Why big banks aim to adapt – not eliminate – branches

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Toronto-Dominion Bank plans to cut just 10 Canadian branches from its retail footprint this year, a slight decrease that speaks volumes about the attachment big banks still have to their extensive networks.

TD operated 1,165 branches in Canada at the end of 2015, implying that the cuts by the end of this year would amount to less than 1 per cent – even though 75 per cent to 80 per cent of customer transactions among the big banks are now handled outside of branches.

"Branches are incredibly important and we think they will continue to be," said Teri Currie, group head of Canadian Personal Banking.

Bank branches have emerged as a key challenge for the big banks in recent years. Extensive networks display signs and logos that provide considerable marketing value. However, the expense of operating branches comes at a time when banks are trying to cut costs and deal with nimble new competitors that aren't burdened by legacy issues.

Online lenders, robo-advisers and digital "branchless" banks – often grouped together as financial technology firms, or fintech – believe their branchless operations give them a significant competitive advantage over established players.

TD, like other big banks, believes that branches need to adapt. Rather than relying on traditional formats, the banks are experimenting with smaller branches that are designed to dispense advice as customers increasingly turn to their phones and computers to pay bills and transfer funds.

"We're taking advantage of good locations for our customers and having the right size branch in a community," Ms. Currie said. "So you'll see more flexible and adaptable footprints."

This transformation, though, takes time because the bank is testing new formats and dealing with long-term leases. Three years into the shift, Ms. Currie estimated that one third of TD branches now reflect the changes.

Other big banks are exploring similar changes as new technology offers one of the biggest challenges ever posed to traditional banking.

Brian Porter, chief executive officer of Bank of Nova Scotia, recently outlined a key advantage of branchless banking. He said that Scotiabank's digital banking arm, Tangerine, serves two million customers with fewer than 1,000 employees – or 2,000 customers per employee. Scotiabank, on the other hand, serves 21 million customers with 90,000 employees, or a less-attractive ratio of 233 customers per employee.

Tangerine, Mr. Porter told students at Ivey Business School at the University of Western Ontario, "is a great example of what a bank of the future can be."

Scotiabank is now starting to reduce its branch footprint. The bank has lowered its branch count by more than 30, or 3 per cent, over the past 18 months. Over the next two years, it intends to cut up to 5 per cent, or another 50 branches.

But, like TD, Scotiabank believes that newer formats are more important than the cuts because branches are still in high demand among consumers.

Ms. Currie, who oversaw TD's technology operations before assuming her current role at the start of this year, said that 25 per cent of financial transactions still occur within TD branches. But she believes they remain especially important for engaging with customers that might also use other co-called channels, such as online or digital banking.

"Most customers deal with us across many channels, including digital, so there are very few who would skew to branch-only or digital-only," she said.

This observation, she added, also applies to younger customers who are largely associated with digital experiences.

"The demographics make only a very marginal difference," she said. "People are really looking for ways to be able to bank when, where and how they want, and they use a combination of the phone, the ATM, online, mobile and branches to meet their needs."

The challenge, though, is to fend off fintech competitors that can appeal with specific online services that might be faster or more user-friendly – and traditional retail banking, which generates the bulk of profits for Canada's big banks, is a prime target.

"We're facing both traditional and non-traditional competitors," said Ms. Currie, whose role puts her at the centre of this battle. "We have the advantage of a customer base, the relationships, the safety-and-soundness aspects that customers really value."

And branches, she believes, are part of the attraction.