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.


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.


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


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


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.


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


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


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?


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


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


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?


Branches historically have been one of the bank's differentiating factors, together with data, ID systems and capital. This is what helped banks over the years.


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


However, things are changing nowadays. Distribution as we know it has already undergone a big shift. Globally, customer interactions shifted from about 5% in person in branches to about 2%, just for the past six years. Digital sales, in the UAE in particular, have doubled from about 10% to about 20%. But it is still far away from global leaders. Global leaders said that around 70% of sales are happening digitally. And for some simple products, it's about 90%. Even branches themselves have managed to move from a physical world to this ‘phygital’ world as we call it, right, which is a combination of physical and digital, with the advancement of remote advisory, the digitisation technology like facial recognition, the tablets in branches, machines, like smart machines, etc. However, this shift has fundamentally resulted in a different row of branches. From sales and service centres, which was about 15 years ago, so this was the single point of contact, supplemented by call centres, to about being the centre for complex advice and sales. And customer preferences are still towards in-person whenever it comes to complex products.

Let's take mortgages, for example. For most customers, this is typically a once-in-a-lifetime event. They would need the comfort and advice from somebody who knows what they're talking about. And this thing happens typically in person. However, this shift means that branches would be less, given that we are shifting away from simple sales and servicing. Branches will be smaller, some branches are even like 30 or 40 people, but on average in the US it's around 10 or 12 people. So it will become less than five people per branch. Size of branches will significantly decrease with a bigger chunk being the customer-facing carrier. But also the branches will be more universal. There will be a single point of contact to cater for all your needs. And some of the banks, even like globally, are exploring decreasing the cost. And basically sharing branches. So multiple banks sharing branches, like in the Netherlands. So having said that, just to summarise, the role of branches will still be there, but will be smaller, with mobile and online being the primary. The role of branches will shift toward complex sales, with simple sales being done digitally and servicing being done digitally.


When you think about the real product of a bank, it's actually trust.


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


And you know, maybe there's a certain amount of trust that you have in a computer system. But I was talking to the CEO yesterday of a bank in the US, a kind of a mid-sized bank. And one of the points that he made was that, at the end of the day, banking is about a relationship, right? Between you and another person, you being the client and another person who is helping you grow your business or who is helping you to establish the wealth that you need to retire when you want to retire. And I think banks have focused a lot on transaction efficiency, which is great, but I believe that people matter and relationships matter. And as long as banks pivot how they engage with clients so that perhaps the bank branch kind of shifts, where it's more of a relationship space.

I don't think that the bank branches are ever going to completely go away, because that is their retail front. But I think what you're going to see is a shift in branches. And I'm hoping that some banks start to look at a bank branch as more of an ecosystem. I'll give you an example. If you're a small business owner, let's say you run a construction company. You have tax needs, you have legal needs, you have banking needs. Why would we use a branch as a place to facilitate and orchestrate those relationships, to pull people together in a community, who really need to know each other and need to work together? I mean, I think it's those relationships in that ecosystem, that will really fuel economies and drive business. And so I don't think bank branches are going to go away 100%, but I really hope that they start to change and to be much more valuable to building those connections and relationships and communities.

Mustafa 16:31

The digital transition is already shaping the way banks operate and the way clients interact with their banks. The pandemic has been a catalyst for more rapid adoption of online banking, and other financial services for all age groups, including baby boomers. For millennial and Gen Z populations, however, the digitisation is driving these groups away from legacy banks and towards digital-only banks and other FinTechs. 2021 was a year for FinTech innovation. Electronic payments took off as people shopped online. Many manage their finances online too, rather than going to bank branches. FinTech disruptors such as PayPal, Block, formerly Square, as well as tech giants, such as Apple Pay and Google Wallet, have achieved spectacular growth and innovation in the past year. The current wave of financial innovation is being supported by specific technological advances involving smartphone technology, application programming interfaces or API's, AI and big data technology, as well as distributed ledger technology, also known as the blockchain. This raises the question of the future of banking in the face of aggressive disruption from FinTech and big players.


