While it’s become de rigueur to say that Covid-19 changed everything about banking, Accenture’s Alan McIntyre not only disagrees, but speaks of changes that will contradict some of the common, almost cherished predictions about the industry.
Consider the rapid and increased digitization of many institutions over the course of Covid. This kicked existing trends forward at a pace that even surprised McIntyre, Senior Industry Director-Banking. However, this advancement came at a cost, according to the firm’s research.
A global survey found that consumer trust in banks fell from 40% to just under 30% over the two years between studies.
“The more digital you become, the more chance that you’re seen as remote and impersonal and not really having a relationship with the customer,” says McIntyre. “And that is undermining trust.”
McIntyre says another Covid “truth” is that branches were proven to be much less necessary during the pandemic and are on their way out.
“I’m not one of these people who thinks that branch networks are dead now. I think many people want to go back to branches. Our lives may have changed somewhat over the course of Covid, but as relates to banking and branches, I think maybe half of the decline in interest in branches will stick and half of it will come back.”
— Alan McIntyre, Accenture
Long term, as Accenture details in its “Banking on Empathy” report, branches will evolve into centers for more personal interaction between bankers and consumers — not less. An increased role in such interaction is just around the corner, the report suggests, as many consumers will undergo financial stress and want face-to-face consultation as government support programs wind down.
Beyond that, branches may become the spoiler the industry will be glad it retained, according to McIntyre.
A good deal of what was paused during the height of Covid will come back, McIntyre predicts in an interview with The Financial Brand. The industry learned to serve consumers and small businesses with greater empathy than before and are more adept at servicing consumers than was previously the case.
And he suggests that this may turn the competitive tables in the next few years in an unexpected way.
Convergence of Challenger Banks with the Traditional Industry
Overall, the banking industry earned high marks for the ways it tried to help consumers and small businesses as the pandemic economy turned down for many. McIntyre believes many of those helpful measures may turn out to be for keeps.
Take overdraft service. During the height of the slump many institutions took steps to minimize overdraft fees. And institutions took other steps, such as offering payment holidays on mortgages.
“It will be difficult to walk back from those offerings,” says McIntyre. “Once measures like that become an expectation, they start getting built into product design.”
McIntyre believes that “Covid forced many into being more responsive and more empathetic.” And this will help them competitively.
Don’t Write the Obit Yet:
Challenger banks continue to enjoy an impressive reputation. But it’s time for a reality check.
“Challenger banks are a skinny version of traditional banks,” McIntyre says. “Many designed their own products and their own customer interfaces. And in the process they lit a flame under the traditional banks, showing their customers that there’s a better alternative in many respects to the way things used to be. But the banks have responded to that. And I think the gap is closing.”
In terms of competitive threat, McIntyre says Google Plex, the coming integration of Google interfaces with “banks plugged into the back of it,” in the consultant’s words, poses a greater challenge.
In fact, McIntyre believes that in a few years challenger banks will no longer be a subject of conversation in the industry. “I think the best of traditional banks will have offerings that are more than comparable to the challenger banks.”
And then, he says, “it will come down to whether you have branches or not.”
Branches Are Where Consumers Get to Complain
McIntyre says that other than during their emergence period, challenger banks in general have not disrupted the traditional industry as much as some think. And as cool as they may seem, there’s more to the picture than signing up new accounts.
The consultant suggests looking at the U.K., where the challenger bank movement had a head start on U.S. trends. A weak spot among U.K. challenger banks is customer service.
“U.K. regulators have received a lot of complaints about not being able to resolve issues with challenger institutions. Unlike with traditional institutions, there is no branch to walk into so you can tell someone how unhappy you are.”
— Alan McIntyre, Accenture
McIntyre says challenger banks and traditional institutions will see a convergence in methods, look and role.
“There will be losers within the challenger bank community as well as winners,” he says, “and the losers will be those who don’t really have something different to offer.”
Starling, in the U.K., “has done well and reached profitability,” says the consultant, “but in terms of product offerings, it is beginning to look a lot more like a regular bank.”
