Canadian banks have weathered the COVID-19 crisis well so far. They are protecting front-line staff and customers by shuttering branches, reducing opening hours and triaging services. They have also delivered smooth access to government stimulus programs, lowered credit-card interest rates and deferred mortgage payments. Meanwhile, consumers are trying to hang onto their savings as a buffer to economic instability.
But some COVID-related benefits to consumers will start to wind down soon. For banks, the ensuing draw on deposits and spike in losses will hit balance sheets that are already under pressure from low interest rates, lower spending and flat lending growth. The branch network represents a huge portion of total costs and is likely one of the most outdated parts of the bank, given changes in consumer preferences.
The crisis, then, creates a unique opportunity for banks to redesign the entire distribution model.
CONSUMER HARDSHIP MAY INTENSIFY
The government and banks moved quickly in the early days of the pandemic to provide financial support to strapped consumers who were already some of the most indebted consumers in the world. But those programs won’t last forever. The last special unemployment payment for the one million Canadians who were laid off in March will be paid out by the end of June. Those made unemployed in April will see their payments end in July.
Furthermore, the 10-15% of consumers who recently applied for six-month mortgage deferrals may still be unemployed when those bills come due.
This will have a direct impact on banks, which historically have a higher cost of funds than banks in other countries. Their balance sheets will be stretched even further if home prices fall.
Offsetting these negative impacts is the opportunity for banks to cut operating costs by taking cues from how customers are responding to the changes in the digital and branch channels. In fact, customers were already moving away from dependence on — and attachment to — branches as “perceived convenience” (including remote access) became a more reliable measure of brand rating than physical convenience.
TAKING CUES FROM CUSTOMER BEHAVIOR
But unlike their counterparts in the U.K., U.S. and Australia, Canadian banks have mostly resisted the obvious move to reduce branches (see Figure). Part of the reluctance is due to an assumption that a local physical presence for “billboard value” was essential to maintain market share.
Now the customers who were already turning away from branches are doing so at a faster pace. In particular, the segment that Novantas refers to as “branch traditionalists” now seems to be the least likely to be seen in branches, partly because they are an older demographic who consider themselves most at risk of COVID-19 infection.
As a result, banks have been forced to reinvent many branch transactions, such as cashier chequing and passbook processing, to take place remotely. They also have placed more emphasis on onboarding customers to these new channels. This is resulting in a rapid acceleration of the remote/digital banking adoption curve that will not be easily reversed.
The fact that the pandemic lockdown has acted as a catalyst to changes that were already taking place represents an opportunity — as well as a wake-up call — to financial institutions that have relied on the strength of their branch networks to acquire customers and increase wallet share.
If customers are thinking about banking differently, then banks must start to reimagine the relationships with those customers — using this point in time as a source of opportunity and creativity rather than as a cause for concern.
Canadian Banks Maintain An Expensive Branch Network
Note: Index is normalized for U.S., Canada, U.K. & Australia. Respective total system branch count @2019 = 100.
Sources: FDIC, Novantas Branchscape, APRA, Canadian Bankers Association, British Bankers Association, RBA, Nomis, Novantas Customer Knowledge
STRIKE WHILE THE IRON IS HOT
As the lockdown gradually eases across the provinces, there will be a long transition where financial institutions can influence customer behavior. After all, many customers (and front-line employees) already expect long-term changes in hours, access and staffing.
If the financial institution has a clear vision for what the future interaction model should look like, it can build a transition path over the next few months that won’t feel invasive. But this vision needs to be built on a sound plan for redesigning the entire sales and service paradigm, not an expedient roadmap back to the “old normal”.
Although it may still be unclear what the emergent environment will look like, there are certain opportunities to change practices that will help mitigate crisis-related risks to the balance sheet.
For example, the rapid acceleration from branch to channel-based banking enables one-to-one customer interaction in a much more precise way than was possible via the teller-based service model. Although many banks still treat all customers the same in digital channels, there is an opportunity to use machine learning and analytics to provide more specific and efficient delivery of product and pricing. Campaigns to build balances can now be priced on a customer level, depending on the predicted size and duration of incremental balances invested. This is a far more efficient method than “one size fits all” national promotional campaigns.
Similarly, messaging and pricing for mortgage renewals can be configured to reflect the value each customer puts on the many non-price benefits of keeping the loan at the bank, instead of just a new negotiated rate.
PROFOUND IMPLICATIONS FOR BANKS
None of this will happen overnight. But the implications for redesign are profound because the decisions taken will be felt across the network — not just branches and channels, but staffing, sales targeting and marketing allocation.
The financial institutions that will emerge in the best shape are those that consider the full implications of how customers have responded to the measures put in place during the crisis. This means re-thinking the entire distribution model at a segment or customer level beyond spatial geographical constraints.
In the end, the potential rewards for these efficiencies may well be higher than initially anticipated.