Crunch time for banks

Bankruptcy comes two ways, Ernest Hemingway wrote: “gradually, then suddenly”. Such has been high-street banking’s fate at the turn of the decade. Justifying the axing of a fifth of Santander’s branches, deputy chief executive Tony Prestedge told the BBC that branch transactions at the eurozone’s largest retail bank had fallen by a third in the two years prior to the covid-19 pandemic—before they plunged by half during the lockdowns of 2020. “The pandemic has ‘concertinaed’ five to ten years of change into a year,” said Mr Prestedge.

The rapid collapse of branch-based banking is an acceleration of a trend that The Economist Intelligence Unit’s global banking survey, now in its eighth year, has long seen coming. In the latest survey, conducted in early 2021, just under two-thirds (65%) of banking executives agreed that the branch-based model will be “dead” within five years, up from 59% last year and 35% in 2018 (see Figure 1). In 2018 69% of Europe-based respondents disagreed with the statement—today the same proportion agree.

This year’s survey finds that branch closures and continued pressure from non-traditional competitors have triggered a wholesale rethinking of banking priorities and business models among banking executives.

Just under two thirds (65%) of bankers now believe that the branch-based model will be “dead” within five years, up from 35% four years ago. The rise has been sharpest in Europe and North America. 

Banks in 2021 face competition from all sides. New, nimbler competitors including fintech startups, payment players, superapp platforms and tech giants continue to gain market share from incumbent banks as more non-traditional players gain the ability to offer more traditional banking services. A number of youthful fintechs have landed banking charters in the past year, including Varo and Square, enabling them to take deposits and extend credit. The growth of capital markets and central banks’ tentative experiments in digital currency further threaten banks’ very raison d’être. 

But banks are coming out fighting. The stumble of some consumer challenger banks over the course of the pandemic—firms such as Monzo and Revolut struggled with sharp falls in revenue and customer complaints over missing funds—has put smartphonefriendly, slick interfaces in sharp contrast with the dour reliability and brand recognition of established banks. Critically, customers appear to remain reluctant to trust digitallynative challengers with salary deposits. Many established banks, spurred by rapid consumer change forced by the pandemic, are hopeful that through strategic partnerships and investments in technology they can be the best of both for consumers: a trusted banking partner, and purveyors of whizzy, consumer-friendly banking experiences.

Customer experience: the currency of competition

This year’s survey reveals a dramatic shift in priorities. Five years ago, as banking costs soared due to new regulatory requirements worldwide, banks were focused on cutting costs and boosting margins to maintain shareholders’ return-on-equity. Today, customer experience and digital marketing are top priorities for executives as they strive to compete with challengers’ frictionless onboarding, budget planning and perks such as free international payments.

In his latest letter to shareholders, JPMorgan Chase chief executive Jamie Dimon does not hold back in his embrace of cloud technology. “We cannot overemphasise the extraordinary importance of new technology in the new world,” he writes, referring to the turbocharging effect that covid-19 has had on the adoption of the cloud and artificial intelligence (AI) in financial services.

Before the pandemic, not all banks were quick to spot the advantages in offloading applications to the cloud, where virtually unlimited computing power allows enormous efficiencies. Banks have generally been slower to take to cloud computing than other sectors. But the adoption of software as a service (SaaS) and cloud infrastructure—for additional processing capacity, improved service capabilities and to outsource data storage—has accelerated since the start of the pandemic, as banks seize an opportunity to cut costs and ramp up their digital transformation projects.

Last year saw a flurry of deals. HSBC committed to using Amazon Web Services to develop new digital products and support security and compliance standards, while Wells Fargo has signed on Microsoft and Google as public cloud providers. Google has agreed similar partnerships with Goldman Sachs and Deutsche Bank. 

This comes as established banks figure out how to use incumbency to fend off fintechs and “challenger” banks, while the newer entrants use the cloud to advance quickly into new market opportunities.

In a new survey of IT executives in the banking sector, conducted by The Economist Intelligence Unit and supported by Temenos, more than seven in ten (72%) report that incorporating the cloud into their organisation’s products and services will help them to achieve their business priorities. Just under half (47%) say that it will do so “to a great extent”, with Latin American respondents the most bullish (see Figure 1). 

Microsoft, a large player in cloud services, believes that the pandemic has accelerated cloud adoption in four ways that go beyond cost considerations. The first is creation of economic efficiency, by moving away from reliance on a clunky computer mainframe environment. Second is enabling agility and speed to market by, for example, improving the customer onboarding experience in retail banking. Third is reimagining the modern workplace and process modernisation to increase productivity, while fourth is digital innovation through, for instance, the adoption of AI. 

In some instances the impact of this shift will be shaped by local factors, such as demographic changes. In other instances this shift will reflect shared characteristics, as demonstrated by the greater popularity of overseas investing among younger high-net-worth individuals (HNWIs) brought up in an era of globalisation. Whatever the drivers, the landscape of wealth is changing—from local to global, and from one focused on returns to one founded on personal values.

Despite rising economic concerns and a tradition of investor home bias in large parts of the world, the new landscape of wealth appears less interested in borders. According to a survey commissioned by RBC Wealth Management and conducted by The Economist Intelligence Unit (EIU), younger HNWIs are substantially more enthusiastic about foreign investing. The U.S. is a particularly high-profile example of a country where a long-standing preference for investments in local markets appears set to be transformed.

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Read additional articles from The EIU with detail on the shifting landscape of global wealth in Asia, Canada, the U.S. and UK on RBC's website.