Covid Has Catalyzed Banking Innovation: The Challenges and Opportunities that Remain

Covid-19 has been a transformative experience for banks. With lockdowns and limits on in-person service, banks were forced to quickly arrange for an increased volume of online services. As a result, an influx of customers who formerly did most of their banking at in-person branches have shifted to digital banking, in many cases, for the first time. Not only that, but customers who had previously engaged in some form of banking online – transferring money or paying bills – now increased their online activity significantly.

For banks, the changes mean an opportunity to expand digital services and cut costs. Since the onset of the pandemic, more customers than ever have used online banking services, and banks would like to keep them online even after the Covid crisis passes. That doesn't mean an end to in-branch banking; in some places, various services (i.e. taking out a mortgage) are subject to regulatory constraints requiring an in-branch transaction, although banks are speaking to regulators about moving that activity online as well. Online services are clearly the wave of the future.

Banks have been promoting digital capabilities for several years, but the Covid crisis has propelled the issue to the forefront, requiring a quick readjustment of expectations, time frames, and usage volume. As a result, banks are being forced to deal more quickly and definitively with the online challenges – including security, communicating with customers, and developing end-to-end services demanded by consumers from new client onboarding to lending services and more.

After more than eight months of changes, it appears both customers and banks have gotten used to the idea of using digital services for all their banking needs. Indeed, according to Deloitte, 35% of customers have increased engagement with online banking during the Covid crisis, helping to “realize the digital promise” in banking. And an analysis by Mckinsey states that the pandemic has accelerated developments in digital adoption by consumers and businesses that were expected to take five years, in a matter of roughly eight weeks.

Like in so many other industries, Covid-19 has forced accelerated adoption of digital technology – requiring banks to deploy services that, without Covid, might only have been deployed several years from now. Here are some examples of that:

Increasingly Heightened Security

Banks have invested huge sums in cybersecurity, but even those robust security systems are feeling the strain of the major increase in digital transactions - particularly as dependence on cloud environments grow and cyber criminals become more sophisticated. The more transactions online, the more opportunities for bad actors to conduct their nefarious activities - and the greater the need for more advanced and sophisticated measures to battle fraudsters. With more customers online, banks are turning to technology for upping their defenses to protect customer and employee data in the face of the ever-evolving attack landscape. 

It’s not just customers who are doing more banking from home; as a result of Covid-19 regulations on social distancing and in-office activities, more bank employees are working from home, using their home internet connections - which often do not have the same level of security as hardened in-office connections. For many banks, this is an unprecedented situation - requiring innovative technologies to harden those home connections, as well. 

Improving the Digital Experience

BC (Before Corona), customers had a choice. Those who were inclined to use apps and smartphones felt very comfortable using their bank's online services, while those who weren't did their banking at physical locations. While little has changed for the tech-savvy, customers who preferred in-branch banking have had to go through a quick attitude adjustment.

App designers, of course, will always strive to create the best user experience for all customers, but the “best UX” for an app-using millennial may be different than it is for a less tech-oriented Baby Boomer (although the Boomers were no strangers to banking apps pre-Covid). While they have been investing in apps for several years now, some institutions have had to redesign their online approach to make it more intuitive for those who are newer to the digital landscape. With that, app use - and satisfaction - is up among all age groups. A study by banking consulting firm BAI comparing adoption and satisfaction rates between January and August 2020 shows those increases among not only millenials, but among Gen-Xers and Baby Boomers, with customer satisfaction - and a willingness to continue using banking apps even after the pandemic - increasing.

Expanding Service Opportunities 

All the changes in consumer engagement with banks these days inevitably leads to changing bank-customer relationships. A PwC survey shows that while most customers are satisfied with the way their banks have been handling their accounts during the Covid crisis, 14% of consumers are considering switching their primary bank in the next six months – and at least a third of them were not considering switching before Covid. As a result, the study shows, “millions of banking relationships are up for grabs.” 

It stands to reason that banks that provide the best service, user experience, and other features will be the ones to retain – and gain – customers End-to-end digital capabilities, of course, take time to develop – but banks that want to retain their customer base have no time to lose.

The Future of Opportunity

In addition to designing safe, secure, and easy to use digital capabilities, banks also need to comply with government and compliance regulations – providing another hurdle for institutions to meet. Institutions that find themselves in this position need quick, effective, and compliant solutions. That could entail partnering with external technology developers and veteran firms working in the fintech space that have the know-how to meet the growing scope of financial technology needs. 

For many banks, partnering with or even acquiring with these firms is the best move – not least because of the expense involved in digital development. In recent months, several large banks have made major investments in or outright acquired fintech firms -  bringing development back in-house, led by innovative teams that have a great deal of experience in the space. One reason for that is the need for rapid development of fintech services – another result of the Covid experience. 

Covid is also challenging the growth of challenger banks - the small institutions seek to grab market share using innovative digital services. The financial insecurity many are feeling now has led customers to prefer larger institutions, believing they are better equipped to weather the storm. This is likely to lead to further consolidation in banking, as bigger banks swallow up smaller ones. For fintech companies, consolidation can mean increased development of digital services, as banks seek to increase market share even further, including more B2B offerings – or a complete overhaul of business models and product offerings to remain competitive in the B2C space. Then again, consolidation can mean less competition, and, in turn, less innovation. How this will impact the financial services landscape, time will tell. 

One thing that is certain is that financial services institutions are coming to realize that innovation and digital transformation have gone beyond a mere value-added; they have become essential – not only for survival, but for future growth opportunities. Customers are looking to banks for safety and stability, but also for convenience. In addition to providing massive amounts of liquidity to the market, this time around, banks are using technology to solve the problem of financial insecurity - instead of being a primary cause of that insecurity, as they were in the 2008 mortgage crisis. Properly developed, digital services can satisfy both desires – making banks an important solution for the financial insecurity many are feeling now.