COVID-19’s impact upon the banking industry and the challenges and opportunities it has faced due to this
Overlook of COVID
COVID-19 has both positively and negatively affected the banking sector massively. The risk associated with the disease has led to uncertainty in businesses and consumers and this led to people changing their economic choices more as they are uncertain of the future. Banks have invested a lot of money into corporate resilience and learned from past crisis such as the financial crisis of 2008, therefore, they were one of the more equipped sectors for a systemic crisis like a pandemic. The impact of the pandemic has affected banks negatively with a dip in profits and consumer uncertainty (as it has with every sector), however, it has also given banks an opportunity to evolve technologically and digitally.
Customers and cash
We need to consider how consumers' behavior has changed due to the pandemic and the opportunities and challenges that banks have faced due to this change. Forty-three percent of respondents to an EY survey said that the way they bank has changed significantly since COVID. This change to a more digital way of operating is also due to the decline of the retail sector in itself, which has led to a need for banks to improve their internet banking systems. The general decline of cash usage in the UK has also been accelerated by COVID and this has again led banks to change the way that they are run.
Past digitalization
The banking industry has reached more of a permanent change due to COVID driving established banks to accelerate their digital programs. Banks have done this through different means but generally, the major change is enabling customers to complete common services through online means such as cashing in cheques, paying for groceries, filling in forms electronically, and changing loan terms. These have been accelerated through the improvement of online banking systems and new apps that banks have created to help consumers perform these acts online. According to RFi Group, 71% of consumers globally are now using digital banking channels weekly and there was a sharp rise in mobile banking use monthly from 52 to 57 percent from 2019 to 2020. This shows that COVID has increased consumers' reliance on digital banking.
Risks of digitalization
The acceleration of the banking industry using more digital ways of operating has also led to challenges through the increased risk of operating online. Every organization in the financial sector had a digital strategy of some kind prepared for such an event as COVID but this situation has become an accelerant for such strategies. The criminal cyber activity has also accelerated with the digital world evolving. This has also impacted the banking industry and the risks that they are willing to take. Therefore, the banking industry faces the ongoing challenge of improving their security and risk assessment in order to improve their technical capabilities at a time when they are increasingly vulnerable to cyber-attacks and consumer credit challenges.
Fintech
Another opportunity that has been accelerated from COVID is Fintech. Fintech refers to financial technology that seeks to improve and automate the delivery and use of financial services. It has helped the banking industry by improving the ease of making financial transactions for consumers through apps and internet banking. This has provided banks with an opportunity to continue to thrive, even when nothing can happen in-person. The increased use can be evidenced through Fintech startups received $17.4 billion in funding in 2016 and according to CB Insights, counted 26 fintech companies globally valued at $83.8 billion. Since lockdown and COVID, there has been a 72% rise in the use of fintech apps in Europe. This has also caused the banking industry to increase its digital capabilities to compete.
Competitors
The banking industry has also seen the rise of Neobanks which are entirely virtual and online banks that operate exclusively without physical branch networks. This rise is due to the digital and technological changes that COVID has enabled and accelerated. Therefore, large banks in the industry with a great market share are now having to compete with these upcoming banks. These banks have apps that are much more advanced than those of the bigger banks and their digital presence is too. This has meant that the industry has faced pressure to improve its technical capabilities.
Strategies
COVID-19 has given the banking industry an opportunity to maximize and improve its digital success. Many banks have already started to change their digital presence but we have to ask what they can do to improve. Firstly, they should redefine and improve their customer experience by asking customers what they want and need and shape their digital experience around this. Then they need to look at the devices that people are using and base their improvements around this. For example, the move from cash to contactless suggests that they should base their strategies around mobile devices and apps. The bigger banks could also learn a lesson from their smaller competitors by making their user experience more personal and improving this through their internet banking.
Move online
The banking industry has also been forced to move its workforce online too. This is an industry that relies on having its workers present in the workplace every day and has many financial districts in major cities. Therefore, the sudden move online has also caused a major challenge for them in adapting their software and the way they work. For example, the Bank of America had transitioned over 70% of its workforce to work from home. This has caused banks to have to improve their security by using things like VPN and investing a lot more money into helping their employees to work from home including laptops and general workspace improvements for them.
Issues with a digital world
There are lots of challenges posed to the banking industry by this acceleration of digitalization. There is a loss of customer interaction and feeling of closeness and trust with customers. The customers are also more aware of competition and can pick and choose which banks are the best because all the prices and interest rates are easily available online. However, there are also opportunities that come with an improvement in data and technology like how it will enable the big banks to compete with the growing fintech market and open banking.
When Open Banking is introduced in June 2021, this will attract customers and take them away from the competitors who are big in the banking industry. The only way for them to compete is to invest into new smarter technology that will differentiate them from the rest. Many banks have already began this transition, for example, CBA has spent over $1 bn on its IT systems in recent years and they announces a $450 million investment into new schemes on their app recently. Therefore, you can see that this change is needed in order for banks to compete, deliver a good sevice and create meaningful customer experiences even when online.
