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Scotland is on the front line in the fight against “cash deserts”

Lossiemouth, Scotland
John Detrixhe
By John Detrixhe

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New technology is upending everything in finance.

Castlebay in Scotland’s Outer Hebrides is exceptional in many ways. More than half of the population speaks Gaelic, the nearest airport features the world’s only cockleshell beach landing strip, and the 15th-century Kisimul Castle was sold to the state in 2001 for £1 a year and a bottle of whisky.

Castlebay is also exceptional for another reason: It is among the very few villages in the UK that managed to save a bank branch after it was targeted for closure. The Royal Bank of Scotland announced it would shutter the only bank branch on the island in December 2017, as part of a plan to close 62 Scottish branches. After a fierce reaction from locals, it backed down. The island village’s extreme remoteness (even by Scotland’s standards) was finally an asset: An independent review found that it would take more than two hours by ferry to get to the next nearest RBS branch.

Communities like the villagers of Castlebay have been rising up in protest all over the UK to oppose the waves of bank branch closures and spread of so-called cash deserts. An average of 460 cash machines vanished every month in 2018, and the country has fewer than 8,000 bank branches now, down from nearly 18,000 in 1989. Around 1,500 previously banked towns no longer have one.

The angst in these villages and towns shows that a swath of people can’t, or don’t want to, leave the analog world behind, even as the number of ways to manage money online is exploding. And they have a point: Research shows that online finance isn’t yet a full replacement for its physical predecessor. Banks like RBS, Lloyds, and Barclays, meanwhile, are under pressure from impatient shareholders to cut costs, as digital rivals brag about their lack of costly physical branch networks.

In banks’ eagerness to embrace more profitable digital alternatives, they are scrapping branches and ATMs faster than society is ready for. As they retreat, the UK is becoming a laboratory for what the rest of the developed world can expect as financial apps rise and storefronts get boarded up.

Ground zero for cash

When it comes to financial services, Scotland is an unfortunate combination of sparsely populated rural communities and a graying population that either doesn’t trust, or want to use, digital alternatives. An independent review in December (pdf) found that physical notes and coins are still important for around 25 million people in the UK, which is around 38% of the population. At the same time, only about a third of transactions use paper notes and coins (roughly the same as the US), a figure that’s expected to fall as low as 10% in the next 15 years.

These days, people in bank-less towns are often dealing with a low-technology alternative in the form of brightly painted trucks equipped with internet access. The bank vans pull up in some villages for as little as 30 minutes a week and are meant to be a stopgap until everyone goes digital. The employees inside the vans are warm and friendly, and the trucks themselves have the atmosphere of an ice-cream truck instead of an armored vault. But the mood outside is colder.

John Detrixhe/Quartz
When banks roll out, the vans roll in.

The elderly, shopkeepers that run pubs or stores that deal in cash, and anyone else who hasn’t fully joined the digital revolution stand in line when the bank van comes to town. Some people don’t bank online because they don’t have internet access, while others, including the elderly and disabled, have a hard time switching to digital apps, and don’t want to disrupt the routines that help them live independently. There are also those who distrust online transactions, fearing fraud and hacking.

Awareness is sometimes a problem, as not everyone realizes they can deposit or withdraw cash through the UK’s Post Office system. A number of people I met along Scotland’s increasingly cashless northern coastline simply don’t want to give up the privacy and certainty that comes with paper money, thank you very much.

If the bank vans are meant to show that the banks aren’t leaving their rural customers behind, then they’ve backfired. White-haired ladies can be heard cursing the vans, as do shop and café owners lugging sacks of coins. To some, the vans are a weekly insult from executives in Edinburgh and London who don’t give a damn. In Castlebay, RBS had to suspend the mobile branch vans because of “hostility” toward its workers. 

