Normality is a reality we so often take for granted. In the last few months, many have recognised the value of normality, even if we still cannot put a price on this commodity. Hopefully, life as we used to know it up until some months ago will be broadly restored. But how will business models and consumer behaviour be affected by this year’s sobering experience?

European banks had been urged to review their business models long before COVID disrupted the way customers interact with their local bank branch. Low interest rates, increasing competition from non-bank financial services, rising operating costs and low profit­ability are the weaknesses that worry regulators, bank shareholders and executives, and also many customers. COVID just widened the fissures that already existed in banks’ business models.

It was not so long ago when local banks competed to open up new branches in practically every town and village in the islands. Modern retail outlets provided a friendlier and convenient environment for customers to visit their banks, meet branch officers, encash their salary cheques and get advice on how best to invest their money. These needs are not all that different today. The means of delivering them cost-effectively is.

The commitment of banks to be more sensitive to the needs of the communities they serve will also mean that other less profitable sectors of their client base must not be treated unfairly

European banks are less profit­able than US banks for several reasons. Europe’s banking system is more fragmented  and over-banking is burdening banks with almost unbearable operating costs. After the financial crisis of 2008, banks started to heed the advice of the ECB to revise their business models. The first obvious stra­tegy was that of controlling ope­rating costs by reducing the number of branches and staff.

Spain, France and Italy are among the larger member states with banking systems characterised by low profitability and high operating costs. The Spanish banking giant Santander has announced that it plans to close almost a third of its 3,100 branches and cut 4,000 jobs. Sweden’s Handelsbanken, one of the banking groups previously determined to keep its branch network mostly intact, in September announced plans to halve its domestic network.

José Garcia Cantera, CEO of Santander, argues: “The relationship between customers and banks is changing, becoming more digital. Clearly, we need to adjust the physical distribution network. Will there be a role for branches in the future? Yes, but they are not going to be transactional like they were in the past. People now can do all the transaction they want from home.” This transformation will not be without pain for both banks, staff and clients.

Banks’ most profitable retail customers are their mid-50s to mid-70s. There is a big generation problem, as older adults are not very inclined to change their habits. Banks can quickly run the risk of running too far ahead of their client base.

Banking unions are also pow­er­ful in Europe. State-backed banks like La Banque Postale in France are unlikely to look favourably on the reduction of employees as bank branches are closed. This resistance, combined with political sensitivity, may mean that bank business model reform may take longer than regulators expect.

What may accelerate the trend to the digitalisation of banking services is the prospect of prolonged low profitability as a result of interest being kept at historically low levels.

Ronit Ghose, an analyst at Citi, asks a provoking question: “Can banks make money with zero or negative rates?” For most banks the answer is: No, we cannot.” Yet, banks in Scandinavia seem to be still quite profitable because they have much leaner cost structures.

The most pragmatic solution would be a strategy for promoting a brick-and-click business model. Many bank customers still need to transact business with banks that go beyond transactions. Corporate customers, small businesses and high net worth individuals will always need face-to-face meetings with their bankers.

These value-added services are what justifies the pre­sences of bank branches in different locations.

The commitment of banks to be more sensitive to the needs of the communities they serve will also mean that other less profitable sectors of their client base must not be treated unfairly. It is disturbing to read, for instance, that there are some towns and villages in the UK where there is not a single bank branch. Another worrying trend is the reduction in the number of free-of-charge ATMs that make it that much more difficult for people to obtain cash for their daily needs.

COVID has exposed some of the operational challenges that retail banks face. These challenges must be addressed to regain people’s trust.

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