Shareholder Ownership Forces Branch Closures

Building societies have closed branches at a considerably slower rate than banks, according to newly published research by the University of Nottingham1.

Banks and former building societies have closed one in five of their branches between 1995 and 2003. However, building societies closed only 1 in every 20 of their branches.

The study acknowledges that closures have occurred as a result of the competitive financial services market place. There have also been changes in the social and economic geographies in which the institutions operate, as well as because of the impact of new distribution channels. In addition to these factors, however, the study stresses the importance of the different forms of corporate governance between banks and building societies and its impact on branch closures.

The report states that “banks in particular [are] anxious to drive down costs by closing branches in the face of investor pressure”. Interviews with representatives of banks and building societies “made it apparent that corporate governance plays a key role in explaining unevenness in branch rationalisation; public limited companies are under greater external financial pressures to reduce costs and improve profits”.

Banks claim to have halted branch rationalisation programmes, saying “natural wastage” was behind recent branch closures, but the research finds evidence of “small-scale, phased closure programmes” that continue to go beyond this. At a time when the banks are reporting record profits, the report suggests even profitable branches are closed if they are not making a large enough contribution to the group’s bottom line.

The study states that building societies value their branches differently. Non financial reasons such as how the branch is valued by members and the importance of personal contact are key considerations. The report also suggests that building societies generally close or impose changes at poorly performing branches with less vigour than is the case at banks.

Unlike banks, building societies do not have any external shareholders, which means they can concentrate 100% on the needs of their customers. This difference is highlighted by branch closures between 1989 and 1995. During this time only Abbey National had converted to a bank and the number of branches closed by the [now] top ten demutualised institutions was just 3.6%. After 1995, when more building societies became banks and had to deliver profits to shareholders, this shot up to 19.3%.

The report concludes that most closures take place in less affluent urban areas. This has important consequences for financial inclusion as most of those excluded from financial services are in the lower income deciles. The government believes branches are vital in improving financial inclusion as low-income customers are heavier users of branches. Not only have building societies closed fewer branches, but the impact on the members in the communities they serve remains a major consideration in assessing branch performance.

1 The Changing Geography of British Bank and Building Society Branch Networks, 1995-2003. Leyshon, A, Signoretta, P, French, S, 2006.