sense of collective behaviour in a sector or business activity like retail banking

A focus on cost reduction and revenue growth
Expectations of 20% RoE, which became normalised in banking before the crisis (Caruana 2012),
increased the pressure on management to reduce the cost base. Selling products via bank branches
in the UK typically accounts for 75% of total retail distribution costs (Bradey 2013;Quarry et al. 2012),
estimated at around £800,000 per branch per year (Deloitte 2007). Retail banks have responded in
two ways: closure of (often unprofitable rural) bank branches and the maximisation of revenue per
Justifying branch closure has been relatively easy for the retail banks, at least for the first movers
when customers could still use automatic teller machines (ATMs) at rivals’ branches. Branch closures
have been presented as the response to changing distribution channels (i.e. customer preferences)
and not primarily as a cost saving or profit maximising exercise. There is clear evidence that direct
channels – via telephone, online and increasingly using mobile internet – are used more, that fewer
customers visit bank branches and that those who do visit, do so less frequently (Deloitte 2007).
However, overall evidence that branch networks are becoming obsolete is weak. Although sales
arranged in branches have declined overall from 94% in 2000 to 67% in 2010 (Capgemini 2012), the
share of products sold in branches can vary significantly, depending on the type of product: for
example, 75% of current accounts and 40% of personal loans are still arranged in branch (Quarry et
al. 2012).
The density of the UK retail branch network is significantly lower than in other European countries:
by 2010, there were 199 branches per million inhabitants in the UK, compared with the EU average
of 463, as shown in table 1.10 Pressure to close branches remains: for example, in January 2014
Barclays announced a plan to close one quarter of its remaining branches, with expected cuts of
around 1,700 retail banking jobs announced just two months previously (Financial Times 14
November 2013).11 In addition to shrinking the branch network, increasing revenue per branch is an
important feature of business model behaviour. Even small increases in income can translate into
significant increases in profits given high fixed costs. In line with a more limited network, average
core retail banking product12 turnover per branch is substantially higher for UK retail bank branches
(£4.36m), compared to those in other main European markets (Deloitte 2007).
These cost and revenue pressures in the business model have a significant effect on customers
within the UK. Closures affect urban and (especially) rural areas: by 2012 there were 1,200
communities without any retail bank branch, and a further 900 with only one (Quarry et al. 2012) so
that some local markets are under-served. Interest rates paid on small deposits (up to £1,000) also
differ significantly across England and create regional retail banking markets; for example, banks in
the South West pay almost 0.7% higher interest than banks in the North East (CCBS 2013). Underprovision of branches in rural areas is not alleviated by new entrants, as these players prefer to open
branches in urban areas. In effect, new entrants tend to centralise bank provision in built-up areas,
leading to relative overprovision which could cause further branch closures of incumbents. If
financialised behaviour leads to cost-cutting in the branch network, the business model also creates
further potential problems for the consumer in the form of a highly opaque customer proposition.
Although, as the next part of the argument explores, customers may believe that they benefit from
‘free banking’, in practice this creates pressure to derive revenue from selling; with all kinds of
hidden cross-subsidy of some consumers by others.
The promise of free banking, the rise of confusion marketing and the importance of cross-selling
The creation and spread of Free-if-in-Credit (FiiC) personal current accounts (PCAs13) since 1984 is a
distinctive feature of UK retail banking, and one which clearly separates it from Management Fees
and Transaction Fees models employed by other European banks (Ashton 2009: 50). This new kind of
personal account, which provides banking services at no charge to those who have positive balances
on their accounts, allowed its originator Midland Bank to gain almost half a million new customers
within a year; the product was then rapidly adopted by other banks, transforming the industry and
creating a PCA market defined by opacity and cross-subsidy. The notion of a ‘free’ service is
interesting in a business model context because the bank will then generate revenues from other
sources, hence the importance of cross-selling additional products for example, insurance, loans or
credit cards to existing customers. This was explicitly highlighted in the Initial Public Offering
prospectus for the TSB Bank, which cites the importance of PCA holders for cross-selling
opportunities (TSB 2014, p.59). The PCA is thus regarded as a ‘gateway’ (CMA 2014a, p.48)) or ‘key
relationship product’ (defaqto 2012, p.2) that provides access to selling opportunities. Research by
Mintel has found that cross-selling is particularly important for some products including cash savings
and credit cards (CMA 2014a:48).
Business model pressure to cross-sell to existing customers to improve profitability has contributed
to a series of mis-selling episodes. The scale of redress required by regulators to compensate
customers who have been mis-sold products gives some indication of the sheer extent of the
problem. For example, payment protection insurance compensation reached £20 billion by 2015,
while the mis-selling of interest rate hedging products to small business had by 2014 led to £1.5
billion of bank provisions. The total effect of penalties and customer redress is staggering. For the
five largest UK banks the cumulative cost between 2011 and 2014 is £38.7bn, equivalent to 60% of
profits made over the same period (KPMG 2015, p.2). This has had a significant effect on RoE and
increases the pressure to find new revenues and to reduce costs further.