Banking Circle research has uncovered how financial institutions are rethinking the value of digital infrastructure to future-proof their business in a post-pandemic world. Anders la Cour, Co-Founder and CEO of the financial utility discusses how the crisis has accelerated digitalisation strategies across the industry.

Earlier this year Banking Circle commissioned MagnaCarta Communications to take an in-depth look at capturing value in financial services for a digital age. The plan was to conduct research among the senior executives of banks, fintechs, payment service providers (PSPs) and payment intermediaries in Europe for their thoughts on the development of digital strategies. But then those plans changed.

We took the opportunity to shift the emphasis of the study slightly and to look at the expected impact of the newly confirmed pandemic and the resulting lockdowns imposed on the regions involved in the research. This provided us with a unique snapshot of business confidence, adaptability and future plans at that point in time.

Even before the global pandemic, banks had been changing their business practices, their culture and, most of all, their technology to create more responsive and flexible businesses that centre on customers’ requirements and experience. The MagnaCarta research looked at how attitudes towards digital technology have changed, particularly around the cloud and outsourced provision of commoditised banking services, such as payments. The potential impact of government stimulus policies and the relative strengths of banks against other players in the finance ecosystem were also examined.

Feedback from the survey and interviews showed industry-wide optimism for the future. A substantially different picture from a decade ago. (See fig. 1)

Some key findings include:

Many may have looked forward to 2020 as the hopeful dawn of a new decade. Sadly, the reality has been very different. So far, 2020 has dealt us a cruel blow, presenting us with an unpredictable future, a rapidly changing landscape and horizons of change.

However, it is both exciting and encouraging to see how the value of digital has taken on a new and immediate significance during the crisis.

Regulation and customer expectations

Respondents to the industry survey and the individuals interviewed were asked to comment on the biggest challenges their business currently faces. The results may come as a surprise. (See fig. 2)

When ranking their three biggest challenges, less than a third (28%) included economic recession – which was already widely accepted as an inevitable consequence of the pandemic, even at the early stage when we conducted the research. Surprisingly, recession came sixth in the list of top challenges.

According to our respondents, the more pressing challenges were aligned to a business-as-usual world. Almost two-thirds (58%) of senior banking executives in key European markets said the impact of regulation was one of their top three challenges. Just over half (53%) also considered the implications of constantly evolving expectations of customers as a top-three challenge.

Regulation and changeable customer expectations are certainly not new challenges, in fact these two issues could have topped any similar poll over the past 10 years.

When we asked directly about the impact Covid-19 has had on business planning, our respondents were encouragingly optimistic. The most common response, at 41%, was that the crisis has had ‘a little’ impact and they expect recovery to be swift. Around a third (32%) said the virus will affect their business ‘quite a lot’ and confirmed that they were making changes to the business and reducing costs where possible. A quarter (26%) said the impact would be ‘significant and wide-ranging’.

None of the participants felt the impact could be classed as ‘not very much’ or that their existing continual review of business continuity practices was adequate protection in the face of a global pandemic.

Expert opinions divided

Clearly, the response to Covid-19 and post-pandemic recovery is not entirely in the hands of the financial service providers. And precisely who will emerge stronger is very much a matter of opinion.

Juan Jiménez Zaballos, who was Santander’s Head of Financial Industry Transformation at the time of the survey, pointed out in his interview that “Banks are better prepared this time. Regulators are being more favourable to financial aid being put together to avoid a slow recovery, and these mechanisms that are in place should help that.”

Georg Ludviksson, CEO of Icelandic digital banking solution provider Meniga, agrees: “Banks feel well positioned to deal with the crisis, they are well capitalised and have strong balance sheets. They feel ready for recession and can weather it better. They learned from the last crisis.”

But, Alex Mifsud, Founder and Chief Strategy Officer of payments optimisation fintech, Weavr.io, doesn’t see it like that: “The power of banks and governments has increased, but they’re not necessarily ready for this change. We don’t get the sense that banks are well tuned to the digital economy. Digital is about fast growth. Profitability is secondary. By design, fintechs are tuned to that (change).”

Fast-tracking digitalisation

Survey respondents and interviewees confirmed that the businesses they represented already had plans to digitise more processes. However, many admitted that these plans had to be fast-tracked due to the crisis, demonstrating the need for organisations to be adaptable, agile and prepared. Covid-19 has certainly proved to be an accelerator for change.

Dean Wallace, payment service provider ACI’s Practice Head for Real-time and Digital Payments, said: “There has been a move to digital channels over traditional call centres, for example, that was already underway for most customers. The pandemic has accelerated that, making it less gradual.”

Zaballos confirmed that digital transactions and app downloads were already increasing, pre-Covid, and that video-conferencing tools are likely to affect the way some banking services are handled: “Digital service was already the new norm. Now it’s imperative. Anything without a digital expression is not going to remain as it is, especially where it relates to large numbers of retail clients.”

The picture is similar at Weavr.io, as Mifsud commented: “It’s accelerating a trend that has already started, from deep digitisation of payments process, to the entire supply chain.”

However, Thibault de Barsy, Vice-Chairman and  General Manager at the Emerging Payments Association (EPA) EU, warns that Covid-19 is too blunt an instrument to effect change: “I don’t see much enthusiasm for the idea that Covid-19 will force change to digital. Change is really driven by making the customer experience smoother.”

Challenges to change

However, the pace of change differs from country to country. EPA EU’s de Barsy added: “The biggest problem for digital solutions in Europe is that it is not a truly unified market. It’s not even about cultural differences. We’re talking about basics like regulation and tax.”

Paul Le, Chapter Lead Trade – Data and Platforms, at Danish bank ING, commented: “The best chance to succeed is an extended channel where clients and banks can interact, and customer experience is high, and the process is efficient. Banks have to rethink their infrastructure, how to make data flow work better.”

As Elliott Limb, Chief Customer Officer at banking as a service platform provider, Mambu, put it: “Digital means building for what individuals need and building for an unknown and unpredictable world.”

Building post-pandemic banking

In spring this year, when the survey and interviews were carried out for this study, the long-term consequences of widespread remote working and subsequent lack of socialising due to government-mandated lockdowns globally couldn’t have been known.  However, the ongoing crisis is creating a solid evidence base for the efficacy of working digitally, alongside an equally strong evidence base of the need for human interaction.

Understanding how and where human interaction fits into a digital model and determining which services should be digitised will be critical in the future. As Zaballos said: “We’re going to see a real statement of values in general and as a society. Human touch will be treasured. Solidarity. Empathy.”

As we make our way out of crisis mode, banks must take time to understand the future, use the lessons of the past – including those learnt during this pandemic – to determine longer-term thinking around the infrastructure that enables success. In the process, we can all regain the confidence that 2020 originally offered and see it as a time that lay the foundations for a bold, collaborative, accessible and future-proof financial ecosystem.  

The whitepapers can be download from www.bankingcircle.com.