The banking business model beyond COVID-19
As the global economy reels from the effects of the novel coronavirus, banks of all sizes are being forced to adapt to a new normal. From providing liquidity and credit to the economy, to providing cash and financial services to citizens, to ensuring their own liquidity, banks are looking for ways to stay operational and healthy during this turbulent time.
Initially, banks had gone to mitigate crisis scenarios and then transitioned to executing business continuity plans and supporting the Paycheck Protection Program to ensure their clients’ continued access to the financial system and liquidity. I believe that now the time is right for institutions to start formulating new business development strategies that will lead us through the summer and into a post-COVID-19 world.
As the use of physical branches plummets and while U.S. interest rates are near zero, banks have the opportunity to improve their existing business models, like deploying multichannel banking capabilities and embracing opportunities to grow deposits. Open architecture – using third-party vendors to in-source certain products and services – promotes collaboration within the financial services industry and can help banks evolve today and thrive in the future.
Demand for deposits persists despite rates
Historically, low interest environments have not impacted overall deposit growth, which have averaged 9 percent CAGR between 2000 and today. In times of crisis, deposits are a safe harbor for consumers looking to exit or reduce the risk of their volatile investment portfolios, or can simply act as a safe parking spot for their money given no volatility and FDIC insurance.
Brand equity and trust are strongly correlated in difficult times – thus, access to the right distribution channels and marketing sources is crucial to reach customers to make them aware of alternatives to the established incumbents. Having such access is an opportunity for banks to present their offer effectively and raise funding levels through alternative – even collaborative – means of gathering deposits. This is particularly true for smaller banks that do not have access to other funding sources like capital markets.
In a low- or zero-rate environment, even small absolute differences in yields represent large relative return differences and can motivate customers to move their money – as long as they know that money is safe. In order to seize this opportunity, banks must do more than make their deposit products and other offerings available online; they need to reach new customers.
Contrary to popular belief, a faction of customers in every age group still prefer to bank at a physical branch or to mostly use a single channel (rather than multichannel banking). With the widespread adoption of social distancing to stop the spread of COVID-19, customers may be more inclined to use telephone banking or digital channels from online banking to mobile banking. To provide such multichannel access, banks do not themselves need to build the infrastructure from scratch, but instead can leverage an open-architecture approach that enables them to partner with fintechs and other third-party providers.
Opportunities for collaboration
No one knows how long the COVID-19 pandemic will last; however, I find it encouraging to see the government and business communities banding together to preserve the banking industry, capital markets and overall economy. Banks are working diligently to maintain the availability of banking services, as well as to provide access to PPP and helping each other weather the storm created by the virus.
This unprecedented time creates an opportunity for banks to reexamine their core services and determine how to evolve their business models for the future. As customers increasingly demand access to best-in-class digital products and services, banks may benefit by leveraging open architecture platforms. Whether a financial institution is classified as a community bank, large bank or neobank matters less than whether it can deliver customers what they want.
While the coronavirus situation is dire, it is not the first crisis the banking industry has endured nor will it be the last. The change the virus has introduced represents evolution, and evolution forges stronger banks and a more resilient economy. After mastering crisis management and business continuity, banks should now shift to addressing their strategic set-up for a post-coronavirus world.
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