While easing from the coronavirus lockdown is well underway, we still don’t have a clear picture of what the “new normal” will look like, nor how quickly or slowly economic activity will recover.
But whatever “normal” turns out to be, we are still going to need banks. Unlike the 2008 financial crisis, most are now well capitalized and have played an important role supporting government loans for business, plus mortgage forbearance and other assistance for consumers. However, financial institutions have also signaled trouble ahead and made huge provisions for bad loans. Few disagree that the world economy faces a gloomy outlook.
Notwithstanding the fintech phenomenon, banking’s position hasn’t changed much in the past 20 years. In the U.K., the Big Six banks — Barclays, Lloyds, RBS, HSBC, Nationwide and Santander U.K. — still control the retail and small business markets. Challenger banks Monzo, Revolut and N26, with their card-based business models, have hardly dented this dominance, despite help from the Financial Conduct Authority to facilitate more competition. FCA figures show over 70% of deposits and 80% of current (checking) accounts remain with the Big Six. It’s similar in the U.S., where the top three banks — Chase, Bank of America and Citibank — grabbed a disproportionate share of the first-quarter’s pandemic-related surge in deposits, according to the FDIC.
While financial institutions have cooperated with the government, one senses that customers remain wary of banks. Huge increases in overdrafts, virtually no interest paid on deposits and increasing minimum monthly repayments on credit cards all send very mixed messages at a time of crisis. When job losses mount further into the recessionary cycle and financial institutions go after defaulters, they will face a real PR challenge.
The Importance of Brand Purpose
During this pandemic, financial institutions have wanted to be perceived as “good citizens” supporting the economy by helping their customers in difficult times. Those that have done this well are likely to be rewarded with an enhanced brand reputation and increased consumer loyalty, as long as they don’t turn nasty when the going gets even tougher.
For those that have failed to support their customers, or have been out of reach when you’ve badly needed them — expecting you to wait hours to have simple questions answered — the story will be different. If these brands claim that “customers come first,” their poor delivery will show that they don’t.
“More and more, brand purpose is experienced digitally. And if your purpose is to serve customers better, your platform has to deliver on this promise.”
— Peter Matthews, Nucleus
More and more, brand purpose — the reason why a brand deserves to exist — is experienced digitally. And if your purpose is to serve customers better, your platform has to deliver on this promise. The opportunity for challenger banks, therefore, is to use technology to target niches, like soon-to-launch Vive, which we helped create. Vive wants to be “the bank that helps you revive your finances,” something everyone is going to need a bit of, post-lockdown.
Aligning a meaningful brand purpose with clear communications and consistent brand experience is a priority for all companies, and will be crucial for banks and credit unions wanting to avoid bad PR in a recession. Brand purpose provides meaning, engages target customers and helps manage expectations.
However, many banks have done little to give their brand much meaning. Most mistakenly believe that they have unique propositions when, in fact, there is a widespread lack of differentiation.
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Digital Transformation Still Has Far to Go
During the long weeks of lockdown people overall probably have experienced more digital transformation than in the last several years. Collaborative working from home, e-commerce and digital finance have transformed the way many people live and work. We’ve also seen a rapid shift from cash to contactless cards and mobile money, and from physical banks and ATMs to online banking apps. The world will not revert to the way it was, but equally, analog-using populations cannot be excluded.
Innovation thrives in difficult times and while digital transformation has been talked about for years in banking, in reality it’s been more evolution than revolution. Even most challenger banks have relied on knitting together third-party platforms that are already more or less generic.
So, what will the future of finance look like? Why can’t a bank be loved like other popular brands, for helping its customers achieve their ambitions? Just because that sounds far-fetched, doesn’t mean it’s not possible. A flawless digital platform with frictionless apps powered by artificial intelligence would be needed to deliver exceptional customer service and show customers how to make the most of their income, by helping them spend, save and invest better.
Some have expected Big Tech to step in here and transform financial services, but this hasn’t happened yet. It’s just not been as easy as they thought it would be, due to the high levels of regulation. The rise and demise of Facebook’s Libra digital currency is the best example of this and showed how even giant Facebook underestimated the regulatory and political challenges of the global financial system. The complexity and cost of compliance has also prevented many a well-financed fintech from offering profitable full banking services. Perhaps that’s why Monzo’s founder has already departed to farm his alpacas, with the incumbent banks still on top.
Wealth Management Needs a Next-Gen Upgrade
In late 2018 we wrote the report “Wealth Management And The Digital Revolution.” One of its conclusions was that technology must place clients’ needs at the center of every process and then digitize them. Digital transformation is especially important in wealth management because the next generation of investors — many of them tech entrepreneurs — spend their wealth on luxury brands and have high technical and design expectations. They do not understand why traditional private banking and fund management remain so analog. Further, Millennial inheritors have very different attitudes towards wealth and will be looking for innovation in products and services to meet their individual needs.
With the prospect of Goldman Sachs launching its digital wealth management platform in 2021, following the successful debut of Marcus, financial institutions are going to need to respond and transform their wealth management models to the post-lockdown digital era.
Fintechs Need a Different Revenue Model
The 2008 financial crisis gave birth to today’s fintechs. Perhaps the 2020 pandemic will inspire a new generation of disruptive financial startups?
If next-gen fintechs can raise anything like the sort of money their predecessors did, they can enter a marketplace under the unique conditions created by COVID-19. It goes without saying that if innovative digital and mobile propositions can identify profitable niches, they will gain rapid traction in a remote-working economy.
Next-gen startups, as well as incumbent institutions, will need compelling brand propositions and strong brands with frictionless user experiences. But instead of business models based on Mastercard and Visa interchange rates, fintechs should look to create sustainable value using AI and even augmented reality to become a more central part of consumers’ lives.
Now is the time to reflect on valuable lessons learned about financial institutions and their customers from the lockdown period — the strengths and weaknesses of their own systems and the relevance of their brand purpose. How institutions serve their customers during what some predict will be the “mother of all recessions” will mark out those with strong brand principles and a commitment to innovation from those that only care about their bottom line.