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Pandemic paradigm shift forces digital innovation

While many of the fears of doom expressed by financial institutions at the outset of COVID-19 have failed to materialize, a new report suggests the pandemic has spurred the industry to accelerate change.

That is one takeaway from Q2 Holdings’ The State of Commercial Banking analysis, produced by senior strategic business advisor Gita Thollesson. 

Gita Thollesson.

Thollesson’s first takeaway is the banking market is poised for a rebound. Companies are beginning to invest and expand. Add in inflation is returning with a vengeance, and you have a market primed for action.

Raising rates will be the tactic to curb inflation, so companies are seeking to lock in cheap financing before rates go up, Thollesson explained. That will drive demand, even among companies not looking to expand, so they have money in hand at a cheaper rate when they decide to strike.

This environment is unique, Thollesson explained. At the beginning of the pandemic, rates had already been slashed. The Fed didn’t cut rates, and banks didn’t tighten up or set a floor to make up for lost revenue. She added that they cut rates to corporations, which just exacerbated their problems with that interest margin.

Cross-selling boost

Look for a return of banks focusing on primacy, Thollesson suggested. Q2/Precision Lending measures the effects of that in the data, and it showed when a bank had the cross-sell, they could achieve much better returns even in the current rate environment. 

“That provides a compelling case for really being deliberate and strategic about winning that business, making sure you’ve got all the guardrails in place, that business materializes, and it’s not just aspirational, but it’s really a deliberate effort,” Thollesson explained, while adding she was surprised how many banks, while stating primacy as a goal, had no established plan for how to get there.

While many banks had digital transformation plans in place for a decade or more, the pandemic forced the issue because they could not operate traditionally, Thollesson explained.

Digital onboarding of treasury relationships, digital account openings, and other activities not previously envisioned had to happen, and that trend is here to stay. People have realized how it is possible to operate digitally, reducing the need for the traditional branch banking approach.

Bank branches closed

According to the report, between 2019 and 2021, 8.9% of all branches in America, 2,853 in all, were shuttered. Wells and US Bank closed more than 500, while Truist locked more than 400.

The branch will still be required, but for different reasons than previously thought, Thollesson said. They will likely serve more high-value and complex interactions.

“More banks are serving as a trusted adviser,” Thollesson said. “That’s absolutely the case.”

Has the industry seen all of the benefits of advanced acceleration already? Thollesson doesn’t think so. She expects more advances and pressure to act quickly. Many are reconsidering the buy versus build angle.

“It’s almost not practical anymore to try to do this all yourself,” she said. “You’ve got to go out there and get best in class to be able to move very quickly, because if you don’t, you lose your competitive advantage, and not just against other traditional competitors. It’s also now all the direct banks and non-banks that offer solutions without any branches whatsoever. 

“And so so it has really forced everyone to step up their game and to move very, very quickly to make digital banking a reality.”

Digital an opportunity, not a threat

So companies have realized they can survive, and in many cases thrive, by operating digitally, Thollesson said. They see that even if many can visit a branch, they see no reason to. The push started on the consumer side, and corporate America was forced to act in step.

Yes, digital banks have seen higher fraud rates, but so have everybody else, Thollesson said, reasoning it’s a natural trend of the digital evolution. Commercial banks see higher rates too.

Another unique aspect over the past few years, another unique characteristic has been that many companies have plenty of cash (partially due to PPP). Still, there is so much uncertainty they are in a holding pattern about how and when (and if) to spend it, Thollesson said. Originally, PPP was meant to keep the lights on, and for many, it did.

Others had their everyday expenses covered, so they parked it into deposit accounts, and there you have your liquidity.

With fixed rates for PPP so low, those firms in more comfortable situations put that money in the bank or paid off higher-interest debt. There was little need to go to banks for a loan.

Depression was feared

Look back to two years ago, Thollesson advised. The idea of a complete economic shutdown with no travel had many fearing the next Great Depression.

Companies that would have never envisioned trusting junior employees to work remotely did so and remained profitable, figuring out new operating models on the fly.

“That cut everybody a little bit off guard because at the beginning of the pandemic. People thought this was going to be so bad that once the federal stimulus ran out and once the forbearance that banks were offering payment forgiveness at ended, that all of a sudden, we were sort of kicking the can down the road, we’re going to have these massive credit losses,” Thollesson said. 

“That didn’t happen. If anything, companies were able to operate profitably. Not every industry, but most were able to still turn a profit. Once the dust settled in, the sense of optimism came back into play, where people realize that even if there is another variant, we will be okay because we’ll figure it out.”

Fundamental change

Commercial real estate is rebounding surprisingly well, Thollesson said. She has been asking clients about their plans post-pandemic, and most banks expected some percentage of staff to remain working remotely or in some hybrid model.

The fundamental way of working seemed to be changing.

But demand hasn’t changed much. There’s been few delinquencies and charge-offs, but perhaps the effects will be longer-term.

“f there is an impact, it’ll be much longer term,” Thollesson suggested. “It’s not going to be in the next year or two. What companies have to really think about is how long their leases on their office buildings are. So at some point, there probably will need to be some rethinking of that industry. But right now, there’s no sign that they’re suffering at all.”

  • Tony Zerucha

    Tony is a long-time contributor in the fintech and alt-fi spaces. A two-time LendIt Journalist of the Year nominee and winner in 2018, Tony has written more than 2,000 original articles on the blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has hosted panels at LendIt, the CfPA Summit, and DECENT's Unchained, a blockchain exposition in Hong Kong. Email Tony here.