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Covid-19 Is a Call for Retail Banks to Accelerate Digital Transformation


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We see nine imperatives that can help retail banks remain firmly on their feet during the crisis and enable them to move forward rapidly in its aftermath. Ultimately, the crisis reinforces an urgent need for banks to accelerate their digital transformations.

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Covid-19 Is a Call for Retail Banks to Accelerate Digital Transformation

  1. 1. White Paper Covid-19 Is a Call for Retail Banks to Accelerate Digital Transformation Sam Stewart, Thorsten Brackert, Chao Jung Chen, Jorge Colado, Laurent Desmangles, Muriel Dupas, Alasdair Keith, Holger Sachse, and Juan Uribe March 2020
  2. 2. 1 BOSTON CONSULTING GROUP March 2020 s the Covid-19 pandemic has spread around the world, retail banks in many countries have started to activate strict crisis-governance measures. Such initiatives have enabled them to promptly address both the safety of their employees and their business continuity amid the social distancing and lockdowns that much of the world is currently coping with. Since some countries, such as China and Italy, are further along the curve of the crisis, there are lessons to be learned regarding what it will take for banks to become stronger in the new normal to come. We see nine key imperatives that can help retail banks remain firmly on their feet during the crisis and enable them to move forward rapidly in its aftermath. Ultimately, banks must accelerate their digital transformations for the future. 1. Move faster toward full measures. Societies, economies and banks have been hit hard by the crisis. All individuals, businesses, and government entities have entered an emergency mode. Despite being further along the curve, banks in China and Italy are still in this mode. The lesson is that banks should not underestimate the time frame that will be required to achieve stability, potentially losing precious time by implementing temporary “work-around” solutions. Banks should start immediately to develop a near- to-medium term approach that enables the organization to prioritize future projects, embrace new ways of interacting with customers, and align their operating model. The new-normal environment needs to be prepared for now. 2. Prioritize actions as a systemic stabilizer. Incumbent banks are becoming systemic stabilizers, far more so than new entrants that do not have the same experience in risk management, and that might suffer more from the tougher economic conditions that are already emerging. On March 26th, the US Department of Labor announced that jobless claims filed by individuals seeking unemployment benefits rose by more than three million compared with the previous week. The figure was the highest ever reported, and is one indication of the crisis’s impact on society. A
  3. 3. 2 BOSTON CONSULTING GROUP March 2020 The response of banks will primarily concern credit and social impact—supporting individuals and SMEs during a period in which many have lost all or most of their income or revenue. Moreover, the impact will be felt differently by people working in different sectors of the economy. Our weekly COVID-19 Consumer Sentiment Snapshot shows that consumers are reducing their spending, with Italy seeing the most drastic response owing to the long nationwide lockdown. Indeed, 97% of Italian consumers have reduced their restaurant and local leisure spending, and more than 20% of respondents plan to spend less in many categories, ranging from luxury/fashion, public transportation, entertainment, home electronics, and appliances, to mortgages and rent (whenever possible). Since banks themselves will have limited resources, they must develop a plan on how to deploy them to retail customers and SMEs that need their help, leveraging close coordination with governments and sovereign bodies. How well they ultimately do this may emerge as a key factor in how customers perceive their banks in the aftermath of the crisis. 3. Create long-term loyalty in this moment of truth. Banks can be at the core of recovery by helping both their employees and their customers in the most critical areas: health, immediate and future financial security, and reassurance that their needs are foremost in the minds of their employers/financial institutions. There is a clear opportunity to reinforce the fundamental purpose of financial institutions in society and to strengthen customer trust, potentially leading to greater competitive advantage in the future. Virtually all banks have already started to implement various measures to protect their employees, and it is especially important to go the extra mile for staff who may be at higher risk. Some banks rapidly acknowledged that 25% or more of their branch staffs were vulnerable owing to their age or medical conditions. The key is to ensure proper hygiene and social distancing in branches—in much the same way that grocery stores have done—and to achieve clear and real-time monitoring of the health and location of the bank's staff.
