When Bank Branch Investments Turn Sour

In what I can only describe as a 'surprising' move, Westpac Bank in Australia announced a A$240 million commitment to its branch network. Dismissing widespread forecasts of the declining role of the bank branch, Westpac has now committed A$240 million to a major, tech-heavy overhaul designed to bring its physical network into the 21st century. Such a move puzzles me, because the very same article makes reference to the rise in digital interactions, and a shift in customer behaviour. Something Brett King championed in his eBook Branch Today, Gone Tomorrow (Amazon). King opens the book with a logical view on the future consumer, "Will my kids ever visit a branch?" Using proof points from music, TV and books, King highlights the reality that traditional players rarely survive infrastructure and digital distribution transformations. Just ask Borders, Blockbuster and Britannica. Such demise are usually under pinned by an unsupported belief that face to face interactions and physical location are important components in the customer value chain. But where are Borders now?

In banking, digitisation is only accelerating through multiple disruptive businesses, like Square, Simple, Venmo, Movenbank, Dwolla and PayPal. Square alone now accounts for 1/8th of all US merchants.

In parallel, the smart phone has put a mobile computer in the pocket of consumers. These computers have created the concept of the 'always on' generation, as entire generations no longer associate physical locations with a service or content based businesses. It's become the behavioural norm to buy the latest Angry Birds game while waiting for a bus, rent a movie on your Apple TV without leaving the house, or to browse a Best Buy store while doing a price comparison on Amazon. You can even open a Pay with Square, Venmo or Dwolla account right from your smart phone. As Brett King puts it, banking is no longer somewhere you go, but something you do (Bank 3.0).

To offer some investment comparisons, Simple (formerly Bank Simple) has taken on roughly US $13.1 million in two rounds of investment and built an entire transactional bank which currently moves over half a billion dollars annually, a fraction of Westpac's A$240 million investment commitment with significantly higher returns. Prior to a recent Series D investment, mobile payments poster child Square, built a billion dollar business from just US$140 million in investments. Square today has over a million merchants and is on track to process well in excess of US$4 billion dollars for 2012.

So I pose the question again. Why would a bank commit A$240 million of shareholders' money to reinvest in a distribution network that is so obviously on its way out, the bank branch? How do shareholders accept such investment decisions? And most importantly, when will the analysts decide that large-scale investments in branch networks are seen as a negative move by banking executives?

If banks continue down this misguided path, they face the same fate as Borders, Blockbuster and Britannica. They can lean on incumbent positions and regulation all they want. But if an entire generation doesn't want to use their services, they are out of business.

This decision by Westpac should be seen as a negative move by its executives, the market and shareholders should hold them accountable.