While the economic impact of the coronavirus pandemic is expected to sharply curtail banking profits, its ripple effects could enable incumbent institutions to reduce the innovation gap with fintechs and the largest banks.
Many banks and credit unions have lagged in adapting to a digital world, as big banks with their billion-dollar budgets and fintechs with their private equity war chests outran them. Large regional banks in particular were frequently seen as behind the curve, in part because they tended to have more older consumers among their customer bases.
That situation appears to have rapidly changed. The coronavirus pandemic forced most institutions to impose major restrictions on in-person banking, which, by necessity drove people toward digital banking. One survey reported a 60% increase in mobile banking app downloads after stay-at-home orders began taking effect in most of the U.S. in March.
“The pandemic forced acceleration of plans that were already in place for many U.S. banks,” states Alan McIntyre, Senior Managing Director and Global Head of Accenture’s banking practice. Almost like a “time machine,” he says, the COVID crisis has advanced the digital capabilities of traditional institutions by anywhere from three to five years.
McIntyre says one of Accenture’s North American client institutions saw its banking app usage jump 100% since the start of the year. And of course branch-based transactions have plummeted since the lockdown began — as much as 75% at some institutions.
Such an extraordinary swing in transaction behavior has “pulled forward a whole range of things that were on the digital roadmap for financial institutions and forced them to make it work,” McIntyre states.
Combine that with a significant shift in investor and consumer interest in many (although not all) fintech providers, and the competitive situation within banking could be impacted for years to come.
The Financial Brand explored the ramifications of these developments in an interview with McIntyre.
What changes has the pandemic brought about in digital banking?
Alan McIntyre: Many institutions have been surprised how quickly they have been able to do things they thought were going to take months, if not longer — often they’ve managed to do projects in weeks. Digital account opening, for example, is something many knew that they needed to do, but now they’ve been forced to do it at speed — and many have.
For the Paycheck Protection Program banks and credit unions had to build or obtain digital solutions to do the processing. Which raises the question, “Why aren’t we using this type of processing for all of our small business lending?”
Once customers get used to doing things digitally, it’s going to be hard to go back.
What’s also interesting is that the pandemic is forcing innovation to come from the core part of the business. Up to now the path of least resistance for many traditional institutions has been to set up a digital bank that runs in parallel to the main institution. Now, the business case for running a multi-brand strategy with your own challenger bank running beside your core bank is going to be far weaker, because the question will be asked, “Why aren’t you doing that with the main bank?”
With this rapid change, there are issues around fraud, risk and governance controls, it’s true. However, regulators have been willing to waive many things through in this period, recognizing that it’s what is required to continue serving customers. That will start to change later in the year. But in general, I believe the regulators are going to take a look at what the banks have done and say, “You’ve managed to make good progress, so we’re not going to force you to go back.”
What has been the impact on challenger banks and other fintechs?
McIntyre: If you use the U.K. as an example, after a fantastic run in 2019, challenger bank app downloads have slowed measurably since the pandemic began. And that trend is starting to depress valuations.
Two factors are driving this. One is a flight to safety and security. With hindsight we can see that much of what happened with the challenger banks was sort of “good-time banking” — such as helping people save for a vacation by telling them how much money they could save if they spent less at Starbucks. People now are more interested in “How am I going to pay my mortgage?” and “Will my car be repossessed when the payment holiday ends?”
Consumers are going to look to the more established financial institutions to help them through what may be a challenging period.
Secondly, the traditional unsexy parts of credit, like conforming mortgages and auto finance are not where the fintech lenders have flourished. Most of the innovation has been on the periphery — unsecured credit that often you can’t get from your traditional bank. In a serious downturn those loans are going to come under stress, and we’re already beginning to see some of that among fintechs, like OnDeck Capital.
All of this will lead to more consolidation among the fintech community. One of the announced deals that makes a lot of sense is Intuit’s acquisition of Credit Karma. That’s because the ability to help customers actively manage credit exposure is going to become particularly important. While you may see some incumbent institutions snap up a fintech, there hasn’t been a great history of success when banks buy fintechs.
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Will Amazon, Google et al fill the void?
McIntyre: The coronavirus situation is an opportunity for some of the big techs to take a larger role in credit, particularly the ones with the supply chain, of which Amazon is the primary example.
However, I don’t believe you will see any of these tech and e-commerce giants make bold moves into transaction banking at this point. That function isn’t what drives customer engagement for them. Also, in such a period of uncertainty I suspect most of them will take a step back and wait and see how things play out. If correct, that will provide an opportunity for financial institutions to further develop their digital and data capabilities.
Who benefits from this shift among different financial institutions?
McIntyre: The institutions that will benefit the most from the pandemic-prompted changes are the larger regional banks. That’s because on the one hand Bank of America, Wells Fargo, and JPMorgan Chase are already making good progress in terms of digital. And on the other hand many smaller community banks depend on bank technology companies for digital banking. Those companies have made heroic efforts to digitally enable their clients, but many institutions are still going to fall behind.
By contrast, the regional banks — particularly those falling in the 10 to 30 rank by asset size — have made the biggest leap forward in the last couple months because they had the technology to do it. When forced by the pandemic to review their digital roadmaps, they looked at what they were already doing and said, “Yeah, we can make this work.”
How can banks and credit unions afford more digital investment given the financial challenges ahead?
What the banking industry is heading into will primarily be a credit crisis rather than a funding crisis. Even though major loan loss provisions have already been taken, and more will come, the credit crisis will take quite a long time to play through. As a result, we don’t see overall industry profitability disappearing during this time. Profitability may be down 70%, but the industry is still going to have positive ROE next year. That’s because the capacity of the industry to absorb lower levels of profitability, and higher credit losses is there.
As a result, 2020 will come in as a little bit of a kitchen sink year. Banks will get to spend money, often on technology, without the same level of shareholder scrutiny they had last year.
One caveat, however: Some of the smaller and mid-size banks may struggle — certainly the ones that are heavily dependent on commercial real estate lending.
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Will fee-based revenue come back?
Accenture estimates that payments volume globally will be down 10% in 2020, which translates to well over $100 billion in revenue that just disappears. That’s dependent on people buying things, and right now, their money is sitting in savings.
The issue of waived overdraft fees and account-servicing fees is interesting because if customers get used to that, then that practice potentially becomes permanent.
Consumers may also get used to the idea that they can take a payment holiday, or renegotiate mortgage payments — only pay nine months out of 12, for example— or get a prearranged overdraft at zero cost. If these practices go on for another six months, which I think is a reasonable expectation, it will be hard to bring customer behavior back to the way things were before the pandemic. So fee income will be compressed by that.
Ultimately even though banks and credit unions are closing the gap with fintechs’ digital capabilities, more and more traditional institutions will end up looking like the fintechs. This will be seen both in the way they interact with consumers — the products and propositions they have and the flexibilities they’re willing provide — along with a “We’re in this together” mentality.