Branching Out

Good Bye Main Street, Hello Tablet

The lights are going out in HVB's branches.
  • Why it matters

    Why it matters

    Germany’s retail banking sector has traditionally been highly personalized, leading to a bloated branch network. Hypovereinsbank is replacing branches with technology to cut costs but critics say customers aren’t ready for the change.

  • Facts


    • Hypovereinsbank is closing 240 of its 580 branches.
    • The Munich-based bank is a subsidiary of Unicredit Bank from Italy.
    • About 20 percent of Germans still do all of their banking at a branch.
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Katrin Hesse is a little nervous about the upcoming ceremony, to which she has invited almost 150 guests. The manager of the Berlin branches of Hypovereinsbank, or HVB, wants to show off to her most important customers the bank’s chic, attractive and newly renovated branch in the Charlottenburg neighborhood.

Ms. Hesse conducts a quick tour of the renovated branch. The ATMs are now in the main room at the front, instead of in a separate vestibule, and there is now someone sitting at a desk who serves as a concierge of sorts, ready to address any questions customers may have.

There is a comfortable seating area in the corner with a coffee machine. Glass cubicles, prepped both for face-to-face and video consultations, are scattered around the branch. The cubicles are surrounded by opaque privacy glass decorated with images of Berlin landmarks, such as the Reichstag. Each has a flatscreen TV.

The design is meant to convey a sense of openness, discretion and proximity to the customer. But it is also part of a risky revolution. The branch is one of the first components of the biggest transformation in the German retail banking sector since the merger of Dresdner Bank and Commerzbank, two leading players, in 2008.

There are many indications that the bank is moving too quickly and asking too much of its customers.

HVB, based in Munich and a subsidiary of Unicredit Bank in Italy, is putting all of its eggs in one basket. It is radically reducing the size of its branch network while simultaneously giving the remaining branches a facelift, complete with new technology. The bank is betting that its customers have already accepted technologies such as consultation via video and the Internet, and that they will not punish the bank’s downsizing by closing their accounts. If the plan works, it could serve as a model for other lenders.

But it’s also very risky. There are many indications that the bank is moving too quickly and asking too much of its customers. They might be unwilling to accept virtual advisers as a replacement for face-to-face conversations. Many could feel abandoned and decide to switch banks.

The experiment has been underway since early October, when HVB began rapidly renovating all of its branches. Some 40 renovations are already completed, and the bank expects all others to be finished by the end of 2015. This means that all branches will have the same features as the one in Charlottenburg.


Development of German Credit Institutions-01


Or at least all the branches that are still open. The renovations coincide with the bank shutting down 240 of its 580 branches. Doors have been closed and signs removed from many HVB branches, especially in smaller towns. The closings translate into the loss of about 1,500 jobs. Customers in these towns are now expected to drive to the nearest branch or do their banking by phone or online.

The man behind this radical concept is Peter Buschbeck, a member of the HVB executive board in charge of retail customers since 2009. He has already tried various approaches. He closed several branches, launched and then discarded a franchise concept, and opened an “online branch” that gives Internet customers access to personal advisers on the web. But all of this was just a prelude to the real revolution.

Since the renovation plans were announced, Mr. Buschbeck has had to defend the new strategy, explaining that it is relieving pressure rather than merely cutting jobs, that he isn’t a gravedigger but an innovator, and that the bank is spending €300 million ($373 million) on its modernization program.

“The branch is and remains a central consultation site, but we are modifying the network to conform to changes in customer behavior.”

Peter Buschbeck, HVB board member

“Even though we are definitely saving costs, we are also sending a clear signal for the future,” he says. “The branch is and remains a central consultation site. It retains its importance, but we are modifying the network to conform to changes in customer behavior.”

Banks have had trouble coping with the changes brought about by the digital age. While rent and personnel costs remain high, banks, not unlike retail stores, are increasingly seeing customers do their business online instead of on-site. They also face a barrage of new regulations designed to protect savers, which are costly and time-consuming to implement.

The low interest-rate policies of central banks have increased the pressure even further, by reducing the interest surplus critical to the bottom line of branch offices. The interest surplus is essentially the difference between the interest a bank pays for deposits, and the interest it earns on the money it invests. If it invests through lending, the profit margin is negligible, while investing in relatively low-risk securities is also hardly profitable. The latest yield on 10-year German government bonds is 0.9 percent.

None of this will change anytime soon, creating the conditions for drastic scenarios. A recent study conducted by Bain & Company, a consulting firm with expertise in the retail customer sector, concludes that German banks will have to reduce their costs by €25 billion in the coming years to remain sufficiently profitable.


Peter Buschbeck wants fewer, more streamlined bank branches. Source: WirtschaftsWoche


The path to profitability sounds brutal: 11,000 of the current 37,000 branches would have to close, and 125,000 of the retail banking industry’s work force of 630,000 would be out of work. The ensuing upheaval would be comparable to the radical changes in the steel industry in the last century, said the Bain consultants.

These are not wild predictions. When Germany’s top financial regulators recently presented the results of the European Central Bank’s stress tests, carried out as a prelude to the ECB taking oversight of Europe’s banks, they were pleased to conclude that no German banks failed the tests.

