Banking Could Be A Mixture Of Old and New Practices
April 14, 2020
The coronavirus pandemic has upended the banking business much more so than the 2008 financial crisis. While banks may be in a better financial condition to weather this storm, the current crisis has had a more profound effect on how they operate and how their customers use their services: thousands of branch and call center employees are working from home. Branches are open only during limited operating hours or by appointment, forcing customers to bank online or through their phones.
What are the long-term ramifications from the virus on the banking business? Will banking return to normal after the virus runs its course, or will many of these changes remain permanent fixtures?
The answers appear to lie in digital banking, more customer engagement, remote work, and maybe most surprisingly, drive-thrus.
What does seem to be the case is that several trends that were already ongoing and expected to play out over the next several years have been accelerated over just the past few months, with digital banking being number one.
“People who knew about digital services but never took the time to learn are all learning now,” says Barry R. Sloane, chairman, president and CEO of Century Bank in Medford Mass., which describes itself as New England's largest family-run bank, with 27 full-service branches. “There has been a gigantic leap forward in the digitization in our industry. It will never look the same again.”
“Our annual report for last year came out recently and the cover was on the digital transformation of banking,” he says. “We said it would be a thoughtful, organized, incremental process. Now all of us have been dumped in the digital pool.”
“Clearly this almost forced movement of customers out of branches is going to cause a good number of them to be happy with digital channels, and stay on them,” agrees Terence Roche, a partner at Cornerstone Advisors in Scottsdale, Arizona. “People are beginning to be much more comfortable doing servicing transactions like remote check deposit and external transfers, and I think they're slowly becoming more comfortable opening a new account online.”
“Clearly one thing banks are going to have to talk about is what this does to branch traffic,” he adds. “We have had an event that has forced customers out of branches. I think over the long-term this behavior would have happened anyway – it's just going to happen a lot faster. What was probably going to happen over three years has been compressed into three months.”
James Robert Lay, founder and CEO of the Digital Growth Institute in Houston, agrees that people have been forced into using mobile banking. “But does that mean the mobile app is the be-all and end-all? No,” he says. “People will still have questions. People still want to do business with people. If I was a community bank, I would be figuring out how to use a video communication platform to schedule appointments remotely, so if people want to talk to a banker face to face they can do that. You could remove the fear of a digital-only platform.”
Indeed, according to Rutger van Faassen, vice president of consumer lending at Informa Financial Intelligence, while more banking services have moved online because of the virus, that doesn’t mean it will be all digital or nothing.
“The current situation is forcing customer segments that prefer to engage with bank through a branch channel to use other channels, like phone, web, mobile, and chat. Once we get through this crisis the key question is if those people will change their preference after their experience with these other channels,” he says.
“It also forces employees at financial institutions to think through how to engage and communicate with customers and colleagues through virtual channels and get comfortable with this way of engaging. On the other hand, it also shows us how important in-person communication is and how not everything can be replaced with remote communications. This crisis is showing how important it is to have multiple options, including digital ones,” said van Faassen.
“I think video conferencing could grow because we're getting so comfortable with it,” Roche said. “But the question for me is, to whatever extent I do video conferencing, I don't have to do that with a branch employee. I can do that with a bank employee who is anywhere.”
That opens two big cans of worms: Permanent remote work and the future of the bank branch.
“Banking has traditionally been viewed as a business that would not accommodate remote work models due to the various regulatory constraints that define how things operate,” notes Michael Carter, executive vice president at Strategic Resource Management in Memphis. “However, it would seem that there is a considerable part of bank and credit union operations that can utilize a remote work model.
“Given the occupancy costs associated with commercial real estate, remote work, specifically working from home, may become particularly attractive to organizations across most verticals, including banking. For banking, this shift would have implications for branch density, further accelerating the elimination of branches.”
“We are going to see some permanent move to remote employees who were not remote before,” Roche says. “Working from home was something that was coming to banking anyway, but I think it's really going to accelerate now. I can't imagine those employees who are working from home now are going to want to go back to the office, at least a couple of days a week. I think what you might see is some kind of grand compromise with a lot of employees about working from home a few days a week.”
“Why would people want to come back to the office if they don't have to?” Lay adds. “We're not just changing consumer behavior, we're changing worker behavior. That's a really hard conversation to have at the management level.”
Ironically, while the virus has pushed more customers into digital banking, it has also made old-fashioned banking methods fashionable – if not critical – again. Century Bank, for example, had to close half of its branches and rely solely on those that had drive-thrus, Sloan says.
“The lowly drive-thru that many in the banking business had given up on has become the principal mechanism to conduct branch banking,” he says. “We have actually closed mortgage loans through the drive-thru drawer. It was kind of a laugh the first few times but now it's become standard procedure and it works for both sides.”
“I think the companies that sold drive-thrus were going into decline, but I suspect they are going to be back-ordered now,” he adds. “In many cases the drive-thrus had been removed and replaced with a drive-thru ATM. I suspect now they'll be putting the window back.”
The crisis will also force banks to rethink their resiliency and redundancy plans compared to how they used to in the past, Sloane says.
“We always prepared for hurricanes, floods, fires and anthrax, but nobody really ever thought that you wouldn't have any people,” he says. “This is an outside-the-box set of problems that we have to address on one level or another. The shutdown of the restaurant, travel and hotel industries all at once was extraordinarily difficult to predict. Certainly, our risk management thinking has to move well beyond how high housing prices are.”