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Banking is transforming as a result of digital technology that is reshaping how individuals and businesses manage their finances. Online banking was once a novel concept but has now become mainstream, as it offers more convenience, accessibility, and efficiency than the previous system. However, this surge in digital banking services has also led to the closure of many traditional brick-and-mortar bank branches. In this article, we explore the factors driving the increase in online banking and the implications of bank branch closures on customers and the economy as a whole.
In recent years, online banking has experienced exponential growth, fuelled by advancements in technology, changing consumer preferences, and the need for greater convenience. With the increasing presence of smartphones, tablets, and high-speed internet connectivity, customers now can access banking services anytime and anywhere, with just a few taps on their devices. Customers can perform several transactions remotely, including checking account balances, transferring funds, paying bills, and even applying for loans or mortgages. Moreover, online banking platforms often offer features such as budgeting tools, financial planning resources, and real-time account alerts, allowing users to take control of their finances.
For more detail on the inner workings of the process behind Online Banking have a look at this article published on HowStuffWorks.
At the same time, it’s important to highlight that the rise of online banking has led to a significant decline in the demand for traditional bank branches. According to data from Consumer Watchdog, approximately 5,800 branches have closed in the past decade, including many well-known banks such as Halifax, Lloyds, and Natwest. This trend is set to continue in 2024, and there are several contributing factors to the fact. Firstly, maintaining physical branches significantly increases overhead (indirect) costs, such as rent, staffing, and utilities. The increasing number of customers moving to online banks has led banks to reassess the cost-effectiveness of maintaining a network of physical branches. Closing underutilised locations can help cut expenses, which supports profits. Secondly, consumer preferences have changed, and there is now a growing preference for digital banking as consumers are attracted to the convenience and time saving involved- more specifically, approximately 93% of Brits used online banking in 2022. This shift in preferences has prompted banks to invest more in digital infrastructure to meet changing consumer expectations. Thirdly, advancements in technology have allowed banks to offer a wide array of banking services, either replicating or improving their in-person services. For example, online banking now has enhanced security features and user-friendly interfaces, and consumers are often required to go through biometric identification or encryption protocols. In addition, FinTech companies like Revolut and Monzo are some of the most recognisable app-based banks in the UK, where customers can send and track money, and even trade cryptocurrency. Both Revolut and Monzo have secured around £1 billion in equity investment, highlighting the potential for substantial growth in the long term.
Here's a wonderful video that illustrates the differences between Traditional Banking and Online Banking.
Inevitably, the closure of bank branches can have negative implications on consumers and the economy. Many customers still rely on physical banking, particularly the elderly or other individuals who struggle with technology. In fact, surveys by Ipsos reveal that only 14% of the 85+ group bank online, and almost 60% rely on physical banking. This underscores the potential disproportionate impact on specific communities, which could encounter restricted avenues for managing their financial affairs. Additionally, the closure of branches can have repercussions for employees who lose their jobs, particularly if the bank is undertaking heavy cost-cutting measures. For example, 20 of the world’s largest banks cut around 60,000 jobs in 2023, per the Financial Times. This figure is partly fuelled by the increase in demand for online banking services. With this in mind, it is clear that the closures may exacerbate unemployment issues in a country, which is particularly problematic during an economically delicate time for the UK (cost of living and low economic growth issues).
Overall, the rise of online banking represents a shift in how individuals and businesses tend to interact with financial institutions. The new system offers unprecedented convenience and accessibility. Nevertheless, the closure of many bank branches emphasises the need to address the challenges of digital exclusion, and unemployment. Banks need to find a balance between embracing digital innovation and maintaining a presence that serves the needs of all customers. By using technology to enhance digital banking capabilities, and maintaining inclusive access and community engagement, banks can navigate this new era and fulfil their mission to customers.
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