Old habits die hard: are you thinking long-term for the good of everyone?
COVID-19… wishful thinking had many hoping it would be nothing more than a blip on the radar. Instead, it’s been called a “black swan event,” wreaking havoc in its wake. Our sense of normality has been fractured. Customer demands – once advocates of the branch – are changing fast, enforced by the “invisible enemy” that is the coronavirus. This is having ripple effects in the financial services industry, much of which has been immediate, unprecedented, and, somewhat, unintended.
Whilst we are all reeling from the shock of the speed and pace of how the pandemic has spread like wildfire across the globe, governments are frantically trying to keep up by putting out each flare-up in the most effective order. But are we utilising the right logistical support to contain the financial landscape damage by considering the bigger picture… the longer-term view? And, are we actually focused on putting out the right fires? Is it all just reactionary, rather than calmly taking a longer-term view? Is effective leadership on show? Only time will tell.
Spotting the shifting wind
Competition has, for as long as we can remember, been cut-throat in financial services. Everyone, including all lenders, credit unions, fintechs, and online-only banks trying to out-do each other across all product propositions. Then the – at the time – “innovative” ways of increasing liquidity and mortgage availability came crashing back down to earth in the financial crash of 2007-8. Though member-based organisations were restricted from offering these “innovations” on liquidity and mortgage availability, it had significant impacts on them. In the race to increase mortgage lending, the key source of liquidity (for so long, retail savings) was forgotten, due to lack of focus on good interest rates offered and product innovations.
Since then, the banking industry has largely cleaned up its act. Yet, the inevitable devil in market forces began to rear its head again. This time, post 2007-8, the competitive landscape saw a rush to acquire retail funding through savings and more widely at the expense of business lending to shore up their balance sheets. In much of the West, the biggest banks (the Barclays, Lloyds, HSBCs, Chases, and Wells Fargos of the world) hold significant market share and, effectively, closed ranks to “protect” their businesses and – to some extent – their clientele. Yet this protection effort sought to deter new entrants to the marketplace – e.g. the neo challengers – rather than build compelling propositions for their existing books and prospects to engender true, honest loyalty.
This led to the Fed in the US and the Competition and Markets Authority (CMA) in the UK to try to enforce a competitive environment through new rules and regulations, with the inevitable consequences many of us foresaw. Certainly, in the UK, this reaction led to expensive (although now valuable) solutions, which had next to no impact on switching rates and the level of competition demanded.
However, as has come to pass, it proved rather short sighted. The impact – and legacy – of COVID-19 will be on the lack of business support by the main banks. Yes, governments are attempting to force banks to lend to businesses from the SBA scheme in the US and the government guaranteed loans scheme in the UK, but the old policies are getting in the way of providing efficient support; the old policies which banks put in place to protect themselves in the aftermath of the 2007-8 crash. The consequences of this have hugely delayed the rollout of the support measures to the very businesses that will help to keep the economy alive (which the banks, themselves, are a key part of). Once again, financial institutions are putting at risk the trust they have earned back.
After all, the new threats are very much to both the supply and demand sides of the economy through businesses acquiring stock, providing service, and paying wages that come back into the economy through consumer spending – and savings into bank accounts and restoring balance sheets of the banks. As politicians are often saying: “we’re all in this together”.
The long game
So, where do we go next?
Banks and credit unions are not only essential businesses but are also crucial for the recovery efforts to our wounded, shattered economies.
Right away, the board and C-suite teams should – if they are not already doing so – be revaluating and reprioritising their 2020-2021 strategic plans. The severity and potential longevity of what we are currently going through could not have realistically been foreseen, especially the global nature of the impact. While data from past crises may be helpful, we are not in Kansas anymore, Toto!
Using customer and market data will be the key in how to move forward with purpose. The questions are what data do we have and what can we do with it?
Here is what we know
Importantly, this is not your grandparents’ depression nor your parents’ recession.
Normally, economies are in growth mode (the US typically averages 2% each year. The UK, 2.4% until 2019 and the European Union has averaged 0.4% in the last 25 years). According to some analysts, right now every economy is in slight or heavy contraction depending on how hard the pandemic has hit, how dependent they are on oil, if they are involved in any trade wars, and other various geo-political challenges.