“In Scotland, this closure program has certainly generated more negative coverage than anything I can remember,” said Ian Fraser, author of Shredded: Inside RBS, the Bank that Broke Britain. “They can see the branches closing, they can see the boards going up. It kind of captures the imagination—here’s this bank we saved. This is the attitude—we saved it, we bailed it out in ’08, and this is a betrayal. It’s turning its back on communities,” he said, referring to RBS’s near-collapse after the financial crisis in 2008 that was only averted after the UK government stepped in. (If there’s one thing many Brits know about banking, it’s that RBS got a £45.5 billion bailout.)

The reaction to RBS’s plan to close the Castlebay branch was brutal. The local MP, Angus MacNeil, called the branch closure “economic vandalism” and said RBS would have to drop the word “Scotland” from its name. He lashed out with a volley of press releases, at one point challenging the RBS CEO to “stop hiding and face the public.”

“He fought to save that branch with every sinew in his body, virtually, and he managed to get it included as one of the 10 that were earmarked for reprieve,” Fraser said. The community “managed to save their branch through political pressure and media pressure and whatever else.”

For MacNeil, keeping the branch was “a victory for common sense.” He told the BBC at the time that “a cloud has been lifted from the island economy.” The former Gaelic primary school teacher said the community’s stores would have been forced to hold more cash for longer, sending their insurance costs “through the roof,” and that the decline in notes and coins would have sucked commerce out of the village.

“For businesses, it would have been economic ruination, for pubs hotels, cafes, shops,” the MP said recently in a phone interview. “The bank is an economic enabler—we had to make that argument.”

When the ATMs run dry

In China, where smartphone wallets are becoming ubiquitous, digital apps brought things like car insurance and bank loans to people who had little access to those things before. But the opposite is happening in the UK. People who spent their lives using bank branches, and enjoyed easy access to their bank accounts and a wide spectrum of financial products, now feel shut out.

Take the coastal town of Lossiemouth, Scotland: It has a population of around 8,000, and you can hear the Royal Air Force fighter jets that are based there flying overheard. It now has one bank, a Bank of Scotland branch that will close in June (pdf). Barbers and restaurant workers say the village’s ATMs routinely run dry. “It happens all the time,” said Conservative councillor James Allan. As a result, people go five miles away to Elgin to get cash or do their banking, and then end up doing the rest of their shopping there as well.

Allan, like many people I talked to, believes the decline in foot traffic to bank branches is only part of the story. He thinks Bank of Scotland, part of Lloyds, intentionally made the branch just about useless: “They cut the hours, they cut services, so you couldn’t get mortgages, couldn’t get travel currency. When people want to open an account, they said you can’t do it there,” he said. “You can’t win with them.”

An hour-and-a-half drive away, shop and cafe owners have similar stories. Invergordon, a port village in the Highlands, lost its last bank branch four years ago. Now its ATMs routinely run dry, too. And since it lost its last bank, the commercial center of gravity has been shifting to Alness, around four miles away, which still has some branches.

Bank of Scotland says its customers increasingly prefer digital services. “Customer behavior continues to rapidly evolve with people increasingly using digital channels for their everyday banking needs,” a spokesperson said by email. “When we make other types of changes to a branch, such as opening hours, our decisions are always based on the frequency and ways in which customers are using the branch.”

With so many banks shutting down, there’s a growing amount of research in the UK about how it affects businesses and communities. The results tend to suggest it’s bad for small businesses (pdf), which not only have to deal with shifting shopping patterns, but have already had a harder time getting loans since the 2008 credit crisis, as banks focused on bigger, more profitable clients.

Businesses are more likely to get financing—the oxygen for commerce—the closer they’re located to a bank branch, according to research published last year (pdf) by professors at the London School of Economics and University of Edinburgh Business School. “Our results suggest that, despite rapid technological change, local banking markets still matter,” they wrote.

Earlier research published by professors at the University of Nottingham in 2012 also showed that branches, already in their third decade of decline, were more likely to be shut down in poorer areas. It found that two-thirds of closures took place in areas where the least affluent people live.

