All those debates around the phased roll out of digital strategies, legacy system replacement, the shift away from physical assets - like cash and branches - are now phased in.
"Behind this meteor impact on financial services’ Jurassic period, there are two key forces in the accelerated digital transformation.”
McKinsey & Co gave that a global context: “Recent data show that we have vaulted five years forward in consumer and business digital adoption in a matter of around eight weeks.”
“Banks have transitioned to remote sales and service teams and launched digital outreach to customers to make flexible payment arrangements for loans and mortgages. Grocery stores have shifted to online ordering and delivery as their primary business. Schools in many locales have pivoted to 100 per cent online learning and digital classrooms. Doctors have begun delivering telemedicine, aided by more flexible regulation. Manufacturers are actively developing plans for ‘lights out’ factories and supply chains. The list goes on.”
As ANZ’s Head of Technology Gerard Florian wrote on bluenotes, this forced march to digital has been driven by operational demand but also customers: “Our customers have a very different appetite for technology and with that comes higher expectations and greater opportunity to innovate.”
Behind this meteor impact on financial services’ Jurassic period, there are two key forces in the accelerated digital transformation: the first is bringing forward planned activities; the second is capturing and institutionalising those practices - driven by panic, necessity, force, whatever - which have proved to be extremely valuable.
As Florian said: “The pace and degree of change has not only been radical but has shown us what is possible - including much we would’ve considered wishful thinking just a few months ago. And so much of that emergency response includes attitudes and ways of working we should keep, whenever and however the pandemic ends.”
Central banks also recognise this. Even as they struggle with economies on life support, they are recognising they too, and their regulation, will have to be a bit more radical.
In its latest annual report, the global banking regulator, the Bank for International Settlements (BIS), devoted a chapter to digital central banking and digital currencies.
“Digital innovation is radically reshaping the provision of payment services,” the BIS noted. “Central banks are embracing this innovation.”
Moreover, “central banks, as critical as ever in the digital era, can themselves innovate. In particular, central bank digital currencies (CBDCs) can foster competition among private sector intermediaries, set high standards for safety and risk management, and serve as a basis for sound innovation in payments”.
This accelerated revolution is taking place while the debate remains ongoing as to exactly what digital banking is.
Very basically, it means fewer physical assets and manual processes and greater and more strategic use of data and technology.
But it is not just doing the same things more cheaply or with fewer mistakes, desirable as that remains. Digital banking - and this is something neobanks and fintechs have very clearly recognised - is about starting with the customer.
Centuries of banking history have evolved institutions which focused on security across the core functions of borrowing, lending, payments and money creation. But that led to very fixed ways of doing business and too often had ossified into “this is what we offer, take it or leave it” rather than “what are you trying to achieve and we can help”.
There’s a greater recognition that not only do banks flourish when economies flourish but the only sustainable strategy is to grow profits on the back of customers building their wealth.
Digital banking is essential to that strategy because it gives customers more control - for example through open data - but also gives financial institutions the opportunity to use data to better understand what will help customers, over the long term.
The practice of banking will change. According to McKinsey, “retail banking distribution will experience up to three years of digital preference acceleration in 2020”.
“In some markets, this may translate to 25 per cent fewer branches, with those remaining performing a different set of activities with more flexible job configurations. Call centres may be transformed to remove up to 30 per cent of less customer-centric and lower value-added activities. Digital sales and servicing will accelerate markedly and the remote advisory channel should finally come of age, potentially handling 35 per cent of complex needs remotely.”
Of course that’s an aggregate forecast, based more on European and North American data and experience, but the general trends will be global.