Banking and innovation under COVID-19
In this first in a series of two articles, R/GA's Peter Pawlick and Christy Randall discuss banking innovation during and post-COVID-19
The global humanitarian crisis of COVID-19 is creating existential challenges for leaders in banking, especially those with the executive authority and responsibility to steer their business out of imminent trouble and into an uncertain future.
This moment puts unprecedented pressure on diverse aspects of leadership, from discipline and courage, to empathy and ethics, to prescience and sense-making amidst an increasingly chaotic landscape.
Wary of adding more noise to the cacophony of “externals” offering up unsolicited advice, we’ll focus here on a single question: how should visionary leaders — especially those on the retail side of large, incumbent firms — be thinking about innovation at a time like this?
The need to revisit and reprioritise initiatives in light of the crisis is real, and in many cases, the hard choices banks need to make will be cutting staff and abandoning ambitions for innovation.
1. The Role of Purpose
Faced with these challenges, a clear sense of purpose is crucial to put priorities in perspective.
Leaders should revisit statements of purpose that were guiding change agendas planned pre-pandemic, as well as the agendas themselves and underpinning strategies.
And for those who find their firm’s principles or transformation strategies to be lacking in ambition or clarity in the present context, now is the time to strengthen them.
To illustrate the power of purpose-led innovation as a means of adaptive survival, we find an unlikely source of inspiration in the UK government.
A decade ago, the UK’s digital transformation had lost its way, dogged by a string of embarrassing debacles that brought progress to a halt.
Today, in the midst of the ultimate test of resilience, the situation is very different.
Unlike most corporate turnaround stories, the UK government’s successful digital transformation can be traced back to a single, external impetus: a baroness and public servant named Martha Lane-Fox.
From 2009 to 2013, Baroness Martha Lane-Fox, founder of online travel retailer Last Minute, served as Digital Champion for the UK — an official appointment made by all EU Member States to promote inclusive digital technology.
During this time, she was asked to oversee a strategic review of Directgov, then the British Government’s single point of access for public sector services.
Her 11-page report makes a case for the integration of siloed services and governance, calling for such changes as the appointment of a "new CEO for Digital in the Cabinet Office with absolute authority over the user experience across all government online services (websites and APls) and the power to direct all government online spending.”
Her case is grounded in a simple but profound assertion of the purpose of digital services in society, arguing that “government needs to move to a ‘service culture,’ putting the needs of citizens ahead of those of departments.”
Her recommendations were accepted in full, catalysing what would become GOV.UK — one of the most ambitious digital transformation efforts in history and a model for government transformation to “digital by default.”
A decade later, the UK government’s digital services and infrastructure — the NHS in particular — are being put to the ultimate test by COVID-19.
While the fight is far from over, the work of the past decade to transform the government’s approach to service is paying off especially as it has enabled rapid response and iteration, even as new information and needs arise from the crisis.
Factors that have contributed to this transformation include: a catalysing event (or series of events), a champion, a purpose to drive change, a vision for the required change, and the latitude and license for an empowered and capable team to realise the changes required.
In some important ways, the COVID-19 crisis has revealed remarkable preparedness on the part of the banking industry.
Recency bias has inspired favorable comparison to the 2007/2008 crisis, as well as the frequently echoed conclusion and collective awareness of a few key differences.
For example, at least the origin of this problem was not the banking industry itself, at least banks are much better capitalised and with more liquidity than they were a decade ago, and at least there is a theoretical role for banking leaders — within their firms and within society as a whole — to be a part of the solution.
Financial firms are taking as much of a hit as any other sector but at least there is an ethical and strategic highground to be had.
Again, theoretically, and therein lies a stark difference: what some in the banking industry have failed to achieve in the same time period as the UK government’s transformation is even the faintest semblance of a guiding purpose, a casus belli for innovation.
Without such a clear purpose or moonshot ambition as “digital by default,” tentative banks will almost certainly squander this rare window of opportunity to lead.
A guiding purpose is only meaningful in context, and insofar as it provides a relevant role to play in a changing world.
To this end, COVID-19 is undeniably changing the world of banking, primarily by massively accelerating secular trends that were present pre-crisis ranging from consumer digital behaviours, preferences, and expectations, to the funding environment for fintech, to geopolitical and regulatory developments that impact domestic and global flows of capital.
2. The Acceleration of Macrotrends: Threat or Opportunity?
“What typically happens after you get a crisis like this is people talk about new eras and how the post-pandemic world will be different,” said Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management.
“This time I think the trends that were already in motion before this pandemic will be accelerated.”
To illustrate the butterfly effect of COVID-19, consider how behaviour change plays out across a complex and interconnected financial landscape: restricted mobility and branch closures has made accessing banking services via digital channels the only option for most, while fear of contagion has driven the use of contactless payment.
Good news for digital transformation, right?
However, gains resulting from these shifts are unevenly distributed, privileging firms with recurring, long-term revenue models over those with transaction-based models.
Meanwhile, private investment in fintech has fallen off a cliff, with as much as $76 billion wiped off the market.
For incumbent firms, this will likely translate to a culled but strengthened set of challengers to contend with post-crisis.
As of January, PE and VC firms had a record $1.5 trillion of cash (or “dry powder”), which will likely flow toward the growth survivors: Monzo, for example, might have more room to maneuver if Starling and Revolut are absent from a post-COVID-19 landscape.
But firms like Monzo were already in the midst of figuring out their fate in a post-Brexit world.
What will be the fate of firms like Monzo now, with the confluence of two crises that test its core value proposition?
Even before the COVID-19 crisis, German-based N26 quit the UK in February, citing Brexit.
What happens once COVID-19 settles remains to be seen: Will post-crisis banks have a more important role to play in enabling cross-border banking?
Or, will the exact opposite be true — that most banks will operate within domestic borders, serving the needs of customers increasingly inclined to stay close to home?
Read the second part of this two-part feature, in which we take a closer look at innovation as disruption insurance and a series of recommendations for financial services institutions moving forwards, here.
For more information on all topics for FinTech, please take a look at the latest edition of FinTech magazine.
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