Is the banking industry facing an apocalyptic future?

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If the saying “everything in the universe grows or dies” applies to financial services, some traditional banks and credit unions – of all sizes – may be in the last few days. The bank analysts at the Boston Consulting Group come to this sobering conclusion.

In its Global Retail Banking 2021 report, BCG says consumers are now moving to digital channels faster than ever. In 2020, online banking grew by 23% and mobile banking by 30%. Analysts assume that these pandemic-induced changes will continue and that the migration to digital channels has been accelerated by more than three to four years.

Banks that previously failed to keep pace are falling further behind, and the door to traditional banking is fast closing. BCG analysts say in an article that the “sun is setting in traditional banking” and that rapid digitization since the pandemic has only increased the vulnerability of established banks. The competition is getting tougher as different players now compete against each other at all levels.

The essence:

Banks and credit unions cannot afford to waste more time making changes that merely optimize existing practices. You have to redefine all processes and think about what is possible in the digital age.

Even size and financial stability do not guarantee a competitive advantage over the digital disruptors. While governments declared big banks “too big to fail” during the financial crisis, many financial institutions are now “too slow to survive,” notes BCG. “If banks are to survive, banks need to act more like digital giants before digital giants … act like banks,” said BCG.

Things like that should “shit” banks, said Jamie Dimon, CEO of JPMorgan Chase, in January 2021 when asked by an equity analyst about sky-high reviews of PayPal, Square and Stripe. In his 2021 letter to shareholders, Dimon noted that financial institutions, including Chase, face stiff competition from both fintechs and big tech companies like Amazon, Apple, Facebook, Google and now Walmart. “With the increasing importance of cloud, AI and digital platforms, this competition becomes even greater. As a result, banks play an increasingly minor role in the financial system. “

(( Continue reading: 7 foundations for the success of the digital banking transformation)

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The current postcovid reality

Sure, it’s no surprise that traditional banks have faced more pressure from fintechs. However, BCG notes that three post-Covid challenges only exacerbated the headwinds:

  • Global banking revenues will not return to 2019 levels for at least three years.
  • Mobile banking rose 30% during the pandemic and continues to grow.
  • Leading retail banks are twice as efficient as typical retail banks.

The massive leap in cellular over the past year means the days of a financial institution are numbered if it can’t already deliver the digital functionality consumers demand. With contactless payments booming during the pandemic, half of cellphone users are expected to pay with mobile wallets by 2025. Dig Deeper For the next year or two, most consumers are unlikely to take a bank or credit union seriously if they lack basic mobile functionality.

While many institutions have recently taken initiatives to rapidly digitize, many have endeavored to introduce a customer-centric tool. Not many have focused enough on cost control and back-end processes. Many of these technologies remain tied to physical assets and are difficult to monetize. This puts these institutions at a competitive disadvantage while trying to make up for lost revenue.

While a best-case scenario could allow some institutions to offset lost revenue by 2022, a slow rebound with repeated lockdowns and a decline in consumer confidence could drag this out until 2024.

Even for traditional institutions that have reinvented and spiced up stores in recent years, pedestrian traffic is unlikely to ever return to pre-Covid numbers. Due to the sudden switch to digital technology, BCG expects a net decrease in store usage of 26% after the pandemic. “If you’ve ever said that our branches will be our competitive advantage, you might as well sell the bank now. It’s a flawed strategy that will get worse, ”said Chris Nichols, director of capital markets at SouthState Bank.

(( Continue reading: What the surge in fintech signals triggers for the future of banking)

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Front-to-back redesign of value streams

Despite the screams of doom and darkness, banks and credit unions still have some advantages. “They have the trust of their existing clientele and a unique knowledge of their account holders and what they are doing with their money,” said BCG analysts. In addition, fintechs face regulatory and political obstacles that will challenge them for a few years to come.

Heads up:

May the day come when large tech companies can use AI tools to automatically meet all compliance requirements.

Banks and credit unions can find opportunities and even thrive if they focus on the right value streams and digitize and redesign them from front to back. BCG analysts note that such a redesign of a value stream can result in cost reductions of up to 25% and an increase in the Net Promoter Score of up to 40%. Redesigning and digitizing these value streams can also improve the customer experience and help these banks make up for lost ground.

“By dividing the challenge into the 10 to 15 most important value streams and fully digitizing each of these streams from front to back, banks can move faster and with fewer missteps,” said Sam Stewart, BCG Managing Director, Senior Partner. and a global leader in the company’s work in retail banking.

Examples of what BCG understands by value streams include opening an account, securing funds quickly, easily saving, optimizing financial well-being, simplifying payments, and efficiently resolving fraud and service problems.

The consultancy advocates an integrated approach with bold business goals, not incremental improvements. This includes a redesigned customer journey with digital and AI tools that help avoid labor and create a simplified and automated process.

For example, when buying a home, most traditional institutions could benefit from easier online mortgage applications with faster approvals. Digitizing front-end customer interactions in addition to back-end processes would enable half of applicants to apply online and get approval in just an hour, the report said. This could result in a 15% increase in the mortgage bill and a 25% reduction in the cost of the loan.

(( Continue reading: Digital transformation requires a culture of innovation

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Unleash digital sales potential

Digital sales should be another focus. As it is, many institutes still generate more sales in branches than digitally. Part of that, BCG says, is that too many banking apps are designed just to process transactions and access account information, not sales. The company notes that digital sales can lead to sales increases of up to 75%, and says some leading banks get a large portion of their sales through digital channels.

Digital sales also include building a comprehensive database of customer needs. In this way, banks and credit unions can use segmentation to help employees focus on higher value activities, especially on more complex products.

What financial institutions need to be

A leading bank, quoting BCG, is now assigning a number of new behavioral lifestyle segments to each of its clients. The three best products for each product are then identified based on an individual propensity rating. From there, personalized e-mails, images and web templates for mobile, online and e-mail channels are created.

This new approach has resulted in a significant increase in several key metrics, with some products increasing purchase rates and purchase value by 25%.

(( Continue reading: 4 technology trends that will massively change banking in 2021)

The stacked operating model

By building a financial institution’s business in terms of value streams, banks and credit unions can more easily adopt agile ways of working and lead to new levels of digitization. By digitizing key value streams, BCG said, institutions will fundamentally change the way they work and fully address cost and control challenges with a model based on new skills and ways of working.

This “stacked operating model,” as the company calls it, enables an institute’s capabilities to work together more efficiently.

Key point:

Traditional banking cost structures are no longer sustainable in this nontraditional world.

BCG found that the best financial institutions have 50% fewer employees and operating costs that are 40% lower than the typical bank or credit union. These top performers tend to sell higher quality products and more of them by focusing less on transactions.

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