The world’s unemployment rate is increasing at a pace not seen in the last 70 years, with the US appearing to suffer the most, and it will potentially take two-to-three years to reduce to the levels we are used to.
The severity of the impact is already feeding through to financial institutions. With a perfect storm of increasing unemployment, and the effect of both quarantine and potential further job losses affecting spending patterns, we are seeing consumer savings being depleted, applications for loans reduce (especially vehicle loans), shunning of credit cards for debit cards, and the risk exposure of existing loan books causing lenders to shore up their capital base. Alternatively, there will be exceptions to this, too, where savings deposits grow, given overall spending is down.
Long-term interest rates are around zero in many countries, with the potential for negative interest rates as the world strives to kick-start their economies once lockdown is lifted. Short-term interest rates are down, too, affecting deposits and investment portfolios – and our pensions – with the yield on assets the lowest in history.
There are many more data points, but we can clearly derive that Net Interest Margin (NIM) compression will continue to feel the pressure.
Here is what we could be doing
Economies always bounce back: it is not all doom and gloom – unintended positives will emerge. This time, though, the road to recovery may be longer but, by taking action now, financial institutions can position themselves at the centre to help customers navigate the changing waters – new products, services, and education in their preferred channels. This is the time to leave behind the old systems of banking and start thinking outside the box.
The future of financial services is digital. According to Mark Sievewright, ex-Fiserv and Mastercard executive, “The COVID-19 crisis has been devastating in so many ways in so many parts of the world. While we will be dealing with its impact for some time to come, it has acted as a catalyst for banks and credit unions in accelerating their digital and electronic payments strategies and enhancing their capabilities in these key areas. Financial Services is now facing a series of ‘new realities’ and one of those is clearly the move to a ‘Digital-First’ business and operating environment”.
The SRM Academy’s recent brief offering an analysis of the results from a COVID-19 survey of its clients saw 82% of respondents rating their online and mobile channels as “vital”, whilst 79% have provided increased education on the use of digital channels. The pandemic has hastened the arrival of that digital future, as the reports of a surge in the numbers of customers and businesses using digital banking channels, apps, and payment solutions have proved. But are customers getting the full benefit of these channels – especially where they’re new to using them? The likelihood is no. Many of those new to digital banking channels would ordinarily rely on their children and grandchildren to support their learning in the use of digital, yet the lockdown brought by the pandemic has limited such family-driven education.
As the lockdowns implemented around the world are eased, the opportunity to consider the future of the branch model is here. Given that social distancing will continue to apply for – potentially – many years to come, the room to have the usual staffing profile is now limited. Indeed, as the use of physical cash diminishes, so too the need for large counter transaction areas.
For an example, let’s look to Apple. Where Apple has excelled with their store model is that they treat their stores very much as an ‘experience’ and an education centre with their ‘Genius Bar’. And, they’re often full – at least prior to lockdown – with people of all ages, being allowed to engage with new technologies, and being supported in learning the possibilities their new technology has.
By shifting to this style, banks and credit unions could safely reduce the complement of staff rostered in branches, and offer many the opportunity to engage customers in a new way – helping to extoll the services their firm provides its customer by teaching and supporting customers with the use of digital services. This will provide important new ways of stimulation for both staff and customers, with staff becoming multi-skilled to handle a wider level of queries as banking moves further beyond basic transactions. It will foster increased loyalty and improve the confidence of customers across all age ranges in using digital channels – including the move to mobile payments, given the concerns of many populations of the continued use of physical cash amid COVID-19. And, in doing so, reducing the inevitable cost pressures.
Furthermore, can back-office teams be retrained in how services are provided? There is surely an opportunity to enhance your solutions to provide services – e.g. call centres – in new ways. If anything, the pandemic has encouraged the use of virtual meetings for both business and family time through platforms such as Zoom, Houseparty, and Microsoft Teams – and, often, we find that age is not an indicator of who is willing to use these options to drive much of that engagement. Yet, in banking terms, IT departments and risk policies can be seen as significantly outdated, their firewalls refusing engagement with business partners and customers alike – much of the world has moved on, but financial institutions remain wedded to their legacy infrastructure.
