Banking will never be the same; institutions need to rethink approaches in key areas

SRM (Strategic Resource Management), an independent advisory firm serving financial institutions, today shared information from its clients and subject matter experts on what to expect in 2021.

It Will Take More Than Understanding the Importance of Digital

• The lockdowns and closures used to battle the pandemic have led to the importance of digital becoming amplified and echoed by most all industry commentators. It is doubtful financial institutions will not scrutinize digital strategy in 2021, but there will be a subset that understand the less obvious factors destined to separate the winners from losers. One such factor relates to breaking with the standing model used by banks and credit unions to meet the needs of consumers.
• More institutions will join those that have already realized that online and mobile banking is not digital banking and that their digital brands will not be sustained by simply finding the right online and mobile banking vendor. Multiple vendors providing enhanced services, e.g., predictive analytics to anticipate a consumer’s need, will be integrated to create a transformative digital ecosystem that is flexible, configurable, scalable, and capable of continuous as well as frequent innovation.
• The movement to this framework for digital transformation will necessitate modern technology and API-driven architectures that create an environment where technology can be disposed of and/or replaced at a much faster rate. The banks and credit unions that embrace this approach will have both answers and opportunity regarding the invasion of big tech – e.g., Google’s digital banking and co-branded checking accounts. Increased agility will allow these institutions to defend their turf and act as a desirable partner with the non-traditional companies entering the industry.

Declining Branch Footprint Accelerates, New Use of Branch Space Emerges

• The total number of bank branches peaked in 2009 at close to 100,000 and has declined to slightly above 85,000 today. In 2021 and beyond, the pace of branch decline will increase materially as financial institutions apply the lessons learned during the pandemic to operate more efficiently – with less reliance on their physical footprints. Increases in M&A activity (more below) will also contribute to a decrease in branches above the pace observed pre-pandemic.
• Branch closures will be combined with institutions rethinking the function of the branch in a fashion more akin to that represented by the Capital One “cafes.” The pandemic has been a catalyst for an initial step in that direction as banks and credit unions have closed their lobbies, except by “appointment only.” Further, transactional activity at the branch has been pushed to the drive-through window.
• The basic “doctor’s visit” model for branch services will be retained for converting remaining branches to advisory and sales facilities in the near term (much of 2021), with other types emerging once socialization can be done without health concerns (beyond 2021), such as co-location with existing coffee chains.

Payments Preferences to Persistently Shift

• There has been exponential growth in payments that operate outside of traditional channels, e.g., P2P, push and disbursement transactions. Though many financial institutions have onboarded these non-traditional offerings, the economics of these payments differ significantly from traditional point of sale card payments and are further complicated by their propensity to attract fraud.
• Before COVID-19, the number of contactless card transactions in the United States was unimpressive. Since the beginning of the pandemic, hygienic concern about cash and point-of-sale device cleanliness has ignited its use.  A contactless card allows its user to avoid cash and requires no contact with the point-of-sale device. Card issuers who have provided contactless cards to their cardholders will move to leverage these trends to promote their card and improve wallet position.
• Smart leadership in banks and credit unions will consider how many contracts, notably with card networks and card processors, were set in the wake of the last crisis and will need realignment. Therefore, institutions must consider the changes in debit and credit volume, the history of card usage, and strategically plan for the short- and long-term. The institutions whose agreements expire in the next two years should already have engagement with their vendors in order to leverage their negotiation position fully.

Changes to Occur as a Result of the Election

• The big question is: Will there be changes in regulatory approach and tax policy? It certainly looks like change is coming. The incoming president campaigned on a promise to reinstate most of the Dodd-Frank era financial reforms that the outgoing administration did not support (like lowering capital requirements). Likely there will be changes to corporate tax structures and the laws impacting the ultra-wealthy. Besides, bank regulators still have considerable leeway to mandate changes in capital and liquidity requirements, resolution and recovery planning, risk management procedures, and disclosure requirements.
• With the new administration and a new majority in the Senate, 2021 will see continued economic support programs implemented as the PPP program was in early 2020. With the most recent stimulus program containing $284 billion more funds for small business relief, it seems unlikely the end of government announced support programs is near. Financial institutions wishing to streamline their participation in their programs will continue to focus on improving their ability to link their systems with the SBA or other govt agencies.

Adapting to Today’s Economy

• In 2021, financial institutions will continue to address the changing economy with traditional balance sheet strategies by monitoring deposit fluctuations, evaluating client refinancing deals, and considering how government stimulus may create lending opportunities/risks. Engaging the credit risk and accounting team to determine how increases in expected losses will affect earnings will also allow them to consider opportunities to refinance existing debt, raise new funding at attractive rates, and/or revise any planned capital actions.
• In 2020, SRM saw an increased number of financial institutions looking for ways to go on the offensive as they adapted to economic conditions. Institutions are more carefully scrutinizing vendor costs and using renegotiations with vendors as an opportunity to ensure the economics of their arrangements are “at market.” Optimizing vendor relationships will continue to be an area where focus can pay off for a bank or credit union.
• With many institutions facing continued net interest margin pressure, subdued loan demand, and threats from traditional and non-traditional players, the desire to get enhanced scale will be one of the dominant stories for the industry in 2021. The several large deals consummated in the last several months are just a hint at what is to come. Over the next several years, deals will easily outpace the approximately 250 deals per year averaged over the last 10 years.

Brad Downs, CEO of SRM, commented, “The pandemic has brought many changes to banking but what might be the most significant is the rate at which consumer expectations and business needs have and continue to change. In 2021, the banks and credit unions that can understand the depth and breadth of this and other impacts introduced into financial services over the last 10 months will be the ones to gain a competitive edge in today’s complex marketplace.”