The economic impact of the COVID-19 outbreak is unprecedented in recent history with no part of the globe untouched. We are only beginning to see the cost of this crisis, and there lies significant uncertainty ahead, the least being the possibility of a second-wave emerging, in the absence of a vaccine.
While the road to recovery is likely to be prolonged and challenging, it is fair to say that the world we are entering into is going to be fundamentally different in many ways from what it used to be before. Things that we had taken for granted in our lives, whether it is air travel, eating out in a restaurant, or going to the theatre, for example, will be a profoundly different experience.
Amidst the pandemic, retail banks have displayed remarkable resilience and agility, moving many parts of their operations online, using the internet, mobile connectivity, and video. The banking industry has successfully enabled their employees to work from home and have been able to serve their customers by bringing digital services into their hands through digital channels, with very little disruption. Retail banking have been at the heart of critical services that have kept our society functioning through this crisis, ensuring that payments are processed, loans are disbursed, supply chains continue to function, customer information is protected, and businesses and people have access to money. A recent survey by McKinsey in North America found that nearly 9 out of 10 consumers felt that they could trust their bank’s response to the COVID-19 crisis.
As many countries emerge slowly from lockdown and economic activity slowly resumes, the resilience and agility of banks will be challenged more than ever before, and it may well be a watershed moment in the recent history of the global banking industry.
First of all, the future of banks will face a significant rise in credit losses, as many corporate and business customers, from large airlines to the neighborhood pub, will face huge losses and potential bankruptcy. Unemployment is likely to rise sharply in the economy, and revenues might fall owing to lesser demand for products like mortgages and central banks’ interest rates that will probably stay very low for a long time to come.
Secondly, customer behavior may change dramatically, as people and businesses rely more on digital channels, including video, rather than face-to-face interactions in bank branches. The limitations of social distancing may reduce branch footfall drastically to render many of them unviable. A recent study by McKinsey, for example, showed that digital preferences by older demographics (more than 50 years of age) are now converging with the younger demographics. This is partly driven by a higher degree of vulnerability felt by the older people and the consequent need to minimize face to face interactions. Some areas of banking, like payments, or business lending, are likely to move digital at a lightning pace.
Thirdly, work from home has become a part of the new normal, not only for back-office employees but also for customer-facing staff such as advisors and customer service agents. This would be a combination of limited office capacity, as a result of social distancing, and also changing employee preferences as many staffs get used to working from home, avoiding the daily commute. A large UK bank recently found through a survey that nearly 60% of its staff strongly preferred working from home, rather than coming to the office.
Finally, banks will be keen to take advantage of technology opportunities that can help them engage customers and employees remotely, and at the same time, reduce costs significantly. The promise of cost efficiency and cost variabilization by modernizing back-office and front-office technologies, for example, more widespread adoption of Cloud, or scaling up automation, often in combination with AI, or scaling up the use of data analytics or use of blockchain technologies, are not exactly new ideas. They can bring cost efficiency as well as improved customer experience in many areas of the bank, from contact centers and payments processing to loan application processing. However, the crisis is the perfect catalyst for banks to seriously speed up the technology-led transformation of their business models, which can help them cope with the challenges to improve digital service journeys in the post-COVID-19 world.
So, what do we see as some of the real priorities of retail banks, over the next twelve to eighteen months? In particular, which are the areas where the COO’s and the CIO’s of these organizations will put the greatest amount of management focus and maximum resources? While there will be different strategies adopted by banks operating in different geographies and market segments, we think that some of the themes will be common in retail banking across the world.
#1. Rethink your digital apps – In the wake of the current pandemic, as branch banking declines, a key priority for all banks will be to streamline and simplify the digital banking experience for their customers. Online and mobile banking apps need to be designed such that they can reduce the barrier to digital and financial accessibility, as older generations engage more through digital channels. Digital apps will need to introduce far more features than traditional ones like account balances or money transfers, as people carry out more complex transactions, for example, changing the terms of their mortgage, or opening a complex savings product, digitally. There will also be new functions that can visibly and tangibly help banks empathize with their customers in financial difficulties, like dealing with a payment holiday request on a loan. This will open up digital banking to segments that traditionally have been less technology savvy and will also require deeper integration of online and mobile apps with channels like video and web chats.