But they also stressed that the banks cannot simply proceed as if nothing had changed, noting that banks would need to both make more and save more money. “It should make them think about their relatively abundant branch networks,” says Andreas Dombret, the member of the Bundesbank’s executive board in charge of banking supervision.

It’s no coincidence that HVB is the bank choosing to take such a radical step. Although it is a leader in business lending, it’s a relatively small player in the retail savings and mortgage lending categories, with only four million (relatively affluent) retail customers. By comparison, Deutsche Bank, Germany’s largest bank, and its subsidiary Postbank have a combined 24 million retail customers.

To address the low customer base, the bank, owned by Italy’s UniCredit since 2005, has repeatedly tried to acquire competitors, but so far without success. This is why Mr. Buschbeck is now trying the hard way. He has a reputation as a tough customer. When he ran the German division of Swedish bank SEB, employees were required to account for their sales successes or failures once a week.


067 HVB HypoVereinsbank Group


But colleagues report that Mr. Buschbeck is taking a more relaxed approach at HVB, where customers are more demanding. He is now trying to shine as more of a technician than a slave driver, determined to make HVB a pioneer in banking via Internet and smartphone. He is constantly presenting something new. For instance, HVB will soon unveil an improved security concept for mobile banking transactions.

While Mr. Buschbeck does not want to turn his branches into “cathedrals of technology,” he is particularly enthusiastic about video consultation. It enables experts to help customers with specialized issues at any time, even if they are not actually on site. The bank saves costs, while at the same time promising customers qualified consultation. HVB tested the concept for three years, and now it is being used everywhere, including Berlin.

To demonstrate how well it works, Ms. Hesse turned on one of the screens in the Charlottenburg branch, and Sandra Schenkhut appears. She is blonde, smiling, wearing a headset and standing in an office in Leipzig, 200 kilometres (125 miles) away. Ms. Schenkhut, an expert in real-estate financing, calculates whether a customer can actually afford to buy a piece of real estate. She asks him questions about his income, how much he spends each month and how much he has saved. It feels a little schematic and impersonal.

“The approach is highly risky. Changes in customer behavior happen quickly, but not that quickly.”

Klaus Grünewald, Trade union representative

But at least it works. Hardly any expert doubts that technologies like this will play a more important role in the future. The only question is whether enough customers are sufficiently ready for the technology to offset the loss of branches.

“HVB is taking a bold approach. It’s the right approach and it makes sense, but it might be too early,” says Oliver Mihm, head of Investors Marketing, a Frankfurt consulting firm. “For many customers, the branch is still the most important point of reference to their bank.”

According to a current study by Investors Marketing, about a fifth of customers still do all of their banking at a branch. For 70 percent of customers, the branch represents the most important way to contact the bank, and 80 percent use it to obtain financial products and for detailed conversations with bank advisers.

It’s also a generational issue. While 80 percent of customers under 49 use the Internet for banking transactions, only a third of those over 60 do the same. The interesting thing about older customers is that while they may have little knowledge of computers, they often have plenty of money.


Online Banking mit allen Jahren-01


“The approach is highly risky. Changes in customer behavior happen quickly, but not that quickly,” says Klaus Grünewald, who has represented the Verdi trade union on the supervisory board of HVB for more than 20 years. He has already witnessed several cost-cutting measures, and he is particularly skeptical about the current one.

Mr. Grünewald questions whether it’s appropriate for a premium bank to communicate with its customers primarily by video, especially if the technology fails occasionally.

Employees are also anxious. When a branch closes, they are often transferred to the nearest one that is still open. But whether they’ll be able to stay there is uncertain.

There is also great interest in the bank’s severance packages. “Many are no longer willing to deal with the stress,” said one employee, who declined to be named. What irritates her most is that everything is happening so quickly.

“We spent a long time carefully preparing these decisions,” said Mr. Buschbeck. “Now we are implementing them quickly, because customers should be able to benefit quickly from the modernization program.”

Branches like the one in Au in der Hallertau, an affluent town of 6,000 near Munich, didn’t make the cut, despite having recently marked its 100th anniversary. Mayor Karl Ecker is angry about the hasty closing of the branch. “This makes no sense at all,” he said, pointing out that the bank has its branch in the best possible location, directly on the market square.

“This was the brainchild of managers at headquarters who are out of touch with reality,” said Mr. Ecker. After he had sent two angry letters to Munich, the bank is now considering keeping an ATM in the town. HVB has offered its customers €50 to remain loyal. “But why should they drive the 12 kilometers to the nearest branch?” Mr. Ecker asked.

The competition is already stepping into the breach. Raiffeisenbank is actively recruiting HVB customers, while the local Sparkasse savings bank  is running a campaign with posters and adverts. The ads depict eight Sparkasse employees wearing traditional Bavarian outfits and gathered around a tractor, under the headline “We’re Staying in Town.” They are smiling confidently – smiles that stand for tradition, proximity and reliability. And stand against Peter Buschbeck.

So who will have the last laugh?


This article originally appeared in the weekly business magazine WirtschaftsWoche. To contact the author:

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