PCR podcast: a battle for the future of banking

The coronavirus pandemic has created an economic crisis like no other. The downturn was followed by an unprecedented rebound. It all happened so fast. It left us with a torrent of numbers and seemingly inextricable questions.

Welcome to PCR, a special limited series by The National in which we try to make sense of the numbers and answer important questions on the post-Covid recovery.

Listen to prominent economists and business leaders as they explain the challenges and opportunities of a unique and often complex economic recovery.

Join Mustafa Alrawi, assistant editor-in-chief, as he explores the many features of the post-pandemic recovery.

Episode 8: digitisation and the future of banking after Covid-19

Digital and online banking have already been steadily rising in recent years, but the pandemic introduced large-scale, full-speed uptake. In some instances, we’ve seen a 200 per cent jump in new mobile banking registrations.

While digitisation was inevitable in the banking sector, many hurdles were slowing the process. From regulations to security concerns, and the lack of substantial investments, many obstacles stood in the way of a much-needed digital transition.

When the pandemic hit, the situation changed. Consumers' expectations were the main driver of a faster and larger digital banking transition.

2021 was a year for fintech innovation. Electronic payments took off as people shopped online. Many managed their finances online rather than going to bank branches.

Fintech and Big tech companies have achieved tremendous growth since the pandemic.

The future of banking and financial services is going to be written by both traditional banks and innovative fintech players. Sometimes they are going to be competing and sometimes co-operating.

Guests:

Carol Houle, senior vice president, global head of financial services and insurance at Atos

Georgi Konov, partner at McKinsey and Co, digital, distribution, and retail banking

Narrated by: Mustafa Alrawi, The National’s assistant editor-in-chief

Episode transcript:

Mustafa 00:08

When was the last time you stepped inside your local bank branch? Chances are you're holding your bank branch in your hand, logging into your mobile banking app, doing all sorts of payments and transactions on a daily basis, without setting foot inside the building.

00:27

We did a study in the last year. A survey of executives within banking and financial services.

00:37

Carol Houle, senior vice president, global head of financial services and insurance at Atos.

00:45

And one of the things that we found is that during the pandemic, 60% of banks globally either closed or reduced their bank branch operating times. And what that meant is that banks really had to be smarter about how to engage with clients, you know, try to reinvent their business models so that they could really have a much more personalised and engaging relationship with clients through online and mobile, the digital channels.

Mustafa 01:24

Digital and online banking have already been steadily rising in recent years, but the pandemic introduced large-scale, full-speed uptake. In some instances, we've seen a 200% jump in new mobile banking registrations. That jump was accompanied by a 50% drop in branch bank traffic during the same period. Welcome to PCR, I’m Mustafa Alrawi, your host for this special podcast series from The National in which we discuss the post-Covid-19 recovery. In this episode, we're examining the impact of the pandemic on the banking industry, and how the post-Covid recovery is shaping business models and customer habits.

While digitisation was inevitable in the banking sector, many hurdles were slowing the process, from regulations to security concerns and the lack of substantial investments. Many obstacles stood in the way of a much-needed digital transition. When the pandemic hit, the situation changed. Consumers’ expectations were the main driver of a faster and larger digital banking transition.

02:45

When you look, historically, at technology in banks, it was a cost centre and cost centres need to be controlled.

02:57

Carol Houle, senior vice president, global head of financial services and insurance at Atos.

03:04

And so before the pandemic hit you saw within banking and overarching within financial services and insurance, there was just a huge push to take cost out. And what happened over the course of time is that it's kind of like an athlete who reduces their calorie intake to such a great extent that they start to lose muscle. And when you lose muscle, you lose power. Right? And so, you know, banks and financial institutions, in trying to really focus on taking cost out, put themselves in a position where it made some of the important transformations difficult for them to take on. But what I've seen is that Covid-19 and the pandemic was really a tipping point for those organisations. And it was partly driven by consumer expectations, you know, with all of us in our houses, trying to get work done through Zoom meetings. We spent a lot of time ordering things through, you know, Amazon.com as an example in order to get some of the things that we need on a regular basis. And we've grown to expect that kind of experience, where it's personalised, it's immediate. And I believe that clients have shifted their expectations and really kind of accelerated their expectations for how they're going to engage with their bank, with their financial institution.

