The great banking strategy shake up
The future of banking has arrived much sooner than most expected – accelerated by the outbreak of COVID-19 and subsequent global lockdowns. Cashless payments rose dramatically in 2020, with the number of contactless debit card payments reaching their highest level in August – accounting for (62%) of all debit card transactions. Since the start of the pandemic, people have also been visiting banks far less, likely contributing to the closure of many. More consumers also seem to be turning to fresh-faced, digital native banks this year; Starling and Monzo, saw an influx of new accounts opening with them.
Many banks were blindsided by the COVID-19 pandemic; according to from Marqeta, three-quarters (75%) of banks admitted they weren’t prepared for the scale of change that took place. And instead of having years to transform, financial institutions have had to adapt in a matter of months. The race to digitally transform is on, and banks are being forced to overhaul their future strategies, stepping up investment in digital banking, and increasing digital services; more than one third (36%) of banks say that COVID-19 has “opened up the floodgates” to modernising core banking and payment systems. The winners and losers of the next banking age will be determined by who can best adjust their strategy to adapt and thrive in this new normal.
Banking on a new future strategy
Whilst many banks already offer exceptional digital customer experiences, in the face of mounting demand for digital services, the majority are choosing to take steps to improve or overhaul their strategies entirely. More than three-quarters (78%) of banks said they were planning to change their future banking strategies to adapt to changes in consumer behaviour. More than half (54%) are expecting to decrease investment in physical branch networks, with several even looking into the possibility of.
Banks are also seeking to boost investment in digital services and capabilities. This has kickstarted a new wave of digitalisation in the industry, with banks accelerating their time frames to digital adoption. Banks are also looking to re-shape their strategies across many other areas, including increasing the number of digital services they can offer in-branch, providing specialist payment services and boosting their digital innovation capabilities, allowing banks to develop more digital services at the pace required.
To keep pace with this huge shift in strategy, banks must continue to focus on enabling faster digital transformation so they can respond to the needs of the market in a more agile way. The vast majority (89%) of banks say that the pandemic has increased the speed of change in banking from years to months. However, many banks face challenges doing this.
The rise of the ‘Russian Doll’ bank
One of the major challenges facing banks looking to transform is the complex web of legacy systems and technology they sit upon. Whilst some banks are still able to deliver seamless digital experiences, six in ten admit that the lack of flexibility and agility of their legacy systems creates challenges to preparing for and implementing future strategies. However, these systems are also home to critical applications and data that banks need to function. Banks cannot simply abandon these technologies and systems – it would be like uprooting a tree. There are, however, a few different approaches that banks can take to overcome their legacy technology conundrum, and which some have already begun to undertake.
Instead of taking the risk of full migration, some banks will instead focus on ‘hollowing out’ certain services – leaving core services that are too risky to move, whilst moving other services onto more modern platforms. Other banks are choosing to start from scratch by building a stand-alone digital bank within a bank, a ‘Russian Doll’ of sorts. Such banks are built on modern platforms, allowing them to modernise the entire stack and incentivise customers to make the switch to the newer entity. An example of this approach is Goldman Sachs’ digital bank, which has debuted to strong success and demand. In 2021, we may see others begin to follow suit.
A new age of digital banking
COVID-19 has ushered in a new age of digital banking, and banks need to ensure they are prepared to adapt. Many are set to overhaul their future banking strategies to double down on digital services and capabilities. However, to do this, they must overhaul existing infrastructure – untangling the complex webs of legacy systems that cannot offer the agility needed to respond to the needs of the market. To adapt and thrive, traditional banks need to be supported with modern core banking and payment platforms that can support the requirement to digitally transform and provide the flexibility needed for their future banking strategies.
CMA warns UK and Irish banks over bank transaction histories
Specifically, the CMA named prominent challenger bank Monzo, the Bank of Ireland, NatWest Group, and Virgin Money as not providing customers with records of their bank transactions within the maximum outlined timescale (40 days after closing the account).
Such information is crucial not only for ensuring a smooth transition from one bank to another, but also to provide a foundation for credit applications in the future.
According to the Retail Banking Market Investigation Order 2017, 95% of bank and building society customers should receive their bank transaction histories in at least 10 days.
Reputation: A bank’s greatest asset?
Of the 150,000 customers affected, Monzo was by far the main contributor - 143,000 (95.3%) - with the other three dividing the remaining 7,000.
The extent to which the magnitude of its mistake is attributable to being a digital-only bank is not clear, although it may give some customers pause for thought. With a superior customer experience being among the bank’s greatest assets, continued reputational damage is something that it cannot afford to sustain.
Although the CMA’s action in this instance has been to issue each bank a warning and order the immediate dispatch of all outstanding information, it has warned that future breaches will carry heavier consequences. Measures could include legally enforceable compliance audits on a yearly basis.
Helping customers get a better deal
Condemning the banks for negligence that could negatively impact customers’ desires to take out loans or mortgages, Adam Land, CMA Senior Director of Remedies Business and Financial Analysis, promised that his organisation would remain vigilant to similar behaviour moving forward.
“Banks must comply with all the rules – that includes providing a full transaction history promptly.
“We will be watching closely to make sure these leading names stick to their word and don’t let their customers down again. The Bank of Ireland, Monzo, Natwest Group, and Virgin Money should be in no doubt that the CMA stands ready to take further action if these failures are repeated.
Image source: gov.uk