Four Trends That Will Define Banking Post-COVID 19

Navigating COVID has given the banking industry a glimpse of the future, but the next 12 months will determine how much of that future is institutionalised.

The world of retail and commercial banking was already a complex and fast-moving sector. The fallout from COVID will make navigating it even harder as banks assess whether to accelerate or pause their digital transformations.

Accenture New Zealand Managing Director Ben Morgan says:

“Undoubtedly, the pandemic has been disruptive for banking globally. Banks were forced to make years' worth of technology and business model changes in a matter of months as demand for digital solutions and secure work-from-home systems exploded.

“This means the mode and operation of banking in most other countries has likely changed forever. COVID has blurred the lines between established players and challengers as traditional banks have upped their digital game and increased their share of digital sales from about 30-40% to over 70%.

“We’ll look back on this period as an inflection point and many metrics will show a pre- versus post-pandemic discontinuity. However, the desire to accelerate digital transformations is not without risk. There are many areas where it isn’t clear if bank employees, customers, or regulators are ready for revolution rather than evolution.

“The ability to navigate these trade-offs by leading rather than following will be the critical success factor for banks to widen the competitive gap in the post COVID world.”

The ‘neo normal’ world will challenge the undifferentiated

The pandemic has seen a blurring of the new and the old around a banking business model optimised for the post-COVID world. In this ‘neo-normal’ the undifferentiated middle will be squeezed hard.

“Product and service differentiation will be the defining battleground for banking. But there are contradictory forces shaping banks’ digital transformations between product and service offerings.

“Banks traditionally compete on grounds of relationship management, quality and advice – to increase loyalty, cross-sell, and expand share of wallet. However, many of the more successful financial products in recent years, like payments firm PayPal and local investment platform Sharesies, have been category killers as consumers have flocked to products that are cheaper and quicker.

“This will be one of the big challenges facing banks. Do they develop clear digital product propositions that can win on a standalone basis, or do they try to create a better digital version of the traditional relationship management proposition? The trade-off between the two will differ from bank to bank.”

Mr Morgan said one of the macro issues facing bank management teams globally is how best to accelerate digitisation of products and services.

“COVID has really advanced banking significantly and the natural inclination will be to use it to accelerate digital transformation. But smart management teams in banking will recognise that there this is such a thing as getting too far ahead and overinterpreting the springboard effect from the digitisation of products and service,” says Mr Morgan.

“For example, it may not make sense to accelerate closure of bricks and mortar branch networks if that’s what differentiates a traditional bank from challengers. Similarly, a consequence of having work-from-home practices become more permanent may make it harder for banks to recruit the best young talent as they still want the social work experience.”

“These are important trade offs banks will need to consider as they determine how they can best incorporate digital into their service and product offerings.”

Cash is not king

In most developed economies cash transactions declined markedly in 2020 as more commerce went online and people were encouraged to use contactless payment.

In Europe, cash transactions declined by over a third in many markets while Norway is close to becoming the world’s first cashless economy with cash accounting for just 4% of all transactions. In the US alone, $4 – 5 trillion of cash transactions will migrate to some form of digital payment over the next decade.

“As residual cash usage falls to single digits, the relative costs of providing a cash service will continue to increase for traditional banks.

“Globally there is a lot of innovation happening to address this fixed cost challenge. For example, OneBanks in the UK is setting up manned kiosks in high-traffic supermarket locations using Open Banking APIs to service customers of many different banks.

“However, there may have financial inclusion ramifications as banks increasingly decouple from cash as a payments mechanism. It’s vital that small businesses and individuals that are more cash dependant don’t get excluded. That will be an important challenge for the banking sector and regulators to grapple with in the coming decade,” Mr Morgan said.

Twilight of the banking apps

As the industry completes its migration from street corners to screens, the competitor set is both broadening and upgrading. The launch of Google Plex banking in 2021 and the likely evolution of Apple from credit card provider to broader financial services player is going to see retail transaction banking disappear into broader digital lifestyle management platforms.

“This is a trend already underway in payments. Organisations like Uber and Starbucks offer seamless payments systems embedded in the purchase of goods, so the consumer doesn’t have to think about the bank transaction itself.

“Google Plex and Apple Pay take this a step further and transaction banking is increasingly becoming native to the phone’s operating system. The balance sheet is pushed quite far back in the proposition which provides a vastly superior customer experience compared with standalone banking apps.

“The twilight of the banking app may also be coming in the world of B2B transactions, as digital business management platforms like Shopify, Facebook, and Amazon can offer better insights than the banks into supply chain economics and business cashflow. Over time, transaction banking and cash management will start disappearing into the operating systems of our devices and businesses.

“This will take us closer to a world in which all but the largest and best-known digital banks will start to think of themselves as product vendors in someone else’s customer experience rather than as customer-facing brands in their own right,” Mr Morgan said.

Fintech and online commerce will incentivise radical transparency

The report notes that fintech start-ups and large online commerce organisations are likely to increase pressure on banks to be more transparent in their pricing and cross-subsidisation.

“Our 2020 research found consumer trust in banks to process transactions effectively and safely is very high, much higher than the Big Tech firms and the main commerce players like Walmart. However, consumer trust in banks working in their best interests has fallen 14 percentage points over the past two years.

“One of the things we will likely see with the move to digitisation is increased transparency from banks on fees to show the deal being offered is actually the best deal possible.

“For example, many customers may not understand the technicalities behind the interest on their credit card or understand the fees associated with investing. Therefore, to try and create a more compelling value exchange, some traditional banks will lean into product pitches that are radically transparent so that consumers really understand what they’re paying for, and whether they’re getting a good deal or not,” Mr Morgan said.

About Accenture

Accenture is a global professional services company with leading capabilities in digital, cloud and security. Combining unmatched experience and specialized skills across more than 40 industries, we offer Strategy and Consulting, Interactive, Technology and Operations services — all powered by the world’s largest network of Advanced Technology and Intelligent Operations centers. Our 624,000 people deliver on the promise of technology and human ingenuity every day, serving clients in more than 120 countries. We embrace the power of change to create value and shared success for our clients, people, shareholders, partners and communities. Visit us at www.accenture.com.

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