Why banks need to embrace the new normal
One year after the COVID-19 pandemic first left many of us working from home, celebrating holidays via Zoom, and spending more than ever before on e-commerce, media streaming, and food delivery, too many financial services executives are still asking the same question they did at the beginning: when the pandemic recedes, will things go back to normal or will we have to adapt to a new normal?
This is the wrong question.
Back to normal isn’t an option because the banking industry’s definition of normal – universal financial services built on top of a branch-based distribution strategy – hasn’t been normal for a majority of customers for years.
The pandemic hasn’t significantly changed the preferences or behaviors of most financial services consumers. It just made it impossible for banks to continue ignoring those preferences in order to sustain the status quo.
The data backs this up. Every two years, the FDIC publishes a massive study on how American households bank. One of the questions they ask is, “what is the primary method you use to access your bank account?”. In 2019, the majority of Americans (57%) relied on digital channels (mobile and online banking) as their primary way to access their bank accounts.
This shouldn’t come as a surprise. Nor should the fact that a majority of the 21% of consumers that used the branch as their primary channel in 2019 were over 65. What might surprise you is that between 2017 and 2019, the percentage of consumers over the age of 65 that relied on branches actually decreased by 5.9% while the number of these consumers who relied on mobile increased by 5.7%.
Fast forward one year – do you think, in the middle of pandemic in which many bank branches are closed and older Americans are rightly exercising extreme caution, that there is any way that the percentage of consumers age 65+ using digital channels hasn’t continued to grow?
In the FDIC’s next survey, in 2022, the data will no longer offer banks’ relying on a branch-centric distribution strategy a place to hide. It will be abundantly clear that they are relying on an operating model that none of their customers want.
Given this inevitability, banks need to seize the pandemic as an opportunity to finally embrace this shift, moving beyond token digital transformation projects and putting in the hard work and sacrifice necessary to truly become digital banks.
I believe this hard work and sacrifice will fall into three main categories:
1. Culture: actively invite partners and developers
Shopify recently announced that it is partnering with Stripe to offer business bank accounts through its e-commerce platform, a development that undoubtedly disappointed a number of banks that might have aspired to be Shopify’s partner in that endeavor.
As others have written, the future of digital banking is embedded. And the companies that are embedding financial services into their websites and platforms – whether it’s Shopify working with Stripe or Peloton working with Affirm – are looking for partners that are, at a cultural level, easy to work with.
If banks want a seat at this table (and they should), they need to build a culture that goes beyond compliance and risk management to one that is actively inviting to external partners and developers.
2. Organizational structure: incentivize on the right strategic outcomes
Organizational structures create incentives and incentives drive behavior. This, more than strategy or technology or budget, determines the success or failure of digital transformation initiatives.
Disney knows this, which is why it recently announced a strategic reorganization that will disentangle content creation from distribution:
“Given the incredible success of Disney+ and our plans to accelerate our direct-to-consumer business, we are strategically positioning our company to more effectively support our growth strategy and increase shareholder value,” says Bob Chapek, Disney’s CEO.
“Managing content creation distinct from distribution will allow us to be more effective and nimble in making the content consumers want most, delivered in the way they prefer to consume it.
“Our creative teams will concentrate on what they do best – making world-class, franchise-based content – while our newly centralized global distribution team will focus on delivering and monetizing that content in the most optimal way across all platforms.”
The intent of this reorganization, painful as it may be for certain stakeholders inside the company, is to ensure that the Disney folks creating content would no longer be incentivized to distribute their best products (big-budget films and prestige television shows) through legacy channels (movie theatres and broadcast TV) when the company is trying to orient everything it does around its new digital distribution channel (Disney+).
For banks, the question is this: how does your organizational structure affect your strategic outcomes? For example, if the credit card division has its own customer service agents then that division may not embrace the digital self-service tools that customers and the larger organization prefer, because they are incentivized to ensure that those agents always have work to do.
3. Business model: enable new, digital-distribution models
This category is the hardest to embrace. Implementing new business models built around disruptive technology is incredibly difficult because it often requires trading short-term revenue for long-term value creation. That’s usually unpalatable for market incumbents, as Clayton Christensen, the renowned academic and business consultant who developed the theory of “disruptive innovation”, explained:
“By and large, a disruptive technology is initially embraced by the least profitable customers in a market. Hence, most companies with a practiced discipline of listening to their best customers and identifying new products that promise greater profitability and growth are rarely able to build a case for investing in disruptive technologies until it is too late.”
But that’s where the unprecedented disruptions we’ve experienced over the past year present an opportunity – the preferences and behaviors of companies’ best customers have been forcibly changed. This gives companies a rare opportunity to turn into the skid, so to speak.
In the movie business, that might look like eliminating the theatrical release exclusivity window in favor of streaming. As Wall Street Journal writes:
“Warner Bros… signalled Thursday that the entertainment industry’s future isn’t in the theatre, but in the living room. The AT&T-owned studio said it would release its entire 2021 slate of theatrical films simultaneously in theatres and on its HBO Max streaming service, the most drastic step yet taken by a major studio as the coronavirus pandemic continued to move Hollywood’s focus away from movie theatres and toward in-house streaming services.”
In banking, it might look like consolidating fees and other revenue streams into a subscription service:
“If you can justify $13.99/month for Netflix, $9.99/month for Spotify, $6.99/month for Disney+ $39/month for Peloton, $14.99/month for Calm, $100/month for wifi + Cable, $70/month for wireless, $50-$250/month for a gym membership, $12.99/month for Amazon Prime etc… what would you be willing to pay to optimize your financial life?”
Now or never
None of this is easy. Creating a culture that enables new, digital distribution channels through partnerships won’t happen overnight. Building an organizational structure that is aligned with a single strategic vision requires a lot of uncomfortable conversations and internal disruption. Seriously experimenting with new pricing, product bundles, and business models usually entails some level of short-term revenue cannibalization.
But the pandemic has given banks a window of opportunity to finally do what is hard; to position themselves for decades of profitable growth and value creation.
The question that remains is this: how many banks will embrace this challenge?