Rethinking The Banking Model Post-Pandemic
Hussein Ahmed is Founder and CEO of Oxygen, a modern digital banking platform for the 21st century that is elegant, simple and secure.
getty
Last year, as the Covid-19 pandemic unfurled across the globe, a slate of articles predicted that neobanks would be left behind in a “flight to quality” as investors and consumers rushed to deposit assets in big banks.
In a Bloomberg article, Mike Mayo, a Wells Fargo & Co. bank analyst, was quoted as saying, “Goliath is winning when it comes to a potential crisis such as this because there’s a flight to quality. Whether you believe the label ‘too big to fail’ or not, it sure doesn’t hurt to attract deposits in an environment like this.”
In a widely shared and republished op-ed, author and consultant Rich Turrin agreed: “Of critical importance for neobanks is that investors’ preference for large banks more than doubled compared with last year. This should be terrifying for neobanks.”
Here we are a year later. Were they right?
The Pandemic Accelerated The Adoption Of Mobile Banking
It’s true that, as mentioned in the articles above, deposits to big banks increased significantly in the early months of the pandemic. But the short-term movement of assets will likely be dwarfed by the long-term effects of the behavioral shift it prompted.
Even before the pandemic, mobile banking was on the rise. According to the FDIC’s annual How America Banks report, mobile surpassed online as the most popular banking channel back in 2019 for U.S. customers 54 years or younger; Americans under the age of 34 overwhelmingly preferred it.
The last holdouts for physical banking were older Americans, and the pandemic forced many of them to embrace mobile (along with everyone else) much more quickly than they may have otherwise. Now that they’ve made the switch, many consumers are expected to stick with it.
Bank Branches Became A Liability
One primary advantage big banks historically had over neobanks was their physical presence. That advantage had been waning with the steady shift of consumer preference to digital banking, and it became a liability overnight when Covid-19 hit. The problem is that bank branches are expensive. The cost to run a typical branch is $600,000 to $800,000 annually, including the cost of overhead and back office support.
Meanwhile, fintechs have seen valuations skyrocket as a result. In 2020, Square exceeded Goldman Sachs, and PayPal surpassed Bank of America in market capitalization. As CNBC reported, PayPal became worth more than every bank in the U.S. other than JPMorgan Chase.
The post-pandemic world will be one in which bank branches become increasingly irrelevant. This puts big banks in something of an innovator’s dilemma: Ignore the newcomers, or try to beat them at their own game.
The Traditional Banking Model Needs Rethinking
Big banks know that the shift to digital banking is inexorable. And, of course, they have all invested in their own mobile banking apps in an attempt to compete with the newcomers. But much of the traditional banking model remains.
Banks are highly reliant on non-interest income — in other words, fees: overdraft fees, account maintenance fees, foreign transaction fees and so on. According to Bankrate, the average overdraft fee ($33.47), monthly service fee ($15.50) and account balance required to avoid a fee ($7,550) all hit record highs in 2020. These fees account for as much as 40% of revenue. They also disproportionately disadvantage customers who are already struggling financially.
Without these fees, and considering the high overhead from bank branch operations and years of expensive technology debt, the economics of big banks will need to be reimagined. If traditional financial institutions don’t figure out how to replace this income elsewhere with value-added products and services, it’s only a matter of time before their customers make the switch to digitally native banks, which, unburdened by legacy infrastructure, can offer higher savings rates, fewer fees and more innovation.
The Imperative For Innovation
I’m not suggesting that brick-and-mortar banks will disappear overnight. Big banks have one major advantage over the current generation of neobanks: a full portfolio of products and services under one roof, something few neobanks can currently offer, though many are making inroads.
But the next few years are going to be a Hunger Games of sorts for big banks. They’re going to be forced to innovate at a pace they’re not accustomed to. They’ll have to shed legacy infrastructure and become more nimble. They’ll have to lean into and rethink the physical experience of banking and what they can do to make that more valuable to customers.
Should neobanks be worried about the so-called flight to quality? Not at all. The pandemic may have caused a brief rush of assets back to the big banks, but it also greased the tracks for a permanent move toward a digitally focused banking future. And that’s ultimately going to put far more pressure on the big banks than their digitally native competitors.
Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?
Hussein Ahmed is Founder and CEO of Oxygen, a modern digital banking platform for the 21st century that is elegant, simple and secure. Read Hussein Ahmed's full executive
…
Nessun commento:
Posta un commento