The fallout from the Covid-19 pandemic will see the battle of the banks intensify, as both legacy and challenger financial institutions race to use tech innovation to gain a competitive advantage in 2020\/2021, says Victor Mupunga, research analyst at Old Mutual Wealth Private Client Securities.<\/p>\n
He said that to some extent, history may be repeating itself, as the financial pressure exerted by the pandemic forces bank management teams to pursue cost discipline while attempting to meet ever-expanding customer expectations.<\/p>\n
\u201cAs in 2008, following the global financial crisis, all banks will feel the pressure as a result of Covid-19. They will be negatively impacted by the drop in the interest rates and declining business and consumer economic prospects. However, innovative banks that can harness their ability to use technology to cut costs and meet customers\u2019 changing needs are likely to navigate the current crisis much better.\u201d<\/p>\n
Banks already spend more than most industries on technology.<\/p>\n
\u201cTake the US for example where over the last few years, banks have been spending around $150 billion a year on technology. The cost savings in doing so are significant – it costs Bank of America about US$5 to process a cheque within a physical branch, US$0.50 at an ATM and US$0.05 via a mobile app,\u201d said Mupunga.<\/p>\n
The Covid-19 pandemic may favour legacy banks with deep pockets and more substantial cash reserves to invest in technology, the analyst said.<\/p>\n
\u201cLocally, each of the big four banks (FirstRand, Standard Bank, Absa and Nedbank) have steadily increased their annual IT expenditure over the last five years, with IT now making up an average of 21% of total expenses versus the global average of 18.\u201d<\/p>\n
While a portion of this expenditure is to maintain the banks\u2019 current IT systems, a growing share is to better position them against the fierce competition that has emerged from challenger banks. On the other hand, analysts have predicted that the Covid-19 pandemic will change consumer behaviour in profound ways.<\/p>\n
\u201cChallenger banks have been known for their lean business models and agility to respond to customer needs,\u201d said Mupunga.<\/p>\n
\u201cWhile these banks don\u2019t generally offer the full range of complex products provided by traditional incumbents, their ability to address consumers\u2019 precise pain points has led to them rapidly gaining customers globally.\u201d<\/p>\n
Despite the commendable exploits of legacy banks, Mupunga said that there may be a limit to how much these financial institutions can do relative to new entrants. \u201cThe critical inhibitor is often their core banking technology infrastructure, which was built decades ago and tends to operate in product silos.”<\/p>\n
Often, making core system overhauls, which are easy for challenger banks, is too risky, too expensive and almost impossible without any downtime. Because of this, most legacy banks will have to be content with gradual improvements to their clients\u2019 digital experience.<\/p>\n
Mupunga warned, however, that the sheer number of challenger banks in the market also presents a problem for the sector. “I would say that globally there are probably too many new banks coming into the market and there isn\u2019t enough space for all of them, even before the pandemic unfolded.\u201d<\/p>\n
\u201cA decade ago, global banks were solely focused on how they would recover from the 2008 Global Financial Crisis. Today, they compete against new entrants and need to innovate their legacy businesses to meet their customers\u2019 ever-changing needs,\u201d said Mupunga.<\/p>\n
“Innovative banks that strategically position their business models to compete with both legacy and challenger bank will be the winners over the next decade.”<\/p>\n