of its rival Nedbank’s branch network is now digitally focused, with plans to convert all branches to this model in time.
Nedbank chief executive Mike Brown says the idea is not to move away from a physical branch network at some point in future.
It currently has 604 branches and believes a number around 600 is appropriate.
“What that enables us to do is to reach 84% of the economically active population in South Africa within a reasonably tight radius of our branches.”
While the actual footprint will remain largely unchanged, branches are becoming smaller, Brown says.
As new digital banks that operate without a branch network continue to enter the market, there have been questions about traditional banks’ ability to defend their transactional fee margins. New low-fee entrants have been quick to point out that South Africa is an outlier compared to the rest of the world, where transactional banking is almost free.
‘Free’ is a relative notion
Tshabalala disagrees. He says in countries where transactional banking is free, it is typically cross-subsidised with fees for payments and money transmission.
A normal commercial bank must cover its fixed cost through its non-funded revenues – mainly fees and commissions. The banker’s burden is the extent to which it is exposed to declining interest rates.
Fixed costs don’t decline as interest rates decline.
“If you are not covering your fixed cost, it is the nightmare of any banker, because the quicker those [interest rates] decline and the less you are covering your fixed cost with fees and commission, the more trouble you are in,” says Tshabalala.
He does not agree that fees and commission in South Africa are high compared to other markets.
“That is not supported by the data. It is true however that with electronic and digital banking, fees and commissions have collapsed.”
He says incumbents face the prospect of being disintermediated by new entrants, fintech or large technology companies and ending up as utilities, but there is also a real possibility that the established sector will use its infrastructure, data and financial resources to improve the customer experience and defend itself.
Standard Bank has the customer base and data to survive and is increasingly investing in the customer experience, he added.
The group reported headline earnings growth of 6% to R27.9 billion in the year through December 2018. Its return on equity improved from 17.1% to 18%.
The share price closed 3.7% down at R182.43.