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RBS branch cull makes strategic sense, but could hit SMEs

Royal Bank of Scotland Group Plc's plan to shutter a swath of branches in the U.K. and Ireland should be eased by a natural shift toward digital transactions. But some smaller firms could suffer as a result, at a time when the bailed-out bank is trying to show it can support the SME sector.

RBS announced plans in March to close 158 branches in England, Wales and Scotland, mainly from its National Westminster Bank Plc, or NatWest, brand, together with 9 Ulster Bank Ltd. branches in Northern Ireland and 22 branches of the Ulster Bank Ireland DAC division in the Republic of Ireland. It said an increasing consumer preference for digital banking was behind the decision.

It comes at a time when RBS, the recipient of a £45.5 billion bailout in 2008, is under pressure to cut costs. In February, having suffered its ninth consecutive annual loss in 2016, the bank unveiled a new £800 million cost-cutting plan for 2017.

Now that it has come to the end of cutting noncore businesses, it is natural that it should start looking to its core business and ask what else needs to be trimmed, with branches being an obvious example, according to Laith Khalaf, a senior analyst at stockbroker Hargreaves Lansdown. But an ongoing shift toward digitization should mean closing branches will be far less painful than it might otherwise have been.

"Customer engagement has been completely turned upside down by the move to digitization," Khalaf said in an interview. "This means that banks that need to shut branches to cut costs are going to have a softer landing."

RBS has been consistently scaling back its business since the global financial crisis, with total assets falling to £800 billion in 2016 from £2.4 trillion in 2008. It has retrenched from international markets such as India and pulled back from business lines such as shipping.

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Diarmaid Sheridan, a research analyst covering financial services firms for stockbroker Davy Research, said major banks like RBS have already rethought the role of the branch.

"It is a natural evolution, given the migration of transactions away from branches on to digital platforms," he told S&P Global Market Intelligence. "Branches, to the extent they are retained, will become service-led centers."

Fellow U.K. bank Lloyds Banking Group Plc is a case in point. The lender announced April 3 that it planned to shrink hundreds of its branches to "micro" versions that would be staffed by as few as two people, with staff helping customers carry out simple transactions and advice on more complex matters such as mortgage advice available by video link.

The average U.K. bank branch received 71 visits per day in 2016, a 32% fall since 2011, according to data compiled by CACI, while the number of payments made by mobile banking apps rose to 347 million in 2015, a 54% increase on the previous year.

Big impact for small businesses

But certain clients will find RBS' cull of bank branches hard to stomach. Smaller businesses in particular may end up feeling that they have lost a vital service, particularly when the bank closes "the last bank in town," said Alan Soady, spokesman for the Federation of Small Businesses.

And the news comes at a time when the European Commission is scrutinizing the bank's proposed alternative to selling its Williams & Glyn network, which involves supporting small and medium-sized enterprises. RBS was unable to sell the 300-odd branch business, which had been a requirement as part of the conditions of its state bailout. The alternative involves setting up a fund to help challenger banks support SMEs and specifically granting SME customers of challenger banks access to its branches.

"Businesses may use a local branch for something as simple as banking their takings at the end of the day," Soady said. "There is a perception among some of the banks that cash is less important than it actually still is, particularly for small businesses. It's easy to think when you are sitting in a skyscraper in London that everything is paid for by card, but this is not the case in much of the country."

The Post Office agreed a tie-up agreement with certain U.K. banks in 2015, which has meant that customers in towns and villages with no bank still have access to a limited number of counter services.

But Soady said that may not be comprehensive enough for the needs of small businesses, and the long queues at the Post Office make it an inefficient substitute for a traditional bank branch.

The FSB is in an ongoing dialog with HSBC Holdings Plc about branch closures, Soady said. HSBC closed 223 branches in 2016 and has announced a further 62 branch closures for 2017.

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