In evolutionary biology there is the well-known theory by American biologist Stephen Jay Gould of punctuated equilibrium — that species are generally stable, changing little for millions of years until this pace is “punctuated” by a rapid environmental change resulting in a new species. We’re witnessing this theory in real time.
For years, banking has been slow to change and adapt but, as a result of the current remote environment, banking is going digital at an electrifying pace. The wisest banks are doubling down on their digital strategies, smart banks are rushing to invest in digital, and everyone else is waiting to go the way of the dinosaur. COVID-19 has punctuated the digital transformation, and banks that hesitate to commit to digital will get left behind. The institutions that survive will be the ones that understand their role in the online landscape and capitalize on today’s accelerating trends.
The survivors are quickly adapting to the new digital reality. With widespread vaccination, a return to “normal” life at least six months away, and discomfort with physical interaction likely to last much longer, it’s not surprising that 82% of consumers are concerned about visiting bank branches in the future. This is a massive problem for many regional banks.
I caught up with the team at AQN Strategies, a boutique consulting firm that brings practitioner experience to consumer and small business lenders. John Crenshaw, a partner at AQN, said he had recently worked with a regional bank that was originating more than 80% of new credit card accounts within branches to existing customers. That is a very narrow market to start with, and what happens to that business as branch numbers and branch traffic continue to decline? Maybe the best way to frame this is through the words of Microsoft founder Bill Gates: “Banking is necessary, banks are not.”
With the old model increasingly in doubt, traditional banks have two choices: hunker down and hope to survive or focus on innovation and put real money into research and development. Those who opt for survival by digging moats and building walls will find themselves like Rip Van Winkle — by the time they wake up, the world will have moved on. The old school must do both simultaneously.
Unless a bank can differentiate itself on offerings or customer experience, it will find itself increasingly irrelevant, hemorrhaging talent, shuttering branches and looking after primarily older, non-digital customers. It eventually ends up as a utility, unable to recoup its cost of capital, let alone deliver a decent return on equity (ROE). The best of these banks will get acquired. The rest will look as old-fashioned and rundown as a Sears store.
During these next six months, banks…