Banking in the COVID-19 era has been anything but predictable with some institutions thriving but others taking a serious hit to their bottom lines. Understanding why some have risen and some fallen — while coping with the same operating environment and external constraints — is one of the industry’s most pressing questions at the moment. Fortunately, even a cursory look at the past year’s winners and losers provides some useful insights.
There Have Been Some Serious Headwinds
The industry, as a whole, has faced significant disruptions — partly due to problems caused by the COVID-19 pandemic shutdowns and partly by its aggravation of existing trends. One of those existing trends was the long stretch of historically or near-historically low interest rates which cut sharply into one traditional revenue stream. The rise of fintechs and non-bank lenders has eroded income from loans and mortgages. Some online-only “virtual banks” and brokerages have leaned on their low costs (and flow of venture capital) to waive fees for many accounts. This has created competitive pressure on another longstanding source of revenue.
The health measures taken during the COVID-19 pandemic created havoc in millions of lives across the United States with its mix of lockdowns and layoffs, medical expenses and suddenly shaky credit for many users. For the banks serving those end users (entrepreneurs and businesses, as well as individuals), this led to the necessity of offering deferred payments and interest in order to help users stay afloat. This resulted in more lost revenue for financial institutions, as well as waiving fees for consumers in many cases. The broad deterioration of creditworthiness and evaporation of savings across much of the population will almost certainly cause lingering effects. This, in turn, makes long-range planning difficult and uncertain for banks and credit unions.
Which Financial Institutions Are Thriving?
To a degree, anyone who has been keeping an eye on the news for the past year can predict who’s doing well. The markets have stayed buoyant, and research by PwC concluded that investment banks haven’t really been threatened by the effects of the COVID-19 pandemic. If anything, they’ve needed to carefully avoid the appearance of being too successful in a time when so many individuals and businesses have struggled.
The COVID-19 pandemic has been largely a non-event for the country’s megabanks. Their deep pockets, profitable investment divisions and feature-rich digital platforms equipped them to cope well with the disruptions and the shift away from in-person banking.
The larger regional banks have also primarily maintained their competitive positions. Most have adequate resources to ride out a few unsettled years comfortably, and those that hadn’t yet committed to their digital platforms in a significant way showed the ability to make that transition quickly and effectively. They were, on the whole, well-positioned to transition to a mostly digital banking environment as consumers stayed home in response to government orders or from natural caution.
Which Financial Institutions Are Struggling?
For smaller retail banks, the picture has been cloudier. Regional and community banks and their credit union counterparts are innately more vulnerable on several levels. First — and most critically — they simply have lesser resources to ride out hard times. It isn’t just about money in the bank (literally), it’s also about having the funds to do things like revamp physical locations to allow for safe distancing and better ventilation or having a digital platform that is ready to meet the needs of the moment.
Secondly, because their geographic scope is more limited, smaller regional financial institutions are more in sync with the fortunes of their members. The tourism and hospitality sector was hit especially hard by the COVID-19 restrictions, for example. So, banks in tourism-dependent areas have also struggled to maintain a healthy balance sheet. The same struggles apply to an even greater degree to institutions that serve minority and low-income communities which have been affected disproportionately by the lockdowns.
The Crisis-Mode Playbook (How to Survive and Thrive)
Recessions and other crises come along with predictable regularity, though the scale of this one was anything but predictable. Surprisingly, there had been relatively little empirical research on how (and why) companies survive recessions until 2010 when Harvard Business Review published an article called “Roaring Out of Recession.” It reviewed how companies fared after the recessions of 1980–1982, 1990–1991 and 2000–2002, in an effort to identify common threads between the winners and losers. Follow-up research looked at the impact of the 2007–2009 economic crash to reinforce those earlier lessons.
During these times, the immediate response of most management teams is to “play defense” by cutting expenses, and this isn’t wrong. The research showed that trimming costs was indeed a part of the playbook for those companies that thrived after a recession. Surprisingly, though, it wasn’t the only — or even the decisive — factor.
A more telling indicator of survival and ongoing success was the management team’s willingness to invest judiciously in the future. This isn’t to say spending a lot of cash will automatically make your bank or credit union a winner. Companies that invested too aggressively were also seldom among the winners. The key distinction was how the winners’ investments were targeted. They focused strongly on creating operational efficiencies, investing in productive assets (and even staff) while they were devalued and increasing their spending on research and marketing.
