Banks: How to get to growth
- Posted on December 14, 2020
- Estimated reading time 3 minutes
Are banks ready for recovery and … (whisper it) growth?
The good news is that banks are in reasonable shape. According to The Banker, the world’s largest 1,000 banks held 6% more Tier 1 capital than in 2018; the previous year this increased by 12%, the biggest annual increase since 2009. There has also been a significant increase in contactless payments. Visa, for example, saw 13 million customers in Latin America make their first-ever online transaction in the first quarter of this year. Banks have moved swiftly to remote working. By May 2020, Standard Chartered had most of its 84,000 employees working from home, increasing the capacity of its VPN by 600% to do so. TD Bank now has over 80% of its traders working from home.
But the bad news is that banks have underinvested in digital transformation and were found behind the curve. They have not yet optimized the digital aspects of their customer experience or operations. They are still shackled by legacy IT. Their approach to decision making has not, in any meaningful way, been sufficiently data-driven. Many are now seriously considering a move to the cloud as they appreciate the need to be much more agile.
Where can banks find growth?
- No more ‘gotcha’ moments. Banks have been making money out of customers for too long by exploiting their bad decisions. And these fees make up a significant portion of a bank’s revenues. How could banks help educate, coach and guide customers in areas of financial management (savings, debt avoidance, retirement etc.), so that they are convinced that the bank has their best interests at heart? Most customers struggle with managing their money. Accenture found that only 14% would go to a bank if they were in financial trouble. There is a significant ‘trust deficit’, which Accenture estimates is worth 5% of retail banks’ total income.
- Financial advice goes mainstream. Discovery Bank uses its Vitality platform to provide rewards for its customers as they maintain five key behaviors that are essential for financial health: spend less than you earn, save regularly, insure for adverse events, pay off property and invest for the long-term (retirement). It offers dynamic interest rates, active rewards for hitting your financial goals, points as you progress and no charges or fees. Significantly, it is not related to what the customer earns. Credit Suisse estimated that 2.2 billion adults globally (in the $10,000 to $1 million range) are generally underserved by financial advice – the ‘neglected middle’. This segment is ripe for an approach that builds around financial health and wellbeing.
- This is personal. Personalization platforms claim that more than two-thirds of customers are willing to share more data with their bank if advice is personalized. Contextual communications double cross- and up-selling rates, increase deposit levels by 5%-15%, improve CSAT by up to 35% and reduce customer churn by 10%-30%. One North American bank increased mortgage renewals by a factor of three over a two year period using this approach. PNC Bank is working with UK fintech, OakNorth, to develop a ‘COVID Vulnerability Rating’ framework for its business loan portfolios. Lenders undertake portfolio diagnostics to rate loans based on their vulnerability based on liquidity, debt capacity, funding gap and profitability – a highly personalised proposition.
- ESG is here to stay. Morgan Stanley found that 84% of investors want products that are closely aligned with sustainability, such as climate change or gender diversity. Admittedly, the share of green investing is currently small. JP Morgan estimates that $3 trillion of institutional assets are now managed in a way that tracks ESG factors, but that is just 4% of total AuM. However, there are signs of growth. Walmart is working with HSBC to provide preferential pricing to suppliers that meet sustainability standards. BBVA recently gave Iberdrola a €5bn sustainability-linked loan to finance energy efficiency projects. This is important because millennials – who make up 25% of the U.S. population alone – are poised to inherit significant amounts of wealth (one estimate: $30 trillion). Those wealth and asset managers who offer ESG investment options will be strongly positioned to attract new customers and retain clients.