Banks and credit unions would appear to have two choices in 2021 as the rollout of vaccinations and other measures herald the arrival of a “new normal.”
On the one hand, having been stretched — and stressed — through 12 months of COVID, naturally many bank leaders and employees would like a respite, observes Alan McIntyre, Senior Managing Director-Banking at Accenture.
On the other hand, that “stretch” — encompassing digital transformation, lessons in alternate work arrangements, and a boom in cashless transactions — can be turned into a “slingshot,” in McIntyre’s mind, to propel institutions forward.
However, decisionmakers must be careful not to let COVID-era lessons override common sense and experience as something-like-normal arrives. McIntyre gives two examples: First, “Do you really want to accelerate your branch closure program only to find that those branches were the only thing that differentiated you from other banks?”
Second, retaining many people in work-from-home status for the foreseeable future may seem to make sense, but will it cost the institution the ability to recruit talented young people who crave a return to a social work environment?
Ultimately the option of taking things a bit easy post-COVID is an illusion. The pandemic started or accelerated trends that no bank or credit union intending to survive can choose not to handle.
During a podcast based on his firm’s annual top trends report, McIntyre described a mix of changing technology, growing competition, further commoditization of banking, shifting politics, and eroded financial results that all demand aggressive action.
In fact, while the post-COVID environment won’t pose solvency challenges for most institutions, many have seen shortfalls in profits for 2020. Accenture projects that many U.S. institutions won’t see a return to pre-COVID earnings levels until 2022.
“Coming back from that is going to be a marathon,” says McIntyre, “not a sprint.”
1. Relationship Banking Must Evolve (Or Die)
Many financial institutions still aim for success as relationship banking managers and hope to become trusted advisors. But McIntyre suggests that the advent of free fintech apps attract consumers more than traditionalists’ complicated accounts with obscure pricing. In addition, as more platforms, such as Google and Amazon, explore financial services, with banking or at least payments as an embedded free service, traditional institutions’ packages have less appeal.
“Unless you’re a clear digital leader, it’s going to get harder and harder to win that battle,” Accenture’s report states.
2. Banking Apps May Already Be On Their Way Out
Even as some institutions are only in the early stages of providing apps for their customers, McIntyre thinks the era of the freestanding banking app may be ending. He points out that in China, among other markets, banking functions have become embedded in large lifestyle management apps. In this country, the Google Plex pilot — which a handful of banks, credit unions and challengers are participating in — could be a clue to things to come.
“I don’t think either Amazon nor Google has any interest in managing a financial institution balance sheet,” says McIntyre. “What matters to them is managing the customer experience, making sure than customers feel that these services are well integrated.”
2020 may go down as the high water mark for banking apps.
For diehard traditionalists, McIntyre predicts an uncomfortable change of life. “Banks may be looking at becoming a provider in some one else’s digital banking experience. I see banking services disappearing into the operating systems of our phones and into the operating system of other businesses, over time,” says McIntyre.
The consultant adds that business banking will also be affected by this trend. He sees the advent of Stripe Treasury as a digital blending of small business banking with ecommerce and platformication.
3. Getting Bigger and Getting Better Will Be Table Stakes
More M&A is coming. “The industry was already consolidating pre-COVID,” says McIntyre, “but given the continuing profit compression, we think there will be even more pressure to scale up.”
“The best traditional banks will do well and the best challenger banks will do well. But the laggards in both categories may struggle.”
— Alan McIntyre, Accenture
At the same time that institutions will be seeking size to cut costs, most will have to spend more on digital just to stay in the game.
“COVID helped blur the differences between traditional banks and the challenger banks,” says McIntyre. “And the two models are converging. The best traditional banks will do well and the best challenger banks will do well. But the laggards in both categories may struggle.”
One potential problem for traditional institutions is the Biden administration’s views on mergers, which will likely base at least part of their economic rationale on branch closures and consolidations. “I hope that the new administration understands that you don’t need a branch on the corner in order to get good service,” says McIntyre.
4. ‘Green’ Will Be The New Color of Regulatory Ink
While many institutions have committed to “greening” their own institutions — building energy-efficient offices, for example — few have taken steps to address lending to fossil fuel and other industries that can affect the environment. With the new regime in Washington, that may no longer be a voluntary matter, according to McIntyre.
“The point we’ve come to now is banks allocating capital to ‘green’ the broader economy,” he predicts. “There will be changes in regulatory standards and changes in reporting requirements to monitor the impact of bank lending on the environment. Once the dominoes begin to fall, it will be difficult to resist it.”
Lending to fossil fuel businesses won’t go away, but policies will make it more expensive, as Washington assigns financial and reputation risk to such credit.
In the closing months of the Trump administration the Comptroller of the Currency expedited a rule that would have prevented banks over $100 million from freezing out unpopular industries, including fossil fuel companies. The incoming Biden administration sent that to the regulatory graveyard.
Accenture warns that as lenders pivot to lending to green deals, they should also expect pressure to start prioritizing and reporting on broader environmental, social and governance goals like funding minority- and women-owned businesses hit by COVID.
McIntyre notes that even as cashless transactions boomed during COVID and promise to continue much of that momentum, regulators will press for continued ability to pay with cash, in the name of financial inclusion.
5. America May Be Changing How It Borrows
During COVID many Americans chose to be conservative with their credit cards, with the percentage of people paying off their balance every month hitting record levels. This trend may only be the beginning of a shift in credit usage.
Financial institutions want to lend and some consumers wish to borrow, but how they do it may evolve. Some lenders may move towards being the credit engine behind ecommerce sites — in some ways a refresh on the idea of white labeling cards and providing indirect lending at dealerships.
However, McIntyre suggests that revolving credit may lose some ground to newer forms such as “buy now, pay later” plans. These plans have grown hand in glove with ecommerce during the COVID era. Younger consumers are driving growth in this update on layaway installment credit plans.
While some credit card companies and individual banks are already offering such options, McIntyre predicts that many others will approach BNPL cautiously “until they really understand what the credit quality is.”
6. Banking Must See Its Way Clear To Much Greater Transparency
One of the hallmarks of fintech firms offering consumer accounts is their stated goal of transparency, putting themselves, in McIntyre’s words, on the consumer’s side of the table. The consultant says these policies of clearly disclosing fees and other costs and requirements put pressure on traditional financial institutions to appear at least equally open and honest. They will have some ground to regain, he adds, because trust in financial institutions has fallen in recent years.
“Something we’ll see with the transformation to digital is increased transparency, so traditional institutions can show that the deal you’re getting is the best deal possible,” says McIntyre. “We’re going to need to see more transparency, simplicity and straightforward communication.”