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Is high-street banking coming to an end?

Written by Timothy King, Senior Lecturer in Finance, Banking and Innovation, University of Kent


TSB Bank, a major UK operator owned by Spanish banking group Banco de Sabadell, is closing one-third of its branches. This means that 164 out of 475 sites will close, with a loss of 960 jobs – in addition to the 82 branches that were already earmarked for closure last November (65 of which are now closed).

To many industry insiders, this will come as no surprise. There has been a general shift towards digital banking since the global financial crisis of 2007-2009. This has spawned new digital-only challengers such as Monzo, Revolut and Marcus.

The trend has gathered further traction during the COVID-19 pandemic as people have become more accustomed to banking online. Over the summer we have also seen the Cooperative Bank and NatWest cutting jobs and branches, while JP Morgan announced it was launching a UK digital bank in 2021.

At the same time, TSB has had to weather problems of its own making. Originally known as the Trustee Savings Bank, it was formed from the gradual amalgamation of many local trustee savings banks in the 1970s and 1980s. The banks disappeared after the group was bought by Lloyds Bank in 1995, surviving only in the group name Lloyds TSB.

The government ended up taking a significant stake in Lloyds after its 2009 merger with beleaguered HBOS, which led to such severe problems that then CEO, António Horta-Osório, was diagnosed with stress-induced insomnia and signed off work in 2011. The European Commission then decided that the government rescue amounted to state aid, forcing Lloyds to rebrand 632 branches as TSB and float them on the stock market in 2014.

New dawn fades

TSB was acquired by Banco de Sabadell the following year, and it was hoped that this would herald a new era for the bank. But unfortunately disaster struck in April 2018 with major IT issues that lasted several weeks.

An estimated 1.9 million customers were affected by incorrect transactions, disappearing mortgages, being locked out of accounts or given access to other customers’ accounts, and a non-responsive banking app. The issues apparently stemmed from difficulties moving customer records to a new platform designed by Banco de Sabadell. This long-planned migration was meant to increase efficiency and improve the digital experiences of customers, but it quickly became apparent that the bank had severely underestimated the complexity and risks involved.

The bank was hit by reputation-damning independent reports, including one it commissioned itself from law firm Slaughter and May, which pointed to management failures and said that the TSB board lacked “common sense”. CEO Paul Pester was forced to apologise publicly and subsequently stepped down (his replacement, Debbie Crosbie, has a background in digital banking).

The IT disaster cost the bank approximately £330 million and thousands of customers, and was followed by further glitches in subsequent months. Like all UK banks, TSB is also having to cope with tighter profit margins as a result of ultra-low interest rates, and an increasing number of defaults on its loan portfolio a result of the pandemic. The bank has had to increase its provisions for loan losses, with more defaults expected over the final quarter of the year. And then there is digital banking.

The future

TSB remains a very important lender in the UK, yet very domestically focused. Its customer base of five million is way behind the likes of HSBC (40 million) Lloyds (30 million), Barclays (24 million) and NatWest (12.5 million). It also has a lower share of the current account market than it arguably should for a customer base of its size.

TSB looks able to weather the storm brought on by COVID-19 and to remain a key lender in the UK. But competition for consumer deposits and to provide consumers’ main current and savings accounts has intensified in recent years, partly thanks to the digital “challenger banks” and new competitors on other fronts, such as peer-to-peer lending platforms Zopa and Funding Circle.

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Of course, all traditional banks face these challenges. They still dominate most areas of consumer banking, and enjoy much more customer loyalty than the challengers, but they are coming under more pressure all the time. This is especially true with younger customers, with surveys such as this one by Crealogix showing one in four under-37s choosing digital-only banks – and that was nearly two years ago. The obvious question is whether traditional banks may become obsolete to some degree.

The trend towards digital banking is likely to have far-reaching implications for customer experience, staff levels and financial regulations. The wave of branch closures will save banks money but it is likely to encourage more customers to evaluate their options. Some who were previously loyal may now decide to switch to a digital-only provider.

It will not help the traditional banks that many have poor customer satisfaction scores compared to the digital challengers. In some cases this will partly still be linked to the global financial crisis, while TSB customers will not have forgotten the IT fiasco of 2018.

To stay competitive, these banks are under pressure to quickly evolve their offerings in the face of digital rivals whose services tend to be reliable, flexible and responsive. The future is bright and digital, but only for those who can keep up.

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