  4. 4. 3 BOSTON CONSULTING GROUP March 2020 On the customer front, banking behaviors are of course evolving, and lockdown conditions have introduced a new paradigm: banks will need to come to their customers remotely, inside their confined homes, to offer human reassurance. Determining how well they can provide a human touch, as well as empathy, in this context is a viable way for banks to test their bionic capabilities and assess areas for improvement in a real-life crisis situation. Many retail banks are already sending frequent messages to their customer bases, communicating that they can help is such areas as emergency loans, complementary insurance coverage, shield plans that cover hospitalization expenses, financial relief programs for those impacted by COVID-19, mortgage and consumer-loan payment pauses, and fee exemptions for changing loan conditions. Banks will also be asked to quickly and proactively distribute government funds, and will need to staff up in this area to serve the soaring demand. In order to be efficient, banks need to leverage their existing data to identify individuals, professionals, and SMEs likely to run into difficulty—and take proactive steps to address potential issues (both for these customers and for the bank). They must also ensure that growth opportunities are not ignored. Banks will need to get much more adept at using real-time transaction data to anticipate changes in the financial health of both their retail and SME customers. 4. Ensure operational resilience, in particular for branches and call centers, as demand grows. At the same time, banks need to manage their physical networks as well as their call centers. This presents a unique challenge for customer-service leaders because, as demand grows, it is becoming increasingly impractical to serve customers from traditional contact centers. Some banks are making the distinction between the following types of facilities: * The call center as a “remote branch” (in the context of branch closures), from which most services can be provided remotely, leveraging RMs from closed branches. Many
  5. 5. 4 BOSTON CONSULTING GROUP March 2020 banks have redirected some tech investments towards enhancing and promoting digital interactions between RMs and customers. * The “general purpose call center” which can hardly be virtualized but can leverage almost-empty premises from the bank. The use of AI to optimize the prioritization and routing of calls will be extremely important. In terms of branches, models can differ between countries and their context. In Italy, some banks are offering bespoke opening hours, delivering cash to isolated people, and opening only for pre-booked appointments in order to protect staff. Banks in the US and China are offering targeted incentives to their frontline staff still working in physical locations. But it's important to note that some banks in Italy and China have expressed regret at not moving faster to complete branch closures. 5. Reinvent the post-Covid-19 distribution model now. Many banks have already built functionalities to enable customers to access products, services, and advice through remote channels. Our BCG Digital Sales Benchmark shows that customers can apply for some products and buy banking services online at more than 90% of the surveyed banks, and through their mobile apps for more than 70% of surveyed banks. The immediate challenge does not concern functionalities per se, but concerns customer adoption and education, as well as the opportunity to permanently migrate customers to digital channels. In China, for example, adoption of online payments has grown dramatically as the crisis has tentatively stabilized to some extent. During the early stages of the crisis, cash usage significantly declined in Australia, and it has halved in the UK. Some people may have been hoarding basic groceries, but few people have been hoarding cash, indicating a high level of trust in the payments and digital infrastructure. In addition, many banks are finding innovative ways to connect with customers through their preferred channels, such as on social media, or by creating an “Online Academy” that teaches customers how to bank online and/or via mobile devices. Retail banks need
  6. 6. 5 BOSTON CONSULTING GROUP March 2020 to double down on digitizing processes for products that are sure to attract higher customer demand. One large UK bank, for example, built a new journey to obtain a loan-repayment extension within one week. The increasing and ongoing migration of customers to digital channels provides a unique opportunity for banks to reinvent the footprint and the role of branches. Indeed, when anticipating the aftermath of the crisis, banks should not plan to revert to the old model but should leap-frog to a new distribution model. This could mean not reopening all branches; and for the ones that are reopened, rethinking service offerings and reorganizing the salesforce—for instance, by including external advisors as part of the front line. 6. Take advantage of increased digital interactivity. The move toward expanding use of digital channels should be leveraged to accelerate digital sales. Our consumer research and Digital Sales diagnostic benchmark show that a number of key features are critical in making digital sales happen. Success factors include displaying the right marketing messages, providing relevant information about products and services, designing a better user experience, significantly improving product application processes, and finding the right balance between self-service and assisted sales. Our BCG Digital Sales benchmark shows a very large dispersion in banks’ digital sales capabilities both within the same market as well as across markets. This finding suggests that some markets are better prepared for remote banking, and that some banks within each market will be measurably advantaged. For those banks with strong capabilities, there will be an opportunity to gain share. Others will need to rapidly reprioritize their investments toward quickly closing the gaps. 7. Change ways of working as resistance to change shifts. As the crisis has deepened, many banks have managed to shift nearly all employees to working remotely within a matter of days, with their operations continuing to support both communities and economies. At some banks, some central-function employees have been even more productive when working from home. We have also seen agile teams successfully
