Bank branches need radical pruning

How many banks does the average high street need? Two? Three? Four or more? It's a question that very few of us have probably ever really considered. The banks are just there, along with the pubs and pharmacies, blending into the background. Yet this issue is likely to become a lot more controversial over the next few years. Why? Because the big banks are finally starting to shut down their branch networks.

As they do so, campaigners fearful of the potential impact on communities are lobbying to keep them open. They are getting a sympathetic hearing in the press and will, no doubt, be listened to by politicians as well. The high street is already in enough trouble, without the banks closing as well.

Yet the truth is, we don't need nearly as many bank branches as we have now. Keeping them all open when they are hardly necessary costs customers and shareholders money and that is pretty much all of us. The sooner most of them are shut down, the better for everyone.

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Other industries that once had a big presence on the high street, such as travel agencies or insurance broking, have largely vanished. Yet banking has hardly been touched. Even though most of us use cash machines to withdraw money, make most of our everyday transactions online, and hardly know what a cheque book looks like anymore, there are almost as many bank branches as there were a generation or two ago. It's only really in the last year that the for rent' signs have finally started to go up.

The big banks have shut 348 branches over the last 12 months, according to the latest figures. Groups such as the Campaign for Community Banking Services think that is a terrible thing, which threatens to rip the heart out of local communities.

Yet there are clearly still too many bank branches. Even small towns and local high streets typically have three or four banks on them, usually in the smartest buildings. That compares with perhaps one bakery, one off-licence, and two newsagents. No one is claiming that financial services are not important. But is banking really three or four times as important as baking, or drinking? It seems unlikely.

Even with the latest closures, there are still 11,300 bank branches in this country, or one for every 5,700 people. That's about the same as the number of pharmacies, and almost 50% more than the number of bookmakers. Those branches are incredibly costly to maintain, what with rental costs, business rates, heating bills, and staff behind the counter. Indeed, it is estimated that around 60% of the total cost base of the major banks goes on maintaining their branches.

This is a waste of money. There is very little that physical bank branches do that can't be done online. Indeed, on the rare occasions that I go into one, all the person behind the counter does is consult the computer on their desk. Branch managers have long since been stripped of any power to make decisions, and there is no longer any pretence that they know either the local people or businesses. If you ask to speak to the manager about some ludicrous rule, you'll usually be told there is nothing they can do whatever the computer says cannot be challenged.

Also, there is nothing that can be done in a branch anymore that can't be done over the phone. If you need to pay in a cheque, it can be done by post. Local businesses may need to deposit cash. But surely one branch per town could deal with that if the banks shared services through a single network, just as they share their cash machines, then the numbers of branches could be slashed by 80% or more.

There are no historic figures available for the UK, but statistics from the US would suggest there are too many branches. Between 1994 and 2006, even as the internet was expanding, the number of bank branches rose by 27%. Indeed, before World War II, the US had less than 3,000 bank branches, but today it has more than 70,000 although in the last two years, rather like the UK, the numbers have finally started to shrink. The UK numbers will be similar.

The cost of all those buildings and staff are passed on to the rest of us as customers. That means we pay higher charges than we otherwise would, and get lower returns on our savings too. Perhaps worst of all, the banks are constantly mis-selling products such as personal payment insurance or packaged accounts, because they need to find some way to cover the vast expense of their branch networks. If they shut those, they could easily offer free current accounts and still make money.

Sure, it's not the ideal time to close down one of the few businesses that still has a strong presence on the high street. Competition from the internet and punitive taxes have forced many retailers to close. Smoking bans have done for many pubs. The banks are often the only businesses left alongside the charity shops. But that is not a good enough reason to keep them open.

High streets will have to reinvent themselves anyway, probably with more residential housing or small workshops. The last thing we want to do is force banks to maintain expensive, outdated branches at a time when they need to get leaner and more competitive. The sooner we shut down 80% of those bank branches, the better.