Now that 2020 is done – and good riddance, some might say! – we’re taking a look back over the themes that have shaped the year and making some PEN predictions for 2021. Foolhardy in normal times, crystal-ball gazing is particularly futile at the moment, but we’d love to hear your own thoughts on what the next 12 months will bring.
One word will dominate people’s memories of 2020, which has been the most challenging and unpredictable year for the sector since 2008. The impact of Covid has led to continued low interest rates, new working practices, increased demand in business, personal and mortgage lending and provision of funds set aside to offset bad loans.
However, most major banks and building societies came into the pandemic profitable and with strong capital bases, which have only grown since regulators temporarily banned them from paying dividends in March. Furthermore, the latest quarterly results show hints of a recovery.
While the year has been challenging, the sector has responded well for the most part. Here’s what we chiefly remember the year for:
Significant operational impact allied with quick responses
- With the national lockdown in place at the end of March, there was a rapid and largely successful operational response across the sector. Whilst resilience has been a regulatory focus for several years now (and will continue to be), no-one foresaw just how we would all be tested in 2020.
- Overnight, offices were exited with a huge operational undertaking to enable entire companies to work from home – a challenge that under usual circumstances would have taken months or even years to complete.
- By April a number of providers had signed up to supply the emergency coronavirus lending scheme (CBILs) and enabled interest payment holidays.
- The mortgage market was hit by high demand resulting from the stamp duty break. Lenders struggled to keep up leading to product withdrawal and increased rates (though we are starting to see more products return to market).
- Organisational changes such as headcount reduction were put on hold while the impact of Covid was unknown - however these quickly resumed, mostly increasing to deal with the additional impact.
- With such as sombre economic outlook, organisations started to look deeper for cost efficiencies – another theme that will doubtless leak into 2021.
- Fraudsters will arguably be one group who look back on 2020 more fondly; a rise in cyber-crime and, despite the introduction of confirmation of payee, a significant increase in Authorised Push Payment (APP) fraud an unpleasant footnote to the year.
- We discussed a number of these themes in our Banking Beyond Covid webinar.
Rapid acceleration of digital adoption
- Lockdown and social distancing has had a direct correlation with an increase in digital adoption. With branch and call centre opening times reduced, customers have increased online and mobile adoption. One survey showed 1 in 5 started to use online banking apps during lockdown, and over half of the respondents now use them regularly.
- It has also been a key factor in the growth of Open banking, with user numbers doubling in 2020 to 2 million.
- Despite this, customers still remain hesitant to transition to a fully digital offering. Now almost a quarter of British adults have opened an account with a digital only bank, but only 1 in 10 have fully switched; something that has been less likely in 2020 with current account switching below pre-pandemic levels.
- Digital transformation is one of the strongest levers to improve CIR, and will become even more essential. Our Banking Cost Efficiency Diagnostic outlines an approach to identifying efficiency opportunities without compromising the service you deliver to your customers.
Change put on hold
- At an industry level, things have certainly suffered; witness the pace of progress of the New Payments Architecture (NPA).
- Banks and building societies consolidated investment spend while the impacts of Covid were understood. This has resulted in a reduction in spend and focus on projects deemed especially urgent.
- As offices closed and people began working from home, companies and individuals had to adapt to new ways of staying connected and working together.
- Change teams have worked remotely with mixed success, a key achievement will be remembered as the transition to “WFH” almost overnight.
- It will be no surprise to know that a survey of 318 Banks identified the most common types of functionality deