Despite over one third (36%) of British adults now predominantly banking online, branches represent the best opportunity for banks to build long term customer relationships and grow revenues, according to a new report - Winning with Branches - by Deloitte, the business advisory firm.

Nearly two-thirds of consumers would not choose a bank that did not offer access to a branch, and the UK's 13,000 branches generate profits of over £3 billion per year for the banks. With three-quarters of consumers having a preferred 'regular' branch and fewer than one in 10 of the population never using a branch, the branch is in a stronger position than direct banking to create deeper customer relationships.

Deloitte believes that the UK's banks have a five year window of opportunity to transform their branches and win over the consumer, before direct banking channels dominate and customer relationships become purely virtual.

Deloitte estimates that the UK's bank branches generate revenues of £13.7 billion per year, at an annual running cost of around £10.5 billion. Branches essentially have fixed costs and while they are clearly carving out a profit, improving revenues could drive up branch profitability considerably.

Nick Sandall, head of retail banking at Deloitte, said: "Banks have the opportunity to build on what is already a profitable asset. Our analysis suggests that increasing the revenues flowing through the branch by just 10 per cent could increase branch profitability by up to 40 per cent. This alone is a compelling argument for re-energizing the branch.

"Too often, financial institutions have viewed the branch network as a significant cost, with the balance shifted towards extracting savings, rather than revenue generation. The branch remains the key point of customer contact, despite the rapid rise of the Internet. By changing the basis of competition and leading on service rather than price, banks can transform branches from a perceived burden into a very real boon.

Intensifying competition means that UK consumers are more price-sensitive and less loyal than ever before. Footfall through the branches is declining, and banks must change the basis on which they compete, to reduce dependency on price-based competition by providing customers with a superior service.

Nick Sandall added: "A lack of investment has left an unhelpful legacy of poorly located and maintained branches, and de-skilled and de-motivated staff. Retail is all about detail, and a walk down any high street quickly reveals that the banks are being outgunned by retailers when it comes to giving customers an appealing experience.

"To drive future shareholder value, fresh thinking is required. The winning banks will be those that can create a cost-effective proposition that can enthuse customers, drag them out of their inertia and give them a memorable experience. Almost nine out of 10 current accounts are opened at a branch, emphasizing the potential power of the branch network, particularly as a base from which to cross-sell.

Retail banks face two key challenges - to create a proposition for which customers are willing to pay and to increase revenues from branches without ramping up costs in the process. Simply refreshing the brand and refurbishing the branch network is unlikely to be enough.

"Without significant change, branches networks are in danger of becoming expensive liabilities. However, branch networks do have the potential to become not only valuable assets, but also the leading channel through which banks can turn the tide against the commoditising forces of direct channels," adds Sandall.

The cost of turning around the branch network to make it rise to the new challenge will be significant, but so are the revenue sums at stake, making it a burning issue for retail financial institutions.

"It's a 'win win' scenario - reward your customers with a superior service and they are more likely to reward you with greater loyalty which, in turn, leads to more cross sales and greater branch profitability," concludes Sandall.

Other research findings:

• Only 17% of people would be happy for their bank not to provide a branch at all if it led to better interest rates or a cheaper service.
• Almost one quarter (23%) of consumers would use their branch more if it was open at more convenient times
• Over half (55%) of adults would not open an account or arrange a loan or mortgage without personally going into a branch