A chill wind is blowing through the halls of the high-street banking giants. In the last decade, more than 2,000 branches have been closed nationwide, with 430 set to shut this year alone, according to financial news website ThisisMoney.co.uk.

Customers who prefer to visit their bank in person now have a choice of 9,500 branches nationwide, down from 15,000 in 1972.

Banks claim that branches continue to play an important role in serving and maintaining contact with customers. But at the same time, they attribute the closures to changes in the way customers want to bank. NatWest says visits to its branches have fallen by 30% over the past four years, while the number of online and mobile transactions has now surpassed those in branches and at ATMs.

The challengers While the mainstream banks have reduced their branch networks, some new entrants to the market have chosen to provide a traditional but improved branch-based service. 

Broken branch?

UK bank branches in numbers

Number of bank branches that have been closed nationwide in the last decade: more than 2,000

Number of branches nationwide: around 9,500, compared with 15,000 in 1972 - a 36% reduction

Reduction in customer visits to NatWest branches over the last four years: 30%

Number of branches Metro Bank has opened since its launch in 2010: more than 30

Number of branches Handelsbanken has opened in the UK since 2008: more than 100Swedish bank Handelsbanken arrived in the UK in 1982, and has opened more than 100 branches since the 2008 banking crisis. Unlike other banks, it does not advertise particular loan rates or savings products - even in its branches. Instead, branch managers and their staff have complete discretion over whom the bank will lend to and what interest rates customers will pay on loans or earn on deposits. Every customer receives a personalised service, and is given the mobile number and email address of their account handler.

Branches can be located in out-of-the-way locations compared to mainstream bank outlets because Handelsbanken says it is not interested in generating high levels of footfall. In fact, it does not hold money in its own branches and has agency arrangements with other banks to handle the paying in and out of cash. This means staff in these lower-cost branches can concentrate on higher value transactions - a win-win situation.

However the bank has no fixed growth plan, no off-the-shelf products and will deal only with customers within a certain geographical area of each branch - something that would cause your typical bank chief executive to lose sleep.

Tellingly, the bank will not reveal customer numbers. Spokesman Simon Alderson says: "We focus on long-term relationships and grow organically through word of mouth."

More expensive route In contrast, Metro Bank has taken a more expensive route into traditional banking. It launched in 2010 and has 31 branches in London and its surrounds that open seven days a week, from 8am to 8pm on weekdays. The bank now has 406,000 customers, with business customers providing 60% of its deposits.

However personal finance expert Andrew Hagger, who provides top-line research and analysis for banks, does not believe this strategy will prove a threat to the mainstream institutions. "I don't understand why Metro is building a branch network from scratch when others are closing them down," he says.
"Interestingly, the strongest challenge is coming from payment-service providers" Anthony Thomson, one of Metro Bank's founders and its former Chairman, agrees, likening opening a branch to BT putting phone kiosks back on the high street. He and Mark Mullen, former Chief Executive of First Direct, plan to launch a new online-only operation, called Atom Bank, next year. "In the 30 years that I have spent in marketing, I have never seen anything trend as quickly as online and mobile banking," says Thomson.

He believes that the money Atom Bank will save on not having branches - it costs about £2m to open a Metro Bank branch, and a further £1.25m a year to run because of Metro's long opening hours, he says - will enable it to provide a better service and products to customers.

Meanwhile in a UK banking first, Barclays has launched Barclays Video Banking, which gives customers the immediacy and personal nature of a branch visit without the cost of running a branch. The round-the-clock service allows customers, wherever they are, to carry out a face-to-face secure video call with a member of staff using their smartphone, tablet or computer. It is relationship banking, but with a difference.

Losing customers Investment in virtual and online banking, however, has not been enough to prevent the Big Four banks from losing customers. A new service launched in October 2013 to make switching current accounts easier did little to increase the number of customers changing banks, but NatWest has fared worst of all. In the first three months of that year, it lost a net 18,258 customers.

Hagger attributes these losses to the prolonged low interest rate environment, with customers switching to current accounts offering the best incentives. Halifax and Santander, which gained a net 41,558 and 37,316 customers respectively according to Payments Council figures, pay cash or interest up to 3% on qualifying balances in their Reward and 123 accounts. 

"This is very attractive for customers who have been earning rock-bottom rates on their savings," he says.

Better interest rates Some customers, frustrated by low savings rates or banks' unwillingness to lend, have turned to alternatives.

The UK crowdfunding market, where many individuals can contribute small sums to help get a venture started, is now worth over £100m a year, according to innovation charity Nesta.

The peer-to-peer (P2P) lending market, meanwhile, enables individuals to lend directly to other people for a typical rate of 5% gross, or to businesses for a typical rate of 7.4% gross. The market had more than doubled in size year on year to £1,207bn at the end of the first quarter in 2014, according to the Peer-to-Peer Finance Association. The Financial Conduct Authority began regulating this form of lending in April, and the Chancellor announced plans in the 2014 Budget to include P2P lending within tax-free individual savings accounts. 

The low interest rate environment has also helped to boost the retail bond market. These are a special type of corporate bond, available in low denominations, and tradable on the Stock Exchange, making them more accessible to ordinary investors. The high coupons -7% from Provident Financial - and the high-profile bond issuers, including John Lewis, Tesco, HSBC, National Grid and even the London Stock Exchange itself, have attracted almost £4bn in four years.

But there are risks for the retail investor, including fluctuating values and the potential for default. Laith Khalaf, Senior Analyst at Hargreaves Lansdown, says: "They have proved very popular in light of ultra-low interest rates, but I think to suggest they may become a serious competitor to banks is over-egging the pudding somewhat."

Digital-payment services such as PayPal and WePay pose an even greater threat to high-street lenders, according to new research from YouGov and law firm Pinsent Masons.

Out of more than 2,000 UK residents surveyed, almost a quarter said they were "likely" to bank with an alternative digital-payment service instead of a large bank within two years.

"Interestingly, the strongest challenge is coming not necessarily from high-street brands or technology companies outside of finance, but from payment-service providers," says John Salmon, Head of Financial Services at Pinsent Masons, who suggests that people see the likes of PayPal as more trustworthy because they're already proven in the digital payments world.

Real competition So far, though, challengers to the mainstream banks have provided little in the way of real competition. And while customers have flocked to better-paying accounts sold by the likes of Halifax and Santander, the Big Four have responded by improving their offerings. Lloyds is now paying up to 4% on its Club current account, for example.

But the rapid growth of the P2P lending market shows that if banks fail to provide the rates and service that customers want, they will go elsewhere. The battle for customers has only just begun.