Policy decisions are also cause for concern. Whilst the existing mortgage loan and savings books provide a strong foundation, they are impacted by those ever-present portfolio risk strategies. Is this the time to rethink the support for businesses and customers? Clearly, the pandemic is leaving significant collateral damage behind; however, an opportunity exists to relax the frameworks and band together with all types of customers – strike the right tone and encourage customers to engage with you while supporting them in developing their ‘personal coronavirus’ exit strategies. Financial services professionals have all the right mix of skills to support financial planning across both business and personal challenges, and – dare we say it – should be allowed influence on lending policy, applying it on a local-level – similar to how Handelsbanken operates in Europe today. No longer should it be “the computer says no”.
As we move through another tricky phase in the world’s economic cycle, opportunities to provide financial education to customers, coupled with digital channel guidance, will help develop new lines of business – from loan consolidations, to increased savings (via less spending), to speedier loan repayments, to new business start-ups, as well as helping people get on the first step of the housing ladder.
And both policies and regulation must meet the new challenges.
If they do, the banking industry will forge new habits for the greater good, and with it a much-needed boost to their reputations. Something we can all look forward to.
Future of cash
Given the widespread availability of “basic” bank accounts, there are still an estimated 9-million unbanked and underbanked, in the UK alone – that is a whopping 13% of the population. In the West, the last decade has seen a huge drive towards a cashless society, driven by the Nordics and the UK predominantly, along with Australasia, too. However, this has largely been at the expense of the vulnerable and elderly. The consequences are plain to see: branches have been closed, forever changing the shape of our high streets, limiting the access to cash to these very groups, and restricting the banking facilities for small businesses – particularly those that have high notes and coins usage, such as cafés.
Whilst we are advocating much greater support of businesses and consumers, generally, by our banks, we advocate financial institutions improve community relations by reconsidering the branch closure programmes and of what they could become in the “new normal”.
The “new normal” caused by the pandemic has become the “now normal” for every society across the globe, with increased use of digital solutions for everything from groceries to banking to general retail commerce, and new subscriptions services. Banks can be at the centre of the change, helping customers navigate the behavioural change; however, they must ensure that it is driven by age and circumstances. With their full trust on physical cash and person-to-person commerce, the elderly and vulnerable need to be brought on the journey to this new digital hinterland, transforming to the Apple Genius Bar model, as we considered earlier. And, where no bank branches exist in the locale, financial institutions should be encouraged to jointly fund opening a unit, utilising Payment Schemes such as the UK’s LINK Scheme which runs the UK ATM network to manage and run these on their behalf – something that the LINK Scheme has previously considered.
In order to encourage the journey to digital in the right way, our financial institutions could use their huge influence and existing propositions to help all societal groups fund the purchase of the essential devices through loans or huge discounts or loyalty rewards. It is very much about involving and encouraging the elderly and vulnerable in the journey towards cashless commerce and not leaving them behind.
Regulatory burden lifted?
Furthermore, how can our financial regulators and lawmakers help smooth the transition? It could be argued that, in the aftermath of the financial crisis, there was a rush to legislate to “prevent” such things happening again. However, rushed legislation is nearly always bad legislation. How restrictive to supporting the world’s economies through the pandemic is the current regulation and laws – only time will tell.
Yet here is the perfect opportunity to take stock and review how flexible, adaptable, and supportive financial legislation could be, whilst having essential protections in place. With two significant crises occurring within 12 years of each other, and both for significantly different underlying reasons, the opportunity presents itself to work out how the regulatory necessity for the lifeblood of our economies – money and its infrastructure – can be developed and improved to ensure we are not caught out again.
The bottom line
There is much debate already out there, stimulated by businesses, financial institutions, regulators, and customers, alike. There are some very clear indicators from the last decade of where we are heading, only this is being accelerated – by what rate, we will have to wait a few more months to determine once lockdowns are lifted (subject to any second and/or third waves). Yet, whilst the coronavirus is clearly in the driver seat right now, the pitstop will soon arrive for banks and credit unions to assume control and drive the change.
Are they up to it? We believe they can be with the right mindset, strategy, and foresight – and the willingness to action their ideas and invest for the future.
We come back to our principal question: are you thinking long-term for the good of everyone? We’ll leave you, the reader, to answer that question.