  7. 7. 6 BOSTON CONSULTING GROUP March 2020 working remotely when enabled by the right technical capabilities. Proactive banks have already taken steps to make some of these changes permanent in the future, anticipating a more streamlined target operating model. 8. Mind the increasing risks. Our recent white paper, COVID-19: Sustaining Business in All Scenarios: A New Lens on Bank Credit Risk Management, explains how banks can assess and mitigate credit risks specifically related to the COVID-19 outbreak — those that are not properly captured by existing credit-rating methodologies. Still, other risks are rising as most employees work remotely and as more customers embrace digital banking. For example, one Italian bank observed a sevenfold increase in cyberattacks compared with the pre-crisis level, as well as a threefold increase in email phishing reports by customers. Reallocating some investment, tech, and human resources to prevent cybersecurity breaches is essential to make this new model work. 9. Get in the starting blocks to review the cost base. Most economists agree that we will experience a deep, global recession. Based on historical evidence, a V-shaped scenario—in which a GDP hit is followed by a rebound, with no long-term loss of output—may be the most likely. The majority of past epidemics (SARS in 2002, Asian flu in 1968, Hong-Kong flu in 1958, and Spanish flu in 1918) saw a temporary shock to the economy followed by a rebound. However, less optimistic scenarios remain plausible, especially in today’s interconnected world. Even if a rebound occurs, the impact on consumer behaviors, global value chains, politics, and ultimately on companies in many industries could be long-lasting. Many central banks have already taken action to offset an economic slowdown and support vulnerable sectors and businesses—moves that will contribute to reducing banking margins. Indeed, pressures on banking profitability will rise, and all senior executives recognize that the cost side of the P&L needs to be tackled. Although governmental and societal pressures will influence the timing, we believe that cost mitigation plans need to be prepared as soon as possible—by integrating a whole new set of assumptions based on the anticipated evolution toward streamlined business and operating models.
  8. 8. 7 BOSTON CONSULTING GROUP March 2020 * * * In countries further down the curve on the COVID-19 crisis, the situation is having a major impact on banks’ leadership mindsets and on their understanding of how digital- at-scale could actually play out. Their digital ambitions are higher than ever. We believe the current situation should accelerate banks’ transformation toward becoming increasingly bionic companies. They can gain a wealth of knowledge on customer interactions, on smart operations, and on agile ways of working. Winning banks will leverage those learnings in real time to accelerate the speed and scale of their digital transformations. Sam Stewart Thorsten Brackert Chao Jung Chen Jorge Colado Laurent Desmangles Muriel Dupas Alasdair Keith Holger Sachse Juan Uribe Sam Stewart is a managing director and partner in the Sydney office of Boston Consulting Group, and global leader of the firm’s Retail Banking segment. Thorsten Brackert is a partner and director for Retail Banking and Financial Institutions Operations in BCG’s Frankfurt office. Chao Jung Chen is a managing director and partner in the firm’s Tokyo office. Jorge Colado is a managing director and partner in BCG’s Madrid office. Laurent Desmangles is a managing director and senior partner in the firm’s New York office. Muriel Dupas is a senior sector manager for Retail Banking in BCG’s London office. Alasdair Keith is a Retail Banking knowledge expert in the firm’s London office. Holger Sachse is a managing director and partner in BCG’s Duesseldorf office. Juan Uribe is a managing director and partner in the firm’s New York office.
  9. 9. 8 BOSTON CONSULTING GROUP March 2020 You may contact the authors by e-mail at: Acknowledgments The authors would like to thank their BCG colleagues around the world, especially those in Italy and China, for their insights and contributions to this paper: Gennaro Casale, Massimiliano Merlini, Justin Chen, Bingbing Liu, Philipp Bieberstein, and Philip Crawford for his editorial assistance. About BCG Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we help clients with total transformation—inspiring complex change, enabling organizations to grow, building competitive advantage, and driving bottom-line impact. To succeed, organizations must blend digital and human capabilities. Our diverse, global teams bring deep industry and functional expertise and a range of perspectives to spark change. BCG delivers solutions through leading-edge management consulting along with technology and design, corporate and digital ventures—and business purpose. We work in a uniquely collaborative model across the firm and throughout all levels of the client organization, generating results that allow our clients to thrive.