Mustafa 04:56

Digital banking is much more than a simple app, allowing clients to check their account balance and make simple transactions. These features were already in place well before the pandemic. What we've seen, and even more so during the post-Covid-19 recovery, is a full-scale digitisation at every level of banking from front to back end. This entails artificial intelligence, and automated back-end operations such as administrative tasks and data processing. Not only do digital banks allow users to make account deposits and transfers remotely, but they also provide them with the opportunity to more easily apply for loans and access personalised money management services.

Banks were slow to adopt this full-scale, multilevel digital approach until the pandemic hit. The post-Covid recovery has seen a formidable acceleration of the digitisation of the banking sector. But it seems the customer's expectations in terms of banking services are still much more than what most banks are willing or capable to offer. What are the challenges facing this digital transition?

06:16

I would say banks have not been the front-runner when it comes to digitisation.

06:23

Georgi Konov, partner at McKinsey and Co, digital distribution and retail banking.

06:28

Regulation has been one of the elements that actually makes banks more cautious. If you compare the digitisation across different industries, be it the music industry, like with Spotify, being at the forefront, be it the entertainment industry, with Netflix, with Prime, etc. However, banks did actually accelerate their digital agenda during and post-Covid. Customer expectations throughout this period have actually evolved significantly. So if you look at the preference of how many customers would like to purchase their products digitally, it's about 60% in the UAE. And, as I mentioned, the current level of sales is just 20%. This created a big gap between the supply - what banks offer - and the demand - what customers are ready to do already. Now, banks have not yet managed to catch up with this gap that was created because of several challenges. First and foremost is that it's still expensive for banks to focus on digital. Scale does matter. Bigger banks, there is a bigger business case. For example, just to give you a sense of the magnitude, if you look at Emirates NBD in the region, they announced a digital investment of about 1 billion. I think talent is another challenge. So, in order to digitise successfully and cater for ever-increasing customer needs, you would need a new age of talent like data engineers, data analysts, designers, agile coaches. Moreover, you would need new ways of working, because typically in banks, given the large size of the organisations, things are being done in a certain way. Now, in order to be successful these days, you need to adopt this new agile way of working, which would allow it to be much more flexible and faster to market.

Additionally, the whole sales and marketing element has to also change, which is a challenge. Many banks started building new capabilities around digital marketing in order to be able to cater for their customers in a more personalised way as well as in the right time. And, last but not least, we are seeing that most of the banks have actually embarked on this type of transformation. However, in order to be quick and successful, a commitment from the top is required. We know that in the Middle East over the past couple of years and particularly in the UAE, many banks launched significant digital transformations, and many banks have already started to personalise the customer experience. But we're yet to see a big shift towards digital, when the banks start catching up with customer demands.

Mustafa 09:21

Even before the pandemic, the change in the banking industry was already under way. Services and customer behaviour were evolving. In fact, in the past decade, branch footprints in the United States had shrunk by 20%, and by 60% in Nordic countries. While new technologies have seen an increase in adoption, their use has translated into a decrease in customer satisfaction and engagement because digital adoption has meant decreased contact with bank employees and customer service representatives. A recent study by JD Power found that overall customer satisfaction with retail banks tends to decline as customers transition away from the branch to digital-only banking relationships. A greater customer dissatisfaction with traditional banks is a bigger opportunity for FinTech players. This is a serious warning for incumbents as they move away from in-person banking to digital-only services.

HSBC announced recently it will shut 69 bank branches amid shifts to online. Other major banks are studying a similar move. Does this signal the end of physical in-person banking services? Or does it mean the bank branches will have to evolve and play a new role, offering new services to clients? And what does that mean for banks in terms of marketing and sales?