The retail-banking sector has weathered many storms in recent years, including grappling with the aftermath of the 2008 financial crisis along with the impact of digitisation and competition from digital challengers. Now COVID-19 has become the disruptor-in-chief, and banks will have to be both bold and innovative to transform the material threat it poses into an opportunity for increased market share.
What can we learn from the past?
As we all live through a pandemic together, no one can say with complete certainty what the coming months will hold for the economy and all of our lives in a broader sense. However, banks do have the 2008 global financial crash as a reference point to shape their strategies. Although the 2008 recession’s catalyst for crisis and timescales of impact are different from today’s, there are still lessons to be learned.
Despite this shock from COVID-19, banks are stronger now thanks to measures taken post-2008, including increased regulations and tough decisions, causing the sector to scale down, streamline and increase capital buffers. Banks won’t be able to rely solely on these efficiencies, however, and will need to be proactive to minimise collateral damage from the current crisis.
Banks are stress tested every year to help manage their responses to intense systemic shocks, but they’re prepared for contractions of only about 5 to 7 percent [i]. The coronavirus saw the United Kingdom’s economy contract by 25 percent in June. Although this is to be expected after months of a near-frozen economy and a bounce back is probable, an intense recession is also likely.
Following the 2008 crisis, governments introduced far tighter regulatory regimes for the financial sector, ensuring capital adequacy and proscribing excessive risk-taking. As a consequence, banks are likely to be more capable of weathering the post-COVID recession. Nevertheless, they will be severely tested; Kearney’s recent report “New decade, new crisis: lessons learned from the Global Financial Crisis and why this time it’s different” estimated that cost savings of around £70 per customer per annum will need to be achieved, compared to £20 per customer after the 2008 crisis. These levels of efficiencies will not be met without radical reform of the business model.
Strategies for success
Pre-crisis models will have to be adapted to post-crisis realities. COVID-19 has exposed many outdated elements of traditional banking, and, with considerable competition from challengers, customers might be inclined to reject traditional retail banks in favour of digital alternatives if they don’t feel that they are being listened to or sufficiently supported through the crisis.
We have already seen the migration to digital and cashless accelerate with the pandemic and the world of traditional banking rapidly evolve its practices to cater to new customer preferences. However, digitising will not just be critical for customer appeal; it will also be vital to realise the operational efficiencies needed to remain financially competitive.
Operations departments will likely become even more automated, with new AI (artificial intelligence) and robotics systems speeding up transactions. Banks will need to accelerate investment in advanced analytics, which will facilitate every aspect of retail banking, from improving the customer experience by predictive sales modelling and gauging clients’ price sensitivity to improving risk management to minimise financial exposure in the future.
As branches increasingly start to pivot towards digital and processes become automated, staffing reductions will be inevitable. The number of in-person bank branches will decrease, and so will the staffing levels of the branches that remain. Technical support will likely be outsourced, and predictive analytics will reduce the need for in-person risk-management roles. But banks will also need to expand post-crisis; customers will still want personal advice—with coronavirus meaning that we’re deterred from face-to-face meetings, remote advisory roles look set to increase.
Kearney estimates that across Europe, banks will need to reduce their costs by €35 billion to maintain their current 2019 cost-to-income ratio, so taking measures to cut costs and adopting new operating models to streamline processes will be essential for survival in the post-pandemic marketplace. However, some retail institutions will need to increase their critical mass to thrive, and this is likely to lead to an uptick in M&A (merger and acquisition) activity.
Opportunities for growth
The post-pandemic terrain will also provide opportunities for growth, and banks will have the chance to revamp their strategies and diversify their business portfolios. This could include embracing new technologies and acquiring new assets, with mergers and acquisitions as a means to achieve economies of scale, increase product ranges and boost the scope for innovation. In previous market crashes, domestic M&A proved critical in enabling retail banks to restore their competitiveness. Kearney analysis has revealed that post-2008, there was a surge in M&A activity, with 80 percent of banks involved in these transactions outperforming their competitors.
While a key precipitating factor in the 2008 crisis was reckless M&A, the level of cost efficiencies the current downturn demands are unlikely to be achieved without significant market integration. For a successful merger, banks will need to maintain strong due diligence and realistic expectations—with an organised plan for merging entities. Transparent and consistent communication with all involved, such as clients, employees and investors, will ensure everyone is aligned and employees remain engaged.
Learn from your customers
The time-honoured cliché the customer is king still stands today. The pandemic generated an evolution of behaviours and expectations, which makes anticipating and satisfying the customer more critical than ever before. Customers will ultimately mould the future of retail banking, so now is the time to invest in a seamless customer journey across digital and offline channels. With the pandemic speeding up changes that were already underway in the banking sector, banks that have not adapted will risk losing appeal to customers who won’t go back to the way things were. The traditional-banking experience won’t cut it for a younger generation pummelled by a pandemic and now captivated by the ease and transparency of digital banks as they face a looming recession.
Traditional banks can take their cue from fintechs (financial-technology firms), with the main lesson being to be bolder and more experimental. While the complexity of compliance regulations imposes additional costs, there are possibilities to innovate. It’s common knowledge that banking was, even before the pandemic, becoming more open, transparent and digital. In some ways, the pandemic has aided traditional banks by prompting a rapid shift towards digitisation. The customer experience can now be omnichannel, with banks always available to customers without the need for them to drop into a branch and with payments and transactions able to be processed online.
The pandemic will offer an opportunity for retail banks to be heroes if the sector shows the resilience, adaptability and vision to act as the primary catalyst for the economic revival. Retail banks can’t be stubborn; they’ll need to listen to customers share their needs and be audacious enough to stand out in the post-pandemic market.
Reference links:[i] https://www.euromoney.com/article/b1kxrvx42r38r6/can-banks-withstand-the-impact-of-covid-19