Applying the Playbook to Retail Banking
“Cut, but not too much” and “spend, but on the right things” hits that unfortunate balance of being gratifyingly easy for the person dispensing the advice, but maddeningly difficult for the one who has to actually carry it out. So, what might the playbook look like, in practice, for smaller players in retail banking?
Furlough/Lay Off the Fewest Staff Possible
Layoffs are a seductively easy way to cut costs in the short term but not a good one. Recruiting and training are significant expenses, and it takes time to instill your corporate culture in new hires. Also, to be blunt, the popular “we’re all family here” message rings hollow when your new hires have all replaced laid-off former employees. If anything, this may be a good time to scoop up skilled, experienced staff who have been furloughed by less-thoughtful competitors.
Find Operational Efficiencies
This is decidedly the time to identify and fix any operational inefficiencies in your organization. Poll your front-line staff and information technology people, and ask them about their pet peeves and the most time-consuming things they do (they’ll know). Eliminating bottlenecks and improving workflows will result in a leaner, better-running organization in the long term. This is a better way to cut costs than through salary dumps. A thoughtful review of your branch footprint could well be part of this process.
Look at Mergers and Acquisitions
This can be a controversial option, depending whether you’re acquiring or being acquired. If you’re in the driver’s seat, unsettled times can create the option of acquiring a competitor’s assets and goodwill at below their normal value. Even if you’re the target of an acquisition — however damaging to one’s pride it may be — the hard truth is that a single, medium-sized bank or credit union might be more viable than two smaller ones, and it’s potentially a way to maintain your regional or community roots.
Spend on Research and Marketing
HBR’s research wasn’t focused on financial institutions. So, its recommendations included marketing and research and development. In the banking context, user research would fill the same niche as R&D for manufacturers. Marketing while your competitors are cutting their own spending is seldom a bad idea, and neither is learning more about your users (and potential users) and their needs. This constitutes playing offense in the best way by identifying and capitalizing on your competitors’ weaknesses in the market and eliminating your own.
Spend on What Makes You Better Or More Productive
The most obvious example here is an updated digital platform. Millions of users — many of them previously tech-averse — have made the switch to online and digital banking during the COVID-19 pandemic and most say they’ll continue to use digital platforms. The restrictions of the COVID-19 pandemic have accelerated digital banking to an unforeseeable degree, and a bank or credit union that can’t compete in this space is simply not positioned to thrive during and after the measures are lifted. It could be argued, in fact, that a judiciously selected digital platform encapsulates many of the principles spelled out in the post-recession playbook.
Leveraging Digital Transformation
A good digital platform isn’t a gimmick, a fad or a box to check on this year’s to-do list. It’s now an indispensable part of retail banking, and it’s one way you can stack the odds in favor of your own post-COVID-19 success.
Most banks initially cobbled their digital platform together from multiple “bank-in-a-box” products. This is innately inefficient, needing IT talent to make those products talk to each other and raising barriers to the free flow of data between modules. This is the kind of operational inefficiency that can be eliminated by a modern, fully-integrated platform. It can make your front-line staff more efficient, too, by giving them easy access to all of a client’s products and services through one modern, easy-to-use dashboard — rather than multiple cramped screens.
You’ll see similar improvements at the management level. A modern platform enables you to view figures from a single client or your entire institution with a few clicks, in real time. It also provides the analytics tools you need to turn the raw data into actionable intelligence. Finally, it creates the opportunity to really know your clients in a way you couldn’t have dreamed just a few years ago. When your new app suggests a product or service to a user, it will be a product or service that you know they can use, right now.
Every bank or credit union is different, but the challenges facing the industry are consistent. Contact us today to learn how Lumin Digital can help your institution face those challenges, and thrive in the coming years.
The Wall Street Journal: For Bankers, 2020 Was a Bad Year to Have a Good Year
The Financial Brand: Pandemic Gives Traditional Banks a Rare Chance to Catch up Digitally
Harvard Business Review: Roaring Out of Recession
Harvard Business Review: Should Midsize Companies Play Offense or Defense In a Downturn?