#2. Use data to personalize your customer engagement – As digital channels become mainstream, and API’s open up the banking marketplace, the competition will be even fiercer for new businesses. Banks will need to think of using data and analytics to personalize customer experience at every touchpoint. This is also important to ensure that banks can use data to understand a customer’s unique personal or business situation, and therefore deal with their needs with empathy. In a recent study, HBR predicts that the most obvious result of this pandemic will be the inclusion of data-driven services in almost every aspect of life. Going one step further, BCG estimates that personalizing customer interactions can improve banks’ net interest income by 0.3%, which, for a bank with £100bn in assets can translate to £300m of additional income! Of course, data has traditionally been an area of significant technology spend by banks, but in the past there was more focus on risk, financial and regulatory reporting initiatives, rather than real-time availability and predictive analysis of data to drive every single interaction with the customer through digital customer experience, deliver the appropriate advice and pricing, optimize risks, and drive highly relevant micro-campaigns on tap, to support business growth.
#3. Scaled up automation and technology modernization – To offset the revenue impact from the crisis, as well as to continue to invest in digital capabilities, and to enable digital transformation, banks need to accelerate and scale-up automation of business processes and modernization of legacy technology. Before the COVID-19 impact, automation and modernization initiatives were viewed as medium-term goals, but now banks need to significantly accelerate and scale up these objectives to realize sustainable, structural cost reduction, as well as technology simplification over the next 12 months. McKinsey has recently estimated that banks need to reduce their operations and technology costs by 25% to 35% to mitigate the impact of the crisis. This is possible only if automation and modernization go hand-in-hand, at speed and scale, and avoid the trap of too many tactical solutions that cannot be sustained and ultimately increase complexity. We believe that banks need to leverage their strategic partners to shape cost reduction journeys that can be self-funded and future-proofed. For example, modernization of legacy applications on the mainframe can reduce back-end technology cost, automate and simplify business processes giving further cost efficiency and enable digital customer experience. But to do it fast and guarantee early benefits will require banks to work with their strategic customer eco-system who can bring together skills and experience in many disciplines, not just in mainframe, but also cloud, automation, DevOps, CX, and other areas.
#4. Resilient and secure by design – Resilience and security have been near the top of every bank’s board room agenda for the last several years and if anything, it will become even more important in a future where a significant proportion of employees will connect from home, clients will interact through digital channels, increased use of public cloud and greater access to the bank through API’s. While in the past, security and resilience were “end-built” into the design on applications and overall architecture, these will now be critical considerations “inbuilt” into every single element of a business process or a technology stack and embedded into ways of working. We will increasingly see CTO’s rethinking many aspects of their current infrastructure design, and CIO’s and CDO’s bringing DevSecOps in an integrated way as they modernize their applications.
In summary, the retail banks have weathered the storm of the COVID-19 relatively well. However, the banking landscape, as the crisis abates, is likely to change dramatically over the coming months and years. The future of banks will be driven by their ability to rapidly scale up the adoption of digital services and bringing them into the hands of the consumers quickly and reliably. While this is not going to be an easy journey for the banks, it is worth mentioning that they have been working to put together the building blocks for the new digital banking architecture over several years. The key to success for banks will be their ability to ramp up and accelerate their transformation journey over the next three to four quarters, and, very importantly, to do it efficiently. This would mean ensuring that there is a holistic approach to transformation that has customer experience and customer needs at the heart of the transformation agenda, along with cost imperative, and a clear vision of a future-proofed, resilient and secure architecture. It would also mean that banks would need to leverage the strength of their partner eco-systems, to accelerate benefit realization, improve the affordability of the change programs, and get access to the right capabilities and skills. It will be a tough economic climate for all industries, not just for retail banking, but banks that are successful in executing their digital banking transformation programs will be in a strong position to capitalize on the recovery that follows.