Small companies make up 99% of the 5.4 million enterprises in Britain’s private sector. Traveling further to get cash or banking advice can make them less productive, and local economies have suffered from “lower footfall in local high streets and town centres,” according to the Federation of Small Businesses. Proximity to banks, meanwhile, is still the third-most important factor for local business in the Scottish Highlands and islands, according to a 2017 survey by David Richardson, development manager at the Federation of Small Businesses for the area.

A place in society

The rise in internet banking is unrelenting and, let’s be honest, most people love it. Bank app usage skyrocketed by more than 350% between 2012 and 2017. Most people would rather go online (or do just about anything else, for that matter) than visit a bank branch, and that number is only going to increase over time. Investors are pouring billions of pounds into London-based, branch-free digital banks, and have been well rewarded for it. Some of the UK’s most valuable tech startups are online-only digital banks.

That makes it easy to lose sight of the parts of society that aren’t part of the digital revolution. It’s one more way this century has favored the young, urban, and digitally minded, concentrating power in capital cities (where nobody has heard of a bank van) and destabilizing communities that were already losing jobs and people.

It draws a sharp contrast with a time, decades ago, when the bank branch manager mattered in Britain. “They had a place in society, they knew what was going on, they knew everybody who was worth knowing,” Derek French, who started working at National Westminster Bank in 1957 and spent the next 38 years there, said in an interview.

But that system, where the local branch manager made key lending and banking decisions, began disintegrating before the internet came along, during the 1970s and 80s. As credit scoring and algorithms caught on, authority was sucked out of the provinces and concentrated in London. The business model proved cost efficient and unstoppable, not unlike the rise of internet banking now.

As their autonomy declined, branches were “de-skilled” and became little more than sales outposts. Their decor matched their new role. “The previously dark and imposing banking halls were redesigned into brightly coloured, open-plan retail spaces,” Pål Marthon Vik, a research fellow at the University of Salford, wrote in a PhD thesis titled The Demise of the Bank Branch Manager.

The digital revolution supercharged the shift in algorithmic, automated authority that was already underway. To be sure, there are benefits beyond fattening banks’ bottom lines. The patriarchal branch manager was almost always a man and more likely to make loans to other men, with the same color of skin (that is, almost always white). Credit scoring makes lending more efficient, precise, and profitable.

But banking also became less personal, and the real-world connection of a banker who is embedded in a community was lost. While the old system could be unfair, people seem to trust the algorithms even less: The percentage of Brits who think banks are well run fell from 90% in 1983 to 19% in 2009. (Scots, hard hit by branch closures, have even less faith in banking services than people in the rest of the UK, according to a recent survey.)

“Fintech has been one of the most overhyped things I can remember.”

Another worry is that big data and better algorithms could exclude some parts of society from getting financing, according to Mick McAteer, co-director of the Financial Inclusion Centre, a not-for-profit policy group. Providers are getting better at identifying the most profitable and most risky consumers. While some, maybe even most, people will get better deals on loans and insurance than ever, those who can least afford it will pay more financial services, he said.

“Fintech has been one of the most overhyped things I can remember, and I’ve been involved in this for a long, long time,” said McAteer, who was previously a board member of the Financial Conduct Authority, the British regulatory watchdog. “We expect fintech and big data to lead to more exclusion.”

In the meantime, the digital benefits to big financial institutions are undeniable. Cash handling costs around £5 billion ($6.5 billion) a year in the UK, according to some estimates. Banks, meanwhile, can profit when they get a slice of electronic payment transactions. And while branches were once a primary means of collecting deposits, an important source of funding for loans, years of branch closures have had no noticeable impact on that source of capital for banks.

Broken promises

“You’ve taken a public relations pounding on this,” Pete Wishart, a Member of Parliament for Perth and North Perthshire in Scotland, said a year ago during a Scottish Affairs hearing in Westminster. “Why don’t you recognize this and do something that people seem to want you to do?”

Wishart was asking RBS CEO Ross McEwan why the lender doesn’t keep more of its branches open, given the protests and headlines, not to mention parliamentary hearings. RBS also owns Natwest bank, which has closed more branches than any other UK bank brand since 2015.

