COVID-19 is a time machine to the future for retail banks, according to Deloitte

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COVID-19 is a time machine to the future for retail banks, according to Deloitte

For retail banks, COVID-19 has been a time machine to the future, as overnight take-up of digital by customers, something which many predicted would happen over years, takes place in a span of weeks, according to Deloitte.

While the value of ATM withdrawals has increased since the height of the pandemic in April, it has plateaued since the beginning of June and remains approximately 40% below the daily average of ATM withdrawals in June last year. Only 17% of customers indicated that they expected to use their bank branch once the restrictions are lifted, preferring digital, more immediate ways of interaction, from mobile banking apps to Twitter and chat-bots.

David Dalton, Head of Financial Services at Deloitte Ireland said, “While digital transformation is nothing new to Irish banks, digital capability has now become an immediate differentiator, and banks must adapt quickly to changing customer preferences, rethink their value proposition, and build a strategic roadmap to a sustainable future.”

Key implications of COVID-19 on retail banking sector

  • Banking employment is likely to shrink significantly, perhaps up to 20-30% in line with cost reduction goals of the banks
  • Digital banking begins to catch up with rest of Europe
  • New wave of vulnerable customers will emerge that need to be supported
  • Branches become increasingly less relevant
  • Banks have an opportunity now to play a critical role in re-booting the economy
  • Retail and SME lending supply will be challenged with increased costs for borrowers
  • Potential for consolidation that will reduce the number of banks
  • Represents a moment of truth for non-traditional players and Fintech
  • A new wave of portfolio sales of distressed assets as a consequence

“Ultimately, COVID-19 may also help the Irish banks by forcing them to accelerate their transformation strategies and make some hard choices. There is both an opportunity and an imperative for each Irish retail bank to accelerate its transformation into a ‘bank of the future’ – to reimagine the retail bank and act on that reimagining.  Today we have published our view on the next steps which retail banks should take as they navigate the COVID-19 crisis,” said Dalton.

Addressing implications and what banks need to do next:

Commercial focus: Fundamentally re-consider where to play

  • Laser focus on customer value proposition
  • Exiting unprofitable segments and products
  • Manage tension between shareholder, customer, regulators and socio-environmental roles.

To succeed in the small Irish market and against the challenge of FinTech companies, retail banks need to find their commercial focus and carefully consider where to play and how to win. The future retail bank will have understood it cannot necessarily offer ‘everything to everyone’ if it wishes to remain competitive. Rather, it must make choices around its sectoral focus, product portfolio, and international diversification. While the banks are unlikely to drastically reduce their product portfolio, for example, there is potential in becoming known for a few best-in-class products,” said Dalton.

Commercial refocusing should be complemented by a rethinking of the bank’s organisation and service delivery models, facilitating its cost transformation and ultimately making it smaller and leaner. Staff-related costs currently form an unsustainable percentage of the banks’ operating expenses, and the examples set by the challenger banks prove it is possible to serve a large customer base with a significantly smaller staff – Revolut, for example, has fewer than 50 employees for 1 million customers in Ireland. This is also in line with historical and international trends: in Ireland, the banks have cut significant portions of their workforce since the Global Financial Crisis, and restructures currently form a key element of the transformation strategies of global banks such as Deutsche Bank and HSBC.

Embrace a digital business model

  • Digital first mind-set with physical channel retained for high-value interactions
  • Accelerate the adoption of digital, transition to cloud and retirement of legacy platforms
  • Exploit the wider ecosystem partnerships (open and beyond banking) for revenue diversification
  • Harness better quality data to inform decisions and manage risk.

“Crucially, the retail bank of the future must be digital by default. COVID-19 forced banks and their customers to go digital overnight; now, banks must forge ahead with ambition. Application processes and customer service must be made effortlessly digital: the customer should be able to buy what they want, when and how they want it, with minimal friction and maximum delight. Leveraging their traditional strengths, such as unrivalled data on their customers, the digital bank of the future can better retain its customers and a larger share of their wallets. The digital bank will also be more agile and resilient, capable of enduring future crises while retaining its competitive edge,” according to Dalton.

How to win - Engage in focused collaboration

  • Industry utilities can reduce cost and dramatically improve efficiency
  • Partnering with the ecosystem to deliver on non-core banking capabilities.

“Partnerships can also be considered: banks must consider which capabilities are core and should be invested in and where the enterprise would be better serviced in seeking collaboration to leverage capabilities it does not possess,” said Dalton.

Adopt a culture of transformation

  • Earn credibility as purpose-led organisations
  • Re-imagine business as usual. Empower the business to radically transform end to end journeys
  • Embed new ways of working that build operational resilience and business agility
  • Attract a more diverse workforce (including STEM graduates and part-time/remote staff).

Commenting on purpose and culture, Dalton said, “To survive and thrive the banks must attract and nurture an increasingly diverse pool of talent. Traditionally, banking has not been a prime career destination for STEM graduates, for example, but true digital ambition and new ways of working can become the first step in making it an attractive choice. Furthermore, the banking industry’s relationship with society – its wider purpose – must evolve. The banks must become purpose-led organisations, taking a key role in promoting the recovery from COVID-19, being prepared to respond to further pandemics and other global risks, and drive the growth of a sustainable economy. The challenge will be for the banks to balance these wider ambitions with commercial expectations: to do well by doing good.”

Optimising capital and return on equity

  • Enhanced tooling to defend, re-inforce and optimise capital structure
  • Consistent measurement and reporting

“Profitability will remain the key challenge for banks. The lower-for-even-longer interest rates and evaporation of traditional fee income streams will depress returns, and aggressive cost control may be the only real lever for banks to improve their profitability in the short to medium term – while they are also responding to the operational and strategic challenges posed by COVID-19. In light of these challenges, the Irish banks are likely to continue trading at large discounts to book value, and a tension will exist with shareholders as the banks seek to balance profits and doing the ‘right thing’ by supporting their communities as the recovery gets underway,” concluded Dalton.

Article Published: 23/07/2020