So I think FinTechs are definitely on the rise. So globally, in 2021, versus 2020, there is an increase in total funding of about 125 billion, which is 175% up


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


Globally, there are about 215 unicorns. These are basically FinTechs valued at more than 1 billion and their value is total values around 740 billion. In the region, FinTechs are still in the early stage. They represent a small chunk of the GDP, they capture about 2% of the banking revenue pools and capture a small chunk of the funding as well. There are no unicorns in this region. There are about 400-plus FinTechs, across all the key product areas and all geographies, with quite a bit of interest from international investors.

Payments in particular is the biggest area of disruption for FinTechs. Given that this is basically where most of the touchpoints with the customers are. And as you mentioned, it's not only about the financial technology companies, but it is also about big technology players like Amazon, like Facebook, like Google. FinTechs will definitely play an important role in the future in terms of being the field where you test new technology, being the field where you experiment with new ways of working and improve time to market, and being the field where you actually achieve the so-called perfect personalisation. So, treating the customer in the way he or she wants. Now, banks have started collaborating with FinTechs. And I believe this will be the future, the B2B collaboration for multiple reasons.

Reason number one is that FinTechs actually still need access to funding. Banks can provide this access to funding. FinTechs are still challenged in terms of scaling up, so it takes time for them to become skilled. Whereas banks have an existing customer base that FinTechs can leverage. FinTechs are probably one of the places where the new age talent and the top tier talent wants to work, so they can actually help financial institutions get access to that. And with this collaboration between banks and FinTechs, you can think about a controlled environment where you still have the traditional bank, but it has access to innovation and provides innovation to its customers. So in a nutshell, I believe that the future of FinTechs and banks is collaboration.

Mustafa 20:45

Traditional banks still enjoy many advantages over FinTech and big tech companies. They have their large customer bases, larger financial resources, and of course, valuable know-how. The incumbents, however, still suffer from one important disadvantage. Compared to FinTechs, and the big techs, legacy banks are slower in their digital transformation, because they have to comply with so many regulations.


One of the things that the tech companies may not be considering, and perhaps they are, [is] when you're dealing with bank regulators. I think this is globally is a challenge.


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


There are certain constraints that you have in how you operate and how you deal with clients in the regulatory compliance, spend, and the amount of effort that, globally, is spent on being in compliance is a huge, huge challenge. Based on the study that we did last year, the realisation for change programme, we found that 81% of financial organisations, you know, took a more digital approach to risk management and in compliance, and 62% of those who have started focusing on digitising compliance processes, but it's a huge challenge. And so, I think that what you'll see is that the tech firms will be able to take some of the space that a traditional bank focuses on, but I think it's going to be more of a ‘co-opetition’. Because it's something that takes many, many years and people with a lot of experience, to understand, you know, how do you run a bank in a way that is compliant with all of the regulatory constraints? But I do think that if we can have a partnership between those tech firms and the banks, which requires a lot of trust, when banks see what's happened with Amazon, for example, and retailers, I think they pause. It is a moment where they kind of have to reconsider whether or not it's a good idea to have that kind of trusting relationship. I do believe that if banks and technology firms work together, there's a lot of good that we can do for end consumers and clients.

Mustafa 23:51

Following the pandemic, consumer needs have been evolving rapidly, as people come to expect more and more from online banking services. And as banks digitised their front ends and responses, they also established next-generation resources in the middle and back offices to help save costs and provide better services. FinTech and big tech 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'll be competing, sometimes co-operating. However, there remain many challenges ahead. Chief among those are regulatory and legal frameworks that need to adapt to the fast-moving, large-scale digitisation and the growing risks around cybersecurity.

Thank you for listening. If you liked this episode, please check out the whole series on Apple Podcasts, Spotify, or wherever you get your audio content. And please do subscribe.

Updated: April 21, 2022, 10:46 AM