Re-imagining Banking beyond the pandemic

I have recently attended a digital banking conference where, among other important topics for the industry, we discussed how will banking be transformed post COVID-19. These conferences never allow you enough time to share your insights, so I thought I would share some brief thoughts on the topic.

In reality, we cannot fully predict what is about to happen. If we didn't know yet what VUCA really meant, I think this pandemic has made it clear for all. The unprecedented level of volatility and uncertainty we are currently living brings added complexity to our lives. Some have even characterized COVID-19 as a black swan event, which I don't necessarily agree with, given the predictability of this pandemic (whether we took it seriously or not is another story).

What we do know by now is that COVID-19 has brought very specific themes to the banking business that may accelerate some trends that were already present.

Among the multiple impacts and challenges that financial institutions are facing with this pandemic, this article will focus only on 3 long term trends and a short term challenge that are of particular importance and in my view will shape the future of banking as we know it.

Extreme acceleration of digital adoption.

Clients more than ever need to transact remotely and digitally. It is no longer a question of preference but a needed requirement. And the pandemic has simply pushed this trend to a whole new level. This is forcing banks to improve their clients’ digital experience. Famous author Brett King tells us that friction is the most disruptive force in banking. Well, COVID-19 has definitely increased friction and made us much more aware of some of the client experience gaps that exist in financial services. These gaps are exposing banks to new competitors who are agile-born and deliver more intuitive, and personalized, digital experiences.

Banks therefore need to significantly accelerate the delivery of digital solutions as clients are already choosing other solutions. A good case in point is Capgemini’s latest World Payments Report mentioning that from April this year, more than 38% of consumers found a new payments provider during the pandemic and are looking at a more permanent switch.

Another good piece of evidence is a McKinsey Global Survey that concludes that companies have accelerated the digitization of their customer engagement by at least 3 yrs. And the percentage of digital products in their portfolios has jumped by an impressive 7 years! Talk about leap-frogging!

In conclusion, we are seeing extreme acceleration for a much quicker delivery of digital solutions to clients. But this is only happening because banks are looking at the current situation as a serious survival scenario.

The acceleration of digital adoption is generating new transformation levers, that are simultaneously risks and potential sources of competitive advantage.

a) Cyber risk. As banks develop new platforms and become more connected to third parties, adoption of emerging technology can bring added security risks. Banks need to step up their investment in protecting against cyber attackers so that an always on, always secure reality can be possible;

b) Data. Clean up, consolidation, handling and protection of huge amounts of client data that banks own will require significant and deliberate investment. This is relevant for banks to be able to generate insights that will lead to personalized products and services, but also for risk management and compliance purposes. With APIs and open banking becoming mainstream, data is already becoming the new oil;

c) Talent. With such levels of transformation impacting the industry, talent becomes more important than ever. STEM competencies are the new focus as banks beef up developer teams, and algorithms become a basic training topic for senior executives. The ability to attract new talent, and speed at which senior management's reinvent themselves and learn new skills will be a critical success, or failure, factor for banks.

So investment in security, data and talent is critical for banks' survival in this new context.

As Banks revisit their business models to survive, innovation is taking center stage.

Whereas in the past we could say that banks have to simultaneously invest in protecting their present business (horizon 1, business as usual), but also in horizons 2 and 3, now we can say that horizons 2 and 3 (nurturing emerging businesses and creating new businesses) have just become much more urgent and in some cases even more important than horizon 1 for survival.

With technology playing an increasingly greater role, the utilization of emerging technologies such as artificial intelligence, blockchain or cloud banking, will certainly help banks accelerate their transformation journey and support improved client experiences. We will see a surge of new digital, AI-powered platforms that will connect multiple parties of an ecosystem generating large amounts of data that is then analysed and treated.

There is a clear shift in the banks investment priorities towards innovation as banks try to remain relevant and more embedded in clients’ lives. More than Horizon 1 incremental improvements, today banks need to be more deeply embedded in clients’ lives without these noticing it - removing friction all together.

That is why Banks need to be investing heavily in Innovation.

In the short term, Banks need to be deliberate in managing Risk and Capital.

COVID-19 has had a severe impact on our economies, especially in Sub-Saharan Africa which will be significantly impacted by this pandemic. Businesses have suffered massive reductions of turnover, leading to layoffs, resulting in a much higher credit risk environment with growing NPL books, as well as the negative impact from sovereign downgrades.

This has impacted the banks’ P&L and capital adequacy ratios and needs to be proactively managed. So managing risk and capital has been a key focus this year and I expect it to continue to be a critical concern for executive teams for at least the next 12-18 months.

In summary, I see the acceleration of digital adoption as an inevitable trend that will push banks to invest further in innovation and emerging technologies. Data, cyber security and talent will be key to achieve success. However, to have a future, banks should be proactively managing their risk and capital, given the immediate stress caused by the current unpredictable and volatile environment.