The drop-off in branch usage has been “much, much greater than I would have ever have anticipated when I started running the retail bank six years ago,” McEwan, a New Zealand native, replied. “It’s not just here in the UK, not just here in Scotland, it’s across the world that people are changing.”

RBS has become the public face of bank closures in Scotland, which isn’t altogether fair. All the major banks in the UK have reduced their branch footprint in recent years. Indeed, to avoid the stigma of closing the last bank in town, there’s a race to the bottom in some communities to get out early, according to the Campaign for Community Banking Services. RBS may have been slow off the block, which has magnified its closures in recent years at a time when fewer villages still have a branch.

Even so, the bank has made a few unforced errors along the way. In 2010, RBS said it would keep a branch open if it is the last remaining bank in that community, and it ran ads about this commitment. That hasn’t happened: In 2015, two years after McEwan became CEO, RBS shuttered the Knott End branch that it used in the ad.

There also indications that not all of the declining footfall to RBS branches is organic. At last year’s Scottish Affairs hearing, McEwan denied giving branch staff incentives to switch customers to digital banking. But a leaked document published by the Daily Record showed otherwise, signaling that staff had targets for mobile-banking signups. RBS didn’t respond to requests for comment.

Broken promises aside, it’s conceivable that the Scottish Affairs Committee should be yelling at itself instead of the boss of RBS. The bank—as everyone in the UK is quick to remind it—is still about 60% owned by British taxpayers. Among the shareholders that are keen for the bank to cut costs and boost profits is the UK Treasury, which wants to sell its RBS stake. The government hasn’t stood in the way of RBS’s branch closures.

The government’s role goes deeper when it comes to modern banking. Commercial banks operate in an unusual sphere, where they rely on government subsidies (access to central bank lending and money, and cheaper funding costs from the implicit expectation that big banks will get bailed out in emergency), yet exist as for-profit entities with an obligation to enrich shareholders.

Banks “should be treated as utility, not as just another provider of services.”

This is why some watchdogs and academics think banks should become a utility, like water or electricity. “They have special privileges and that’s a good thing. It’s central to the functioning of the economy,” McAteer, co-director of the Financial Inclusion Centre, said. “The tradeoff is that they should be treated as utility, not as just another provider of services.”

There was a moment after the financial crisis, as Britain’s banking sector was put on government life support, when a major rethink of the world’s banking systems was possible. And indeed, some major changes have taken place—banks are fortified with much more capital, and trading is much less profitable than it used to be. (So much so that Goldman Sachs, a swashbuckling investment bank, is ramping up its retail banking operation—sans bank branches, of course.)

But the underlying principle that banks are for-profit entities that derive much of their earnings from government support remains. They’re designed to benefit private shareholders rather than society as a whole.

“That was the key moment,” Shaun French, an associate professor at Nottingham University, said of the post-crisis soul searching that took place around 2009. “The banks had lost so much, they were on the edge of collapsing and the state had to step in. You could hit the reset button and have a good political conversation. But for all sorts of reason that moment was lost.”

Safe for now

The uproar over bank branch and ATM closures in the UK has at least sparked a political reaction, with the government announcing a new committee this month that’s meant to protect the public’s access to cash. And Square, a tech payment company, sees a business opportunity: It has been reaching out to local politicians and community shops, offering systems that could help villages make the transition to digital payments. The fintech industry may be overhyped, but it could also offer some solutions.

In Castlebay, the remaining bank branch is safe for now, as RBS says it has no additional plans for branch closures through at least the end of 2019. MacNeil, the local MP for the island of Barra, where Castlebay is located, hopes RBS leaves its branch alone. But if it is closed one day, he argues that all branches elsewhere should be shut down, too. Why should small villages be the only ones to lose out?

“If the argument was that Barra didn’t need a branch, then why don’t they close every branch in Scotland?” he asked. “If people don’t need branches and people bank online, then close every branch.”

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