Should UAE banks go easy in cutting down their branch networks?

A fierce debate that has dominated the banking world in the past decade centers around the future of bank branches.

Who needs them in an increasingly digital world? What functions should they perform – just banking or more? Should they focus on transactions or advice?

In the last 10 years, as many as 56,000 bank branches closed down in 100 countries where data is available, translating into a 14 per cent drop in network. In the UAE, the cut has been more severe: over 40 per cent since 2015. There are about 565 bank branches in the country today, and we are witnessing an average drop of 3 per cent every year.

The reasons for rationalisation are many. Customer transactions are migrating to digital channels – up to 97 per cent of all transactions are now digital, and do not require a branch. The pandemic changed customer habits away from face-to-face assisted banking to self-service banking. And increasing focus on costs is driving banks to cut down on physical locations.

Are banks going too far?

The question is: Are banks going too far? Is there a post-pandemic over-compensation in branch closures? According to a McKinsey-Finalta study, while branch usage dropped only 1 per cent in 2020-21, banks closed 9 per cent of branches.

In the UAE, most banks have rationalised their network by up to 25 per cent and some like Mashreq dropped from 39 branches to 7 today. As a result, the number of bank branches per 100,000 population in UAE is 7.6 compared to 28 in the US, 25 in UK and 15 in South Asia.

I spoke to the retail banking heads of three leading banks in the country about their network plans, and the responses varied. Emirates NBD ‘will open 6 new branches’ by end-2024, says Marwan Hadi, group Head of Retail Banking & Wealth Management. ADCB has no branch expansion plans. And FAB, the largest bank by assets, is ‘still reviewing the plans’, as per Futoon Almazrouei, group Head for Consumer Banking.

In contrast, J P Morgan Chase, since 2018, has opened 650 new branches in the US that are reportedly fuelling deposit growth and cross-selling. So are UAE banks being too conservative in their expansion plans? After all, a recent study shows that 28 per cent of customers still express a preference for using branches (though only 16 per cent actually do).

Rationale for expansion

With interest rates on an upward cycle since March 2022, the rationale for expanding branches has only become stronger. In most markets, a bank’s deposit share, especially for low cost current and savings balances, is directly proportional to its network share. Given that branch costs are typically only 0.84 per cent of the deposit base of a bank, the higher deposit margins now available to banks justifies more branches.

Especially in a cash-driven market like UAE, branch banking is a backbone of commerce for SMEs and smaller corporates.

However, bank branches today look and feel different. Traditionally, about 70 per cent of a bank branch was devoted to cash tellers, and the rest to customer service. This is flipped in a modern branch and tellers are positioned at the back to reduce the focus on transactions.

Gone are the huge marble-arched banking halls – they are now replaced by smaller, more efficient branches that are digitally enabled with an array of self-service machines. The focus is on fostering personal and community relationships and on financial advisors addressing complex financial needs like investments and mortgages.

Even the branch staff are increasingly multi-skilled as universal bankers who can serve, sell and advise.

Branch of the future

What will the branch of the future look like? They will be one of five formats:

Biometrics, robotics and artificial intelligence will be integrated into the customer journey. Banco Bradesco in Brazil uses robots to greet customers. CaixaBank in Spain launched their imaginCafes to serve as a ‘cultural space for millennials’.

Virgin Money lounges in UK are designed for communities to come together. DBS in Singapore has launched lifestyle spaces where they offer retirement planning to singing lessons. Capital One cafes in the US, where ‘banking meets living’, boast of good coffee and food.

Is this the beginning of the reimagination of the humble bank branch? Clearly the reports of the death of bank branches in the past were highly exaggerated. Similar concerns were raised in the 1980s with the launch of ATMs, in 2000’s with the introduction of mobile banking and in 2020 after the onset of the pandemic.

Maybe, we will see the advent of smart branches that foster customer relationships and complement digital banking. Maybe, just maybe, even the coolest fintechs will follow suit and open branches…