Impact of the COVID-19 pandemic on the consumer banking experience

There are many ways in which banks interact with and serve customers some include: physical banking at branches, ATMs services, online and mobile banking, private banking (including wealth management services), and loans and overdrafts. All of these services have changed in some way and the way that they are delivered to customers has been altered because of the COVID-19 pandemic. Globally banks have responded to the COVID-19 pandemic by closing branches, enhancing digital capabilities, offering differentiated treatment to customers in financial difficulties, and have enhanced support for vulnerable customers. However, due to the unpredictable nature of the pandemic how long these changes to services and service delivery will last and how the interaction between banks and their customers will change after this pandemic is difficult to foresee. These are factors that the banking industry has to consider when creating banking experiences for customers in the post pandemic future. Specifically, a few different factors are likely to be the most important customers' interaction with banks in terms of digital vs. physical interaction, banks responses to customers in financial difficulty, and how banks will interact with and engage customers whose behaviors have changed as a result of the crisis.

Banks' immediate actions for customers during COVID-19

The immediate response by banks to COVID-19 was to close bank branches and to operate a few necessary services on reduced hours, in order to keep their employees and customers safe. Banks such as Barclays and NatWest also reduced fees or waived them all together in order to allow customers access to money in fixed savings accounts. Most banks in the UK even gave customers payment holidays of up to three months on their mortgage repayment. Additionally, in the month of March when the pandemic initially hit globally, banks responded by either helping customer to increase their overdraft limits or by waiving any overdraft fees entirely for the next few months. Furthermore, banks such as Lloyds and HSBC offered loan and credit card payment holidays for up to three months in order to help customers who may be facing financial difficulty as a result of the pandemic. These reactions by banks were a direct result of governments urging banks to provide relief to customers who were burdened with financial difficulty in order to help society through the pandemic.

Digital vs. physical channels

Rapid adoption of digital channels

During the COVID-19 pandemic around a quarter of bank branches have closed in many countries and territories, and many of the remaining 75 percent are open on reduced hours with reduced staff. According to research, the pandemic could potentially be a significant accelerator of the trend towards digital banking resulting in a vast reduction of the size of banks’ branch networks. In recent years banks globally have been reducing the size of their branch networks, for example, the US had 2,000 net closures out of a total network of around 90,000 branches in 2018. Furthermore, in the UK around a third of the total branch network closed between 2015 and August 2019, and similarly in Australia around 5 percent of bank branches closed in 2019. Now in the midst of a pandemic banking through remote digital channels will be seeing rapid growth and customers who had previously adopted these channels are continuing to use them, and those who are starting to learn them are realizing its ease and efficiency.

Older generations shifting to digital

The elder population has also shifted to digital channels because of their concern for safety. This shift is largely due to the increased support the elder population is receiving from banks. During the pandemic banks are making it a priority to proactively contact their most vulnerable customers to ensure they have enough help and support in order to continue their regular banking activities smoothly. Through reaching out to vulnerable customers banks are helping older customers who are not already confident in online banking, and banks are also allowing older customers to grant trusted third-party access to their accounts so that a friend or family member can help them use digital channels such as online banking.  Additionally, banks are allowing a trusted third party to use ATM services on the behalf of elderly customers so that they don’t have to risk their safety in order to utilize banking services. According to industry professionals at McKinsey & Company, this pandemic is resulting in the elderly becoming confident adopters of digital channels and research shows that preference for handling everyday transactions digitally is as high as about 60 to 85 percent across Western European markets, even for customers 65 years of age or older. Suggesting that all age groups of customers are preferring the adoption of digital channels over physical ones, during the current pandemic.

