The coronavirus pandemic will have a lasting impact on banking, and life, as we know it. While a vaccine for COVID-19 will surely bring us to a “new normal,” for banks and credit unions, now is the time to prepare for how people will bank in the near future, and indeed how they are banking now.
As the crisis subsides, financial institutions must streamline their digital solutions to reduce operating costs, prepare for new competition in the marketplace, offer personalized and innovative services, update risk management and support the potential for a permanently partially-remote workforce. Let’s explore each of these five essentials further.
1. Speed Up the Move to Digital-First Banking
While cash may not be dead, its use will likely continue to decline in favor of contactless payment options. Banks and credit unions must ride the wave of this trend as touchless payments and digital solutions become increasingly popular. Digital-first banking is here to stay. While some consumers will return to the comfort and familiarity of in-branch banking, it’s important for every in-branch operation to have a digital alternative if possible.
Front-end digital solutions are not enough, however. End-to-end digital processes are paramount, as consumers’ and businesses’ appetite for on-demand service and approvals increases. Financial institutions should consider shifting resources, implementing new training programs and onboarding additional talent to support a digital-centric approach. This is especially important to factor into 2021 budgets.
2. Adapt to a Radically Changed Competitive Landscape
The rise of banking-as-a-service providers, such as the new partnership between Goldman Sachs and Amazon, poses a real threat to many institutions. Additionally, banks and credit unions can expect to see increased competition from online-only banks, fintech companies and retailers who began offering lending products to capitalize on increased demand. These business models are highly effective due to their low operating costs, efficiencies driven by shared data and uncomplicated interfaces with real-time approvals.
With the Goldman/Amazon partnership, for example, Marcus will operate through Amazon’s seller portal, offering lines of credit of up to $1 million to merchants. Applications are fully digital and accompanied by on-demand approvals. The arrangement is expected to be lucrative for Goldman Sachs, which enjoys low-cost loan processing and underwriting data sourced from Amazon. Processing costs are also mitigated by Goldman’s hand-selection of applicants.
While most traditional lenders sift through applications to identify qualified borrowers, Goldman cherry picks qualifying merchants and invites them to apply. This results in a higher approval rate and reduced processing time.
The trend toward embedded lending will infringe on financial institutions’ market share. Banks and credit unions should zero in on small business lending, which can bolster local economies by supporting both the financial institution and the business.
3. Reinforce Commitment to Putting Communities First
The current financial crisis highlights an already trending need for responsible, community-minded banking. How financial institutions respond to the COVID-19 crisis — and the actions they take as the economy begins to right itself — will influence their reputations in the long-term. Personalized service and community-mindedness have never been more important. The approach to providing them, however, will often be different from the past.
Data-powered audience segmentation can help banks and credit unions proactively anticipate the needs of their customers, then offer services and solutions to solve them. Voice-of-consumer and social listening tools can help financial institutions understand and monitor their brand perception.
It’s important to develop a process and allocate resources to engage with consumers in the digital space. For example, when complaints or concerns are raised on social media or other channels, they should be triaged quickly and effectively. If this capability is something you previously have put off developing, it’s time to re-prioritize.
According to EY’s Future Consumer Index, only 17% of consumers surveyed said they trusted their financial institutions in a time of crisis. Community involvement and support efforts, paired with highly individualized offerings, can help financial institutions establish and maintain trust. Banks and credit unions that focus on giving back in this way will gain credibility in the eyes of their communities.
4. Reevaluate Risk Management Models
The coronavirus pandemic has underscored the need to develop an agile risk management plan. Financial institutions must be flexible enough to respond urgently to changing needs and provide support and reassurance in a time of crisis.
This presents an opportunity to reevaluate model risk-management frameworks and leverage systems that can support real-time data fluctuations. Risk management plans must be nimble enough to evaluate liquidity constraints, rapid changes in creditworthiness and stressed market conditions.
During the post-pandemic period financial institutions should evaluate their earlier responses and develop protocols that can ensure resiliency both now and in the future. The coming months will also require a shift from threat mitigation to a longer-term response plan.
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5. Manage a Changing Banking Workforce
While the beginning of the pandemic required an immediate focus on remote working solutions, it’s important to close any remaining gaps in technology or accessibility to ensure employees can effectively — and perhaps permanently — work from home. This raises questions about the future of corporate headquarters and in-branch operations.
Banks and credit unions will also need to carefully assess their reopening strategy — keeping employees’ health and safety top of mind while reassuring customers and other audiences that they’re safety is also a top priority. The office environment may in fact change for good, with many employees continuing to work remotely even after the immediate risk subsides.
Working to proactively establish and maintain open lines of communication can help provide support and drive accountability with remote employees. Further, transparency about business operations and workforce decisions can go a long way in developing trust and rapport.
Digital learning programs can expand employees’ skill sets to make them more adaptable as roles are redefined to accommodate changing business needs.
In addition to the above five essentials, a prolonged low (or even negative) interest-rate environment highlights the need for new sources of revenue, particularly as consumer needs and demographics continue to change. As a long-term plan, banks and credit unions should focus on reaching out to broader markets. A bank that primarily serves a city clientele, for instance, may consider entering suburban markets as city dwellers escape to the suburbs in the wake of the pandemic.
Equally important is for banks and credit unions to create efficiencies and reduce operating costs in the face of a prolonged decline in revenue and reduced liquidity if the pandemic’s economic impact is slow to subside.