Exclusive: ‘Banks post-COVID: The uncomfortable truth’ – Jim Marous, The Financial Report in “The Fintech Magazine”
Fintech influencer and publisher of the Digital Banking Report, Jim Marous, is famous for telling it like it is. Here he discusses the report’s latest findings and questions if the wrecking ball of the pandemic will finally lead to true transformation.
There now appear to be two acceptable ways of feeling about COVID-19 in the banking world.
Surveying the damage exacted on corporate budgets, customer numbers, employment rates, and personal lives across countries and sectors, it’s understandable that the first, gut-felt reaction is one of deep sadness and unease. The second focusses on the unexpected upsides of the pandemic and how banks managed to pull rabbits out of hats to weather the storm.
But, as a growing number of banking executives interpret COVID as the incentive they needed to rip up old floorboards and deliver innovative products that would have otherwise taken years to roll out, there’s another truth emerging, too: of a polarised industry where the niche players and the behemoths prosper, leaving the vast majority in the middle squeezed.
That’s according to fintech influencer, co-publisher and face of The Financial Brand, Jim Marous, and it’s one of a number of findings revealed in his most recent Digital Banking Report.
Being privy to banks’ internal conversations provides reliable but disquieting insight, and it’s led Marous to conclude that, notwithstanding the impressive somersaults banks performed during the crisis, and the enormous impact that had on keeping the economic wheels turning, the impediments to true digital transformation that existed before the pandemic have not been fully overcome.
The World Economic Forum’s How Digital Innovations Helped Banks Adapt During COVID-19 implied that the floodgates to transformation have been opened, But In one of Marous’ recent Banking Transformed podcasts, guest Sanat Rao, global head of Infosys Finacle, which provides core products to 200 banks, warned against interpreting such commentaries as the whole story.
“One should not get too excited about the fact that, as a result of this transformation, innovation has really been accelerated… It is easy to pass off many changes as a result of innovation but I don’t think all of them can necessarily be categorised as that,” cautioned Rao. He used the example of UK banks increasing the contactless spending limit from £30 £45 at the start of lockdown, to underline the difference between true innovation – that being the fundamental rethinking of a system – and spontaneous change brought about by necessity or law. “No one wanted to touch cash, people weren’t able to interact physically. There was no choice,” he pointed out.
According to his definition of innovation, only a handful of recorded initiatives during the crisis – such as the Indonesian government’s repurposing of a stored value card for skills programmes to a benefits payments card for cash purchases – were in fact pioneering.
The Innovation In Retail Banking 2020 report backs this up with statistics showing that bank executives ranked their own performance as having been significantly ‘less innovative’ than last year, despite increased transformation. Actions were simply reactive to client behaviour, which changed overnight and by brute force to reflect health and safety requirements.
Marous says ‘faking digital’ still persists. “That means having a digital app, being able to check off a box and say ‘I have digital account opening’ or ‘I have digital loan engagement’ is not enough. It’s not about taking what’s currently there and just putting it on a digital device.”
At the start of the pandemic, banks were ‘forced into digital for two months’, says Marous, but most never provided the digital ease and speed that is required.
“They opened up the drive-through teller, then they opened up banking-by-appointment. In the last two weeks, I’ve had two sets of companies ask ‘what should we do about building our interactive teller machines?’ Don’t buy them, obviously! I mean, why are you trying to build an interactive teller machine if, to keep customers safe, you don’t have as many coming into branch?”
Aside from the very largest corporations, like Chase Bank, which have enough financial backing to support a network of empty, low-earning buildings through foreseeable lockdowns and increased customer phobia of high-traffic zones, Marous urges re-purposing real estate as swiftly as possible and redirecting resources towards the real survival tools – Cloud computing, embedded banking and AI support among them.
According to his research, transaction volumes in branch were already 60 per cent down on what they were 10 years ago, before COVID-19 cut them down by another 40 per cent.
“Don’t keep investing in the branch structure. In fact, you may be better off selling that branch structure, or giving it to the community,” Marous urges banks. “We have to get out of the mindset of how we make our branch customers happy. They lived two months without branches. They can be kept happy. I’m not a proponent of closing all branches – but customers don’t need them the way they need digital today.”
He attributes the fog of fake digitisation to crisis marketing and the old chestnut of legacy culture combined with vested professional self-interest holding back transformative innovation, when the Cloud computing has put it within every bank’s reach.
“If the culture doesn’t change, what we have is a legacy fiefdom down the whole organisation” says Marous. “Most leaders have been at that bank for 30 or more years. They have surrounded themselves with people that came up through the ranks with them. Nobody wants to disrupt what‘s currently working, and, even if it’s not working, they could be as long as 10 years away from retirement and thinking ‘there’s more risk than reward here’.
Unless the culture can be changed because the leadership wants to change by embracing it, taking risks and disrupting themselves, what they are left with is an organisation with a vested interest in what they’re doing today, not what they can do tomorrow.”
Caught in the ‘blind zone’
The Great Acceleration Review of sectors’ revenue performance before and during COVID, published by consultancy McKinsey in July, showed that out of 23 industries globally, banking is projected to suffer the single largest revenue loss, and is stuck in not only the bottom quartile, but on an accelerated downward curve. Its advice is to them is to embrace a bold, radical portfolio or restructure their industry.
The Digital Banking Report’s findings give a more nuanced, if still troubling, perspective. It can be paraphrased as: the larger traditional institutional and neobanks are still faring well; they’re getting funding, they’re investing in digital technology and they are growing. The smallest organisations are also doing well because they had less needs so were able to pivot quickly. But mid-range organisations have found themselves in what Marous terms a ‘blind zone’. They’re not functionally efficient, they’re hampered by legacy tech and culture and, unlike the big banks, they don’t have the cash to invest in changing it.
“We’re seeing this in all our research on innovation, digital transformation, financial marketing, customer experience and use of data,” says Marous. “The middle range bank is stuck between ‘we know exactly what we need to do and how we can do it, but we don’t do it’ and, on the fintech side, ‘we thought we had a solution here, there are four other solutions in our space now that are bigger. How do we get scale and funding?’. Unfortunately, a lot of fintech firms were built around the funding mechanism. That was easy. Now they’ve got to look at how they make revenue.”
If what his research shows is true, some very familiar organisations need to begin to rethink their business model, prepare to be bought out, merge, or melt away.
Meanwhile, Marous highlights neobanks such as Chime, Dave and Varo in the US, and WeLab in Hong Kong, as pointing to a way forward. They are all examples of models built on the Cloud, using data to fully realise ‘embedded banking’, which treats customers as individuals.
According to McKinsey, embedded solutions will become a market worth more than $7trillion by 2030, twice the combined value of the world’s top 30 banks today. And that focus on individual customers is something that has resonated during the pandemic.
As Sanat Rao of Infosys Finacle told Marous, the need for banks to demonstrate empathy – and often the demonstrable lack of it – was exposed during the pandemic and consumers will have long memories.
“Given that COVID-19 has been such a traumatic experience for many people, customers, whether they are individuals or small businesses, will remember their experiences during this period,” said Rao. “They will very well remember which banks showed empathy and were able to react and offer them the kind of support and services they required – and which banks forgot to do that.”