The coronavirus pandemic has been an accelerant for digital bank transformations. Banks must now keep that fire going.
“There’s never been a more important time for bank executives to think strategically,” says Cornerstone Advisors cofounder Steve Williams. The pandemic accelerated digital transformation plans by about two to three years, he estimates. It will soon be up to opportunistic bankers to continue that transformation in order to better position their institutions for the future and increase shareholder value during what could be a prolonged economic recovery.
The pandemic’s impact on physical spaces like branches underscored the importance of digital channels, capabilities and products. No longer was it acceptable for institutions to tack digital offerings onto existing branch initiatives and force customers to do a cross-channel dance: Open an account or loan in the branch but service it online, for instance.
Going forward, outperformers will be the banks that successfully overhaul or transform legacy tech, expenses, buildings, organizational structures and vendor contracts into next-generation capabilities. Williams says smarter banks are led by executive teams with a focused strategy, that leverage data strategically and actively manage vendor partnerships, rather than relying on their core processors. They also attract the talent and skills that the bank will need in the future, rather than just filling the vacancies that exist today.
The first place that banks direct their energies and attention to continue their digital momentum is the legacy branch network, says Tim Reimink, a managing director at Crowe. Branches are expensive to operate, have been closed for an extended period of time and were potentially underperforming prior to the pandemic. Banks also have the data to prove that customers will continue banking with them if locations are closed, and that many are now comfortable using digital channels.
“Every single location must be evaluated,” says Crowe Senior Manager Robert Reggiannini. Executives should weigh the market opportunity, penetration and existing wallet share of small businesses and consumer customers, as well as how the branch fits in with the rest of the network. Rationalizing the network frees up capital to redeploy into digital transformation or other areas of operation that need greater investment in the post-pandemic economy.
Certainly some banks have gotten that message. It wasn’t uncommon to see banks across the country announce double-digit rationalizing efforts, often announcing they would cut 20%. In December 2020 alone, banks opened 43 branches but permanently closed 240, according to S&P Global Market Intelligence data. For the year, they opened 982 locations and closed 3,099.
Reducing the branch network will necessitate changes in how bank staff interact with customers, Reggiannini adds. Banks should not assume tellers at a branch will find the same success in the digital chat environment, call center or at in-person meetings conducted outside of the branch.
He says banks should train staff in developing the skills needed to service a customer outside of a branch and consider how they will manage and measure staff for flexibility and productivity. “Engagement with customers is going to be critical going forward,” Reggiannini says.
The branch network, and the foot traffic and relationships they used to attract, have been under pressure from digital banks, often focused on consumer and retail relationships. But Williams warns that the pandemic underlined the vulnerability of commercial relationships. Numerous fintechs competed successfully against banks in issuing Paycheck Protection Program loans from the Small Business Administration, and a number of businesses are shifting more of their relationships to payment processors like Stripe and Square.
“Disruption will come to business banking – not as fast as retail banking but it’s coming,” Williams says. “If we lose the deposit and business relationship with commercial customers, will banks be able to keep their returns? We don’t think so.”