3 COVID-19 Digital Transformations Financial Institutions Must Act On Now

Coronavirus has shredded financial institution strategic plans that assumed a steady pace for adopting digital channels as the mainstream choice. Coming with the challenge to accelerate adoption is greater competition — or potentially cooperation — with fintechs and mobile carriers who have the technology and increasingly the potential to offering financial services.

As the impact of COVID-19 has accelerated, banks and credit unions have been encouraging people to use alternative options outside of going into their local branch. Since mid-March, most financial institutions have been consistently providing information and educating customers through remote channels. Many have also increased their remote support options to help with day-to-day banking transactions and offering fee waivers and, in some cases, deferred payments for credit cards, mortgages and auto loans.

In addition to this accelerated digital adaptation, financial institutions have quickly adapted to a new reality of many employees working from home, which will inevitability lead to branch network consolidation.

To this point, the primary focus of banks and credit unions has been on ensuring that immediate client needs have been addressed. As these fundamental needs are met, institutions will need to help customers understand these new trends in banking.

Mobile First is the Wave of the Present

The key trend going forward will be on providing mobile solutions and digital on-boarding for new account holders. The smartphone has evolved from being a luxury item to a lifeline for many people.

The current number of smartphone users in the world today is 3.5 billion — meaning 45% of the world’s population owns at least one. By comparison, 1.7 billion people remain unbanked, leaving 1.8 billion people that own a smartphone but do not use a credit or debit card. This gap represents an opportunity — it is critical for financial institutions to implement seamless mobile solutions, as well as the ability to add new customers digitally.

The industry should anticipate a healthy competition between financial institutions and mobile carriers owning both the customer and the payment ecosystem. Carriers could either be the digital service provider themselves or could partner with another digital service provider, like a bank, where the institution handles all of the back-end integration. The institution that creates the most straightforward, easy-to-use service that can tie in all of a customer’s data and provide peace of mind, will win.

Digital Currency Pulls Ahead of Paper Money

Cash has become a casualty of COVID-19, as the virus can potentially be transmitted by living on cash itself. Additionally, some customers hesitate to use ATMs for fear of catching coronavirus from money. Such fears will inevitably have a long-term negative impact on money, and an upward trend towards digital currency. We’ll see an increase in people using both contactless e-payments and credit cards, such as Apple Pay and Google Wallet. Amazon and Google both offer payments and lending. While still small and agile, they are a significant threat to traditional banks and credit unions.

There is a chance that digital payments are so prevalent that mobile carriers will end up competing with financial institutions for control of consumer payments. Banks and credit unions may need to partner with some of these carriers or tech companies to meet their customer’s demands.

One of the world’s fastest-growing brands WeChat, owned by Tencent, is a defacto digital solution — both a wallet and a communication platform. China’s mobile payments market is 5.5 trillion, which is roughly 50 times the size of the American market. Of that 5.5 trillion, WeChat makes up 40%. In China, customers utilize WeChat for everything from hailing taxis to purchasing real estate to paying for hospital visits, and all of it is contactless. Due to the current climate, we could see this solution become prevalent sooner than anticipated in the US. Recent actions by Libra (Facebook) and Apple have shown how they want to evolve their business models and create these types of ecosystems. Institutions like Goldman Sachs are smart to realize that instead of competing against these big tech companies like Apple and Facebook, they are better suited to partner with them and capitalize on these pivotal opportunities.

Long-term, digital currencies, coupled with a society interested in contactless payment options, could lead to financial inclusion. Cash tends to limit a customer’s knowledge of their financial circumstance as it does not aggregate data from other parts of their financial lives, such as their mortgage, savings or rewards programs. If consumers shifted to digital currencies and remote payments following COVID-19, we could see an uptick in financial literacy as consumers will now have a transparent snapshot into their entire financial portfolio. If there is an economic recession, consumers will benefit from a more evolved and personalized payment system, and physical cash won’t hold the same weight it once did.

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Open Banking Must Be Unlocked for America

Data aggregation becomes critical to the open banking ecosystem as it builds connectivity between financial institutions, consumers and businesses, and fintechs. Without useful data aggregation, many of the most valuable fintech apps cannot be helpful.

Visa and Mastercard have an opportunity to become significant players. Visa’s acquisition of Plaid, a digital data aggregator, in early 2020, shook up the fintech world, as the acquisition enhances Visa’s global platform and strengthens their partnership with fintech.

Additionally, it will feed into Visa Direct, increasing Visa’s total addressable market and reinforce its push-payment platform. This will be powered by the next generation of financial apps, which will also help them plug into mobile and internet technologies, which will increase their total addressable market.

Some of Plaid’s partnerships, which Visa will now have access to, include Goldman Sachs, Robinhood, Quicken Loans, Betterment, PayPal, and Coinbase. These services represent investments, payments and trading — all areas Visa has not penetrated in the past. Additionally, Plaid has a robust development platform with access to over 2,600 fintech developers building apps on top of Plaid’s data pipes. This development power is similar to Apple apps store in that they can utilize development scale.

MoneyGram recently launched a service that allows anyone in the U.S. to send up to $10,000 to anyone in Spain or the Philippines using Visa Direct. The sender only needs the phone number of the person they are sending money to. The recipient gets a text message notification. It’s an instantaneous transaction. With unemployment soaring worldwide, people with funds will need such services to bolster friends and family in need in other countries.

The world is changing in significant ways before our eyes. Now, more than ever is the time for financial institutions to show their agility and quickly implement solutions to meet people’s needs. Firms that have a reliable digital roadmap, and a variety of online services, already have a leg up on their competitors who have limited digital options for their user base.

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