How should retail banks navigate COVID-19?

The global coronavirus pandemic has irreversibly changed society and the global economy. 

Companies in every industry sector face dealing with significant and lasting change, and retail banks - along with the broader financial services sector - are no different. 

For those banks in particular, says McKinsey, key challenges include COVID-19 accelerating already shifting consumer behaviour patterns, economic impacts worldwide and the ongoing risk of financial distress for businesses and customers. 

In Reshaping retail banking for the next normal, published 11 June, McKinsey argues that retail banks will play a prominent role in guiding the world towards economic recovery, while preserving the health of their organisations. 

McKinsey reports that its modelling for overall revenue declines as a result of COVID-19 found a potential drop of 16% to 44% for Western Europe. 

A significant challenge that retail banks must consider is changing consumer behaviour. For example, says McKinsey, in Italy, Spain and the US between 15% and 20% of customers surveyed said that they expected to increase their digital channel use after COVID-19. 

In addition, it found that the preference for handling everyday transactions digitally is as high 60% to 85% across the Western European markets. 

It should be recognized that the results above represent a mindset shift. For many, says McKinsey, this has yet to translate into actual user behaviour. 

If this does occur, McKinsey says that “retail banking distribution will experience up to three years of digital preference acceleration in 2020”. 

This could result in 25% fewer bricks-and-mortar branches in some markets, and lead to a broader shift in product, service and customer experience models.

According to McKinsey: “As revenue growth and customer relationships come under pressure, banks may want to rethink their revenue drivers.”

This, it explains, could include new product channels or a shift in direction of existing service offerings to take on more of an advisory or consultative role. 

Similarly, retail banks should consider the greater use of data and analytics in order to hone these opportunities further and to digitally transform in a relevant and meaningful way. 

In a post-COVID world, it is also highly likely that customer support will take a greater importance than previously. 

Accordingly, McKinsey says that retail banks should look to reinvent their approach to risk and customer assistance solutions, so that they fulfil their ‘societal purpose’. 

Importantly, it notes, retail banks must act quickly to position themselves for success in the ‘next normal’ world that will follow COVID-19.

In doing so, they should focus on four core questions: 

1. Is the bank’s distribution strategy configured for up to three years of digital preference acceleration? 
2. Is it possible to rethink revenue drivers? 
3. Is the bank’s approach to credit risk and customer assistance adequate for the new environment? 
4. Is it possible to keep the rapid decision making mindset that has typified working in a COVID-19 environment?

Read the full article by McKinsey here.