Your Friendly Neighborhood … Chime?
McIntyre believes the all-digital challenger bank survivors will morph somewhere down the road: They’ll go physical.
“I would not be surprised over time to see a SoFi or a Chime open physical locations in downtown San Francisco and in Manhattan, for example,” says McIntyre. “They will want to round out their distribution model to provide service to consumers.”
To defend this prediction, McIntyre cites history. While discount brokerages such as E-Trade, TD Ameritrade and even, to an extent, Charles Schwab experienced strong growth via remote means, they all opened offices in various locations because they believed that some consumers would want to go to a physical location.
Segmentation Will Grow As a Strategy for Newcomers and Longtime Players
McIntyre is not saying challenger banks are going away. In fact, an angle on challenger banking that he sees gathering momentum are players who choose to serve specific slices of the market.
Aspiration, which focuses on sustainable investments that avoid involvement with fossil fuels and firearms, has been around for several years. McIntyre thinks it has timely appeal. A newer player, Greenwood promotes itself as “Modern Banking for the Culture: A digital mobile banking experience made for Black and Latino customers.”
“You’re going to see more segmentation, where founders link a business model to a specific purpose. The purpose could be the environment, the community or just general financial well-being.”
“You’re going to see more segmentation, where founders link a business model to a specific purpose,” says McIntyre. “The purpose could be the environment, the community or just general financial well-being.”
“These new segmented players will need to demonstrate to customers that they’re doing something different and that they are therefore worthy of being treated differently by their customer base,” says the consultant.
Segmentation will not just be for newcomers in the years ahead, says McIntyre. Increasingly larger banks that still lack a national presence for their overall business will work to launch specialized national businesses, sometimes under different names. KeyBank, for example, is getting into a national brand of medical practice banking via its Laurel Road operation.
“Could they have done that under the KeyBank brand? Probably,” says McIntyre. “But are they going to be able to build something more distinctive under the Laurel Road brand. Yes, they probably can, and they can do it on a national basis.”
Not everything will fly. McIntyre says the JPMorgan Chase attempt to create a bank within a bank for Millennials, called Finn, did not succeed because it was not distinctive enough from what the bank was already offering digitally.
“Any traditional institution that is going to try an activity that is going to have a separate identity really needs to have a compelling reason to be distinct from the mother ship,” says the advisor. “Banks don’t have unlimited money to invest in branding. So there’s got to be a solid reason for fragmenting the brand.”
Banking Like a Brewery
Some of the greatest successes, in terms of financial performance, in the traditional banking industry have been those institutions that offer Banking as a Service in one way or another. McIntyre says that while the biggest winners in this spin on banking have specialized in it, he sees the practice growing more widespread as more and more nonbank companies want to embed financial services into their businesses. The use of “buy now, pay later” services embedded into the online customer journey is one example of where this strategy can lead.
Building Financial Power Plants
McIntyre believes that larger U.S. banks will develop a single technology and operations stack that can be used to power multiple options. They can distribute products and services directly and the same technology can be used to offer white-labeled, co-branded or embedded services.
“Choosing a factory strategy is going to be an important trend, in which the industry takes basically the same product, tweaks it and the messaging around it,” says McIntyre. “You can target particular communities, while still having the scale and efficiency that comes from being a large product ‘manufacturer’.”
To see what this looks like in a tangible way, McIntyre suggests going to your local beer and beverage center.
“It used to be you could find maybe five or six beers in such stores,” says McIntyre. “Bud, Bud Light, Coors, Coors Light, Michelob, and in some regional stores, maybe Rolling Rock or Pabst.”
Nowadays, the range of choice is stunning. “You may be faced with 65 different India Pale Ales alone,” says McIntyre. “But many of those beers come from the same brewery.”
There’s no reason large banks can’t develop many approaches and avenues for their “brewing,” according to McIntyre. “You may be making it all in the same place, but the way you package and sell it may be very different, with different wrapping, branding and purposes.”