Frontpage News 2013 Danes have taken o...

Danes have taken online banking to heart

24 October 2013

The number of bank branches in Denmark decreases as more and more Danes use the banks’ digital solutions. 
 
In the recent inventory in 2012, approximately 80 percent of Danish internet users used online banking, while the number of branches was 1,436. 
 
Each time the proportion of the population using online banking increases by one percentage point, the number of branches falls by about 17.
 
 
Figure 1: The prevalence of bank branches and online banking in Denmark
Source: The Danish Financial Supervisory Authority, Eurostat and the Danish Bankers Association’s calculations.
Note: Index 100 for 2004. The number of bank branches and the proportion of the population with Internet who uses online banking.
 
 
The Danish banks really started to adjust the number of branches in 2007 and 2008. During the subsequent financial crisis, the banks' earnings have not only been very low, it has sometimes been negative. Therefore, there has been a need for cost adjustments, and as part of the process, the banks have looked at the number of branches. So there is a direct cost explanation to why the banks have modified the number of branches in recent years. 
 
It is also a fact that Danes are increasingly seeking to do banking business on the computer, mobile phone, tablet, etc. This demand is a major reason why there are fewer bank branches.
 
Calculations based on data for the 28 countries in the EU suggest that demand for digital self-service solutions is the dominant factor behind the branch modifications (see Box 1).
 
Also the cost explanation is statistically significant. And it can be concluded that the development with fewer branches is both driven by a desire for less costs and less need for physical bank branches.

 
________________________________________________ 

Box 1: What can explain the development in the number of branches? 

To illustrate what can explain the development in the number of branches, a series of statistical models is established, see the chart below. A combination of OLS and Fixed Effects is used.
 
As the explained variable, the percentage growth is used in the number of branches from year t-1 to year t. As explanatory variables, the share of online banking users is used (expected operational sign negative (-)), personnel costs compared to total bank assets (expected operational sign -), return on equity (expected operational sign +), growth in the number of banks (expected operational sign +) and GDP per capita, to control for differences between richer and poorer countries (expected operational sign is uncertain). Finally, year dummies are included to capture common macroeconomic shocks in the EU area, and individual country effects.
Data for the EU28 countries is used individually in the period 2007-2012.
 
The table below shows that the explanatory variables have the expected operational signs. However, only the share of online banking users and the return on equity are significant (i.e. the demand- and cost explanation). It is also noted that the degrees of explanation tend to be low. When controlling for country-specific effects significance of the other explanatory variables disappears. It may be due to the fact that the included variables do not perfectly capture e.g. the demand- and cost explanation, and the modeling of them is individual from country to country. Or that it is entirely different motives that drive the development.
The models' explanatory power increases, moreover, considerably if one instead estimates the level of branches, rather than the growth in the number of branches, as shown here.
 
Table: Explanation of the growth in the number of bank branches 
 
(1)
(2)
(3)
(4)
(5)
(6)
(7)
The share of online banking users
-0.06**
-0.07**
-0.07**
-0.07**
-0.10***
-0.09**
0.10
Staff costs compared to assets
 
-1.78
-2.00
-2.01
-0.67
-0.57
4.70
Return on equity
 
 
0.05*
0.05*
0.05**
0.04*
-0.01
Growth in number of banks
 
 
 
0.03
0.05
0.02
-0.00
GDP per capita
 
 
 
 
0.00
0.00
0.00
Constant
-0.26
1.78
2.01
1.98
-0.48
-1.92
-52
Macroeconomic shocks
 
 
 
 
 
+
+
Individual countries’ power
 
 
 
 
 
 
+
Number of observations
117
117
116
116
116
116
116
Explanatory power
0.04
0.05
0.08
0.08
0.10
0.15
0.40
Note: The explanatory variables are for the period t-1, with the growth in the number of banks as the exception. *** Indicates significance at the 1 percent significance level, ** at 5 and * at 10. VCE robust error terms. + Indicates that the variable is included in the model.
Source: IMF, Eurostat and the Danish Bankers Association’s calculations
.
 
 
To elucidate the individual components’ explanatory power, a basis is made in the model in (6). As shown in the table below, the individual partial explanatory powers are relatively low. The contribution of the share of online banking users are, however, twice as large as the contribution from the focus on earnings. That is, the demand explanation dominates the cost explanation.
 

Table: Partial explanatory powers of (range of) the growth in the number of bank branches 
Factor
Partial correlation, R2
Share of online banking users
0.0618***
Staff costs compared to assets
0.0015
Return on equity
0.0338*
Growth in number of banks
0.0022
GNP per capita
0.0201
Note: *** indicates significance at the 1 percent significance level, ** at 5 and * at 10. VCE robust error terms. + Indicates that the variable is included in the model.
Source: IMF, Eurostat and the Danish Bankers Association’s calculations
.
 
________________________________________________ 
 

Still a relatively large number of bank branches in Denmark

A declining number of bank branches is not a unique Danish phenomenon. As seen below, the majority of the banking sectors in the EU has shut down branches since the financial crisis began. Denmark, along with countries such as Spain, the Netherlands and some Eastern European countries, has had the most significant decline. 
 
Whereas in 2008 there were approximately 40 branches per 100,000 inhabitants, the figure in 2012 is about 25. Although Denmark since 2008 has moved from being among the countries with the highest number of branches in relation to population size, to a place in the middle of the field, we still have many branches compared to several of the countries to which we normally compare ourselves - Sweden, Holland and England.
 
Branches are expensive to maintain. This itself speaks for the modification of the branch structure that will continue in the coming years. It will also be considered how bank customers who are not familiar with IT solutions will become able to handle their banking transactions. There is experience with, for example, PC courses aimed at the elderly.

 
Figure 2: Number of bank branches per 100,000 inhabitants
Source: Eurostat, ECB and the Danish Bankers Association’s calculations.
Note: The available figures for the EU countries
 

Online banking is widely used in Denmark

The modification of the branch network will, as mentioned earlier, also very much be driven by weaker demand for personal contact with the bank. As the digitalisation gains ground and the development of new solutions for tablets, mobile phones and the like increases, it is expected that the need for physical branches will be even less.
 
The Danes have taken online banking to heart. Among the EU-28 countries, only Icelanders, Finns, Norwegians and Dutchmen use online banking more than us. In 2012, about 80 percent of Danes did their banking online. In 2008 it was 61 percent and in 2004 only 45 percent.

The total net banking coverage across Europe obviously depends on how widespread the Internet is. But here, too, international studies suggested that Danes are at the absolute top. 
 
 
Figure 3: Proportion of population with Internet using online banking, EU-28 countries
Source: Eurostat.
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