Is the Banking Industry Facing an Apocalyptic Future?

If the saying “everything in the universe is either growing or dying” applies to financial services, some traditional banks, and credit unions — of all sizes — may be in their last days. That’s the sobering conclusion reached by banking analysts at Boston Consulting Group.

In its 2021 Global Retail Banking report, BCG says that consumers are now moving to digital channels faster than ever. In 2020, online banking grew by 23%, and mobile banking jumped by 30%. Analysts believe these pandemic-driven changes will stick and that the migration to digital channels has been accelerated by more than three to four years.

Banks that didn’t keep pace before are falling even further behind, and the door of opportunity for traditional banking is quickly closing. BCG analysts say in an article that the “sun is setting on traditional banking,” and the rapid digitization since the pandemic has only increased the vulnerability of incumbent banks. Competition is growing stronger as different players now compete on all stages.

The Essence:

Banks and credit unions can’t afford to waste any more time making changes that merely optimize existing practices. They must reimagine all processes – thinking about what is possible in the digital age.

Even size and financial stability don’t guarantee a competitive edge against digital disruptors. While governments declared big banks “too big to fail” in the financial crisis, many financial institutions are now “too slow to survive,” BCG observes. “If they are to survive, banks must start acting more like digital giants before digital giants … start acting like banks,” according to BCG.

It’s stuff like this that should make banks “scared shitless,” said JPMorgan Chase CEO Jamie Dimon in January 2021 in response to a stock analyst’s question about sky-high valuations of PayPal, Square, and Stripe. In his 2021 letter to shareholders, Dimon noted that financial institutions, including Chase, face extensive competition from both fintech and big tech companies like Amazon, Apple, Facebook, Google, and now Walmart. “As the importance of cloud, AI, and digital platforms grows,” he wrote, “this competition will become even more formidable. As a result, banks are playing an increasingly smaller role in the financial system.”

( Read More: 7 Essentials of Digital Banking Transformation Success )

The Current Post-Covid Reality

Sure, it’s no surprise that traditional banks have been facing more pressure from fintech. But BCG notes three post-Covid challenges have only increased the headwinds:

• Global banking revenues won’t return to 2019 levels for at least three years.
• Mobile banking surged 30% during the pandemic and continues to rise.
• Leading retail banks have 2x greater efficiency than the typical retail bank.

The massive leap in mobile in the past year means a financial institution’s days are numbered if it can’t yet offer consumers' digital functionality. As contactless payments have boomed during the pandemic, half of the mobile users are now expected to pay by mobile wallets by 2025. Dig Deeper Within the next year or two; most consumers likely won’t even take a bank or credit union seriously if it lacks basic mobile functionality.

While many institutions have recently engaged in rapid digitization initiatives, many have been efforts to roll out a customer-facing tool. Not many have put sufficient focus on cost control and the back-end processes. Many of these technologies remain tied to physical assets and are difficult to monetize, leaving these institutions at a competitive disadvantage while trying to make up lost revenues.

While a best-case scenario may enable some institutions to make up revenue losses by 2022, slow recovery with repeated lockdowns and a decline in consumer confidence could drag that out until 2024.

Even for traditional institutions that spent the past few years re-imagining and spiffing up branches, foot traffic is unlikely to ever return to pre-Covid numbers. Due to the sudden shift to digital, BCG expects a net reduction of 26% in the use of branches after the pandemic. “If you have ever said ‘but our branches will be our competitive advantage,’ you might as well sell the bank now. It is a flawed strategy that is about to get worse,” said Chris Nichols, Director of Capital Markets at SouthState Bank.

Credit: The Financial Brand