Unequal access to digital channels

On the other hand, most people are not even able to adopt digital channels during the pandemic because 3.7 billion people in the world don’t have access to an internet connection and thus lack the digital infrastructure to conduct online banking. Those who could visit a physical branch before the pandemic cannot do so anymore and so these customers will stick to their physical channel preferences and are not likely to adopt digital channels unless they gain access to digital infrastructure. However, because the pandemic is accelerating the use of digital financial services, just as the SARS epidemic in 2003 accelerated China’s launching of digital payment and e-commerce, this acceleration is actually likely to increase financial inclusion. This is because between 2014 and 2017 it was found that digitalization increased financial inclusion, even where financial inclusion through traditional physical banking services was declining. Due to the increase in adoption of digitalization during the pandemic this is likely to have progressed even more since then. Greater financial inclusion occurs because digitalization gives companies the ability to accumulate users’ data from the various digital channels and develop new ways to use the data for creditworthiness analysis. Inevitably, an increase in financial inclusion means that traditional financial services can be extended to low income households and small firms, which can lead to increased economic growth and reduced income inequality. Digital financial services are enabling governments to provide quick and secure financial support to people during the pandemic, which will help mitigate the economic impact of COVID-19 and potentially strengthen economic recovery. After experiencing this pandemic and realizing the significance of digital financial services, governments are likely to awaken to the importance of equal access to digital infrastructure when trying to mitigate economic fallout. As a result, it is likely that unequal access to digital infrastructure will reduce in the future and will enable those currently without access to the internet to adopt digital channel preferences as well.

Popularity of digital channels post pandemic

Even though the pandemic has shown an overall shift in customer preference towards digital channels this preference for digital channels may not be permanent, as a study found that only 24 percent of respondents expect banks to operate more digitally in the next year or two, and only 16 percent of respondents stated that their banking habits will change in the long term because of COVID-19. Hence, the assumption that customers won’t eventually revert back to their previous channel preferences cannot be made. On the other hand, the increased usage of digital channels by bank customers can be sustained in the long-term if banks invest in marketing. Investing in marketing will allow banks to build awareness of the omnichannel interaction options available to customers, to share the successful experiences of new digital customers, as well as to support and build confidence in vulnerable customers or slow adopters who do not feel at ease using digital channels. Therefore, the channel that majority of customers will use in order to interact with banks in the future is likely to heavily depend on whether banks invest in marketing their digital channels.  

Greater focus on wealth management services

In the midst of the pandemic, banks are supporting customers facing financial difficulties by offering forbearance support, mortgage and loan payment holidays, access to savings accounts without penalty, and discounts on overdraft and credit card borrowing. However, new research suggests that COVID-19 could increase the demand for services such as financial advice and financial planning especially amongst millennials as 68 percent of the millennials surveyed stated they would consider getting financial advice. Additionally, from all the respondents who were surveyed 52 percent stated that even though they had not previously received financial advice they would now consider talking to a financial advisor after the pandemic. Research suggests that post COVID-19 banks will have a large role in helping customers feel better prepared for the future, by offering customers services like savings, investments, insurance, and income smoothing products. This could mean that banks may place greater focus on interacting with customers regarding wealth management initiatives more proactively than the current short-term initiatives of direct relief (such as, forbearance support, repayment holidays, discounts on borrowing etc.), as direct relief methods are less sustainable for banks in the long-term.

Flexible propositions for banking customers

Banks will also need to make their retail banking propositions more flexible when interacting with customers post pandemic. This is due to the lasting social changes COVID-19 has caused, hence, banks will need to understand how consumers select channel preferences, products, and banks for their individual financial needs. Thus, banks will need to understand the behavioral changes in customers as a result of the current pandemic and will no longer be able to interact with customers using marketing tactics generated from broad demographic segmentation. According to PricewaterhouseCoopers, customers are expecting to receive more individualized offerings, and so banks will need to prepare for a more flexible customer, product, and pricing strategy in order to deliver on those expectations in the future.

Not only is the interaction between customers and retail banking going to change post COVID-19, but the way in which customers interact with investment banking services is also predicted to change. Due to the more price-conscious attitude of customers, investment banks are expected to shift their value propositions to better serve customers through greater focus on data-driven and analytical offerings, digital toolkits, and electronic market access. Since, these tools are better suited towards aiding cost sensitive customers it is likely that customers will choose to adopt these new more cost-effective propositions, hence changing the way in which customers interact with investment banking services from a transactional model to a platform-based model.

References

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