It’s now twelve weeks since lockdown and while easing is underway, we still don’t have a clear picture of what the ‘new normal’ will look like, nor how quickly or slowly economic activity will recover.
But whatever 'new normal' does look like, we are still going to need banks. Unlike the 2008 financial crisis, most are now well capitalised and, in the UK at least, have played an important role supporting the chancellor with billions of pounds of government-backed CBILS and Bounce Back loans for business, plus mortgage holidays for consumers. However, they have also signalled trouble ahead and made huge provisions for bad loans. Few disagree that the world economy faces a gloomy outlook.
Notwithstanding the fintech phenomenon, banking hasn’t changed much in the past 20 years. In the UK, the Big Six banks – Barclays, Lloyds, RBS, HSBC, Nationwide and Santander UK – still control the retail and SME markets. Monzo, Revolut and N26, with their card-based business models, have hardly dented this dominance, despite de-regulatory help from the Financial Conduct Authority to facilitate more competition. FCA figures show over 70 per cent of deposits and 80 per cent of current accounts remain with the Big Six.
Brand reputations at risk
While banks have cooperated with government, one senses that customers remain wary of banks. Huge increases in overdraft interest rates, virtually no interest paid on deposits and increasing minimum monthly repayments on credit cards all send very mixed messages at a time of crisis. When job losses mount and banks chase defaulters, they will face a real PR challenge.
The importance of brand purpose
During this pandemic, banks have wanted to be perceived as ‘good citizens’ supporting the economy by helping their customers in difficult times. Those that have done this well are likely to be rewarded with an enhanced brand reputation and increased consumer loyalty, as long as they don’t turn nasty when the going gets even tougher.
For those that have failed to support their customers, or have been out of reach when you’ve badly needed them - expecting you to wait hours to have simple question answered - the story will be different. If these brands claim their ‘customers come first’, their delivery will show that they don’t.
More and more, brand purpose – the reason why a brand deserves to exist – is experienced digitally. And if your purpose is to serve customers better, your platform has to deliver on this promise.
The opportunity for challengers is therefore to use technology to target niches, like soon-to-launch Vive - which we helped create. Vive wants to be ‘the bank that helps you revive your finances’, something we’re all going to need a bit of, post-lockdown.
Aligning a meaningful brand promise, with clear communications and consistent brand experience is a priority for all companies, and will be crucial for banks wanting to avoid bad PR in a recession. Brand purpose provides meaning, engages target customers and helps manage expectations.
However, many banks have done little to give their brand much meaning. Most mistakenly believe that they have unique propositions when, in fact, there is a widespread lack of differentiation.
During twelve weeks of lockdown we've probably seen more digital transformation than in the last several years. Collaborative working from home, ecommerce and digital finance have transformed the way we live and work. We’ve seen a rapid shift from cash to contactless cards and mobile money, and from physical banks and ATMs to online banking apps. The world will not revert to the way it was, but equally, analogue minorities cannot be excluded.
Innovation thrives in difficult times and while digital transformation has been talked about for years in banking, in reality it’s been more evolution than revolution. With the exception of ClearBank, even the challenger banks have relied on knitting together third-party platforms that are already more or less generic.
So, what will the future of finance look like? Why can’t a bank be loved like other popular brands, for helping its customers achieve their ambitions? Just because that sounds far-fetched, doesn’t mean it‘s not possible. A flawless digital platform with frictionless apps powered by AI would be needed to deliver exceptional customer service and show customers how to make the most of their income, by helping them spend, save and invest better.
Some have expected BigTech to step in here and transform financial services, but this hasn’t happened, yet. It's just not been as easy as they thought it would be, due to the high levels of regulation. The rise and demise of Facebook’s Libra digital currency is the best example of this and showed how even Facebook underestimated the regulatory and political challenges of the global financial system. The complexity and cost of compliance has also preventing many a well-financed fintech from offering profitable full banking services. Perhaps that’s why Monzo’s founder has already departed to farm his alpacas, with the incumbents still on top.
In late 2018 we wrote a report on Wealth Management must join the digital revolution. One of its conclusions was that technology must place clients’ needs at the centre of every process and then digitise them.
With the prospect of Goldman Sachs launching its digital wealth management platform in 2021, following the successful debut of Marcus, wealth managers are going to need to respond and transform their models to the post-lockdown digital era - a topic we will cover in a future article.
The 2008 financial crisis gave birth to today’s fintechs. Perhaps the pandemic will inspire a new generation of disruptive financial start-ups?
If nextgen fintechs can raise anything like the sort of money their predecessors did, they can enter a marketplace under the unique conditions created by COVID-19. It goes without saying that if innovative digital and mobile propositions can identify profitable niches, they will gain rapid traction in a remote-working economy.
Nextgen start-ups will need compelling brand propositions and strong brands with frictionless user experiences, but instead of business models based on Mastercard and Visa interchange rates, they should look to create sustainable value from the soft underbelly or profitable extremities of the financial services marketplace, using AI and even Augmented Reality to allow banks and financial services brands to become a more central part of customers’ lives.
In life after lockdown, things will be different and now is the time to reflect on valuable lessons learned about banks and their customers, the strengths and weaknesses of their own systems and the relevance of their brand purpose. How they then serve their customers during the mother of all recessions will mark out those with strong brand principles and a commitment to innovation, from those that only care about their bottom line.
Nucleus Founder & CEO
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