Covid’s Lasting Impact on Banking Remains Unclear

The pandemic has provoked and accelerated changes in retail banking, but the full impact is not yet known. What is certain is that banking is in the midst of a major shift in products and players with new entrants like challenger banks, tech titans and big retailers like Amazon and Walmart eyeing the business.

Banks are at an inflection point in product design and how they create new innovative products. In at least a few cases, they are beginning to think from the outside in — like consumers — rather than creating products to serve the bank’s needs or simply meet regulators’ requirements.

“The Covid-19 pandemic has both accelerated and initiated changes to consumer behavior and the retail banking landscape that will be felt for many years to come,” says Alyson Clarke, principal analyst at Forrester Research.

But almost no one knows what the full economic impact in the banking sector will be, she says in an interview.

“A lot of people haven’t gotten relief on debt payments, so a lot of potential defaults may be coming,” Clarke continued. “When you get to the other side of a downturn, that is when things start to change and shift, and right now we are in that shift.”

Forrester sees a dynamic and confusing landscape — one that’s difficult for executive teams at traditional institutions to navigate strategically. The complexion of the financial marketplace is further complicated by the astronomical rise of fintechs now offering banking services directly to consumers and businesses.

“According to CB Insights, challenger banks raised over $4.6 billion globally across 104 deals in 2020,” Clarke noted in a Forrester report, “Consumer Banking Trends in 2021.” “These [neobanks] continue to see strong customer growth: U.S. challenger banks now serve around 39 million customers, an almost 40% increase from 2019 to 2020.”

Chime in San Francisco credited stimulus checks days ahead of traditional banks, as it does with payroll checks, and attracted some $500 million in funding. Clarke said that outside the U.S. regulators often require early access to funds; in the U.S. the Federal Reserve has a hands-off approach and lets banks enjoy the float — less valuable in today’s low interest rate environment, but a reliable generator of NSF fees.

Challengers Prefer Subscription Pricing Model

“Digital bank Revolut offers three subscription plans to U.S. customers, with a discount if you pay up front,” Clarke noted. “Monzo Premium bundles insurance products, airport lounge access, and account aggregation services with a metal card for a monthly subscription.”

The difference between a subscription and a monthly fee is that with a subscription a consumer can shift levels of service, and fees, without terminating one account and opening another as they would at a traditional bank. So if a customer reduces travel — for pregnancy or a change in job type for example — they can drop the premium for travel insurance and airport lounges for several months or longer without changing their account number and automatic payments, direct deposits, and deductions.

Forrester’s report also noted the rise in niche segments and values-based banking.

“Consumers are becoming increasingly attracted to brands with values that align to theirs, which will increase the appeal of more focused digital bank brands,” the report said. “Some entrants are focusing on underserved communities — such as Greenwood (in the U.S.), which aims to help improve financial wellness for Black and Latinx consumers and communities — and Green Dot, which launched GO2Bank to help unbanked consumers.”

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Big Techs, Retailers See Opportunity in Banking

As if specialist challengers were not enough, Forrester also points to major corporations looking to get into banking or competitive financial services even if they don’t get a banking license: Amazon, Apple, Facebook, and Google from the tech world, T-Mobile from telecom, Walmart from retail, and many others like Uber Money.

Established tech titans enjoy strong brands, said Forrester, and more to the point, says Clarke, they don’t need to make money directly from whatever banking services they provide. Newer fintechs flush with VC funding can also afford to lose money or make up losses with gains in selling merchandise or services.

In his annual letter to shareholders, which ran to 66 pages this year, JPMorgan Chase CEO Jamie Dimon echoed Forrester’s findings. “’Banks are playing an increasingly smaller role in the financial system,” Dimon said.

The Chase chief cited competition from an already large shadow banking system and fintech companies, as well as Amazon, Apple, Facebook, Google and Walmart. He argued those nonbank competitors should be more strictly regulated.

Forrester rather unkindly notes that traditional banks haven’t always done well in their forays into digital and cites as examples Chase’s Finn along with Greenhouse by Wells Fargo.

Licensed banks are taking advantage of their status to provide Banking as a Service (BaaS) to fintechs who want the business but not the expensive and highly regulated bank certification. Green Dot, for instance, provides a banking entree for PayPal, Uber and Walmart.

BBVA which shut down its Simple digital banking for consumers and Azlo for small business, seems to have focused on basic services such as KYC, account origination and other services. Meanwhile Goldman Sachs continues to expand into retail with consumer banking like Marcus and support for other firms getting into banking services such as Apple Card and Amazon small business lending.

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Neobanks Will See a Lot of Failures

Clarke readily admits that the neobanking scene has a lot of noise. Many of the new banks won’t last, she said.

“Some think digital end to end will get them there, but today digital is just table stakes.”

When she gets announcements from new banks seeking her attention, she looks to see what value they are adding for the customer.

“Your model may be the cheapest but a lot of the time you aren’t, and besides, not everyone can be cheapest,” the analyst tells them. “I often can tell from their web site that it is not real clear what market they are going after.”

Clarke thinks niche banks hold promise because they can work from a deep understanding of customer needs. KeyBank has just launched a healthcare banking organization to work with hospitals, physician and dental practices, outpatient facilities and outsourced health services. TransPecos Bank, a small Texas bank, is doing the same with its national BankMD brand. Niche banks can use artificial intelligence, personalization and team expertise for a very targeted customer type.

Banks can’t keep doing things the way they always have with their reliance on interest income; it’s just not viable, said Clarke.

“Some will need to give up the ghost on B2C, although that’s hard from an ego perspective and from the brand perspective. In the future of banking, we say banks should look at multiple routes to market.”

“Everybody talks about digital innovation, but where is the business model innovation?” asked Clarke. “U.S. banks are behind because we haven’t had the legislative push for open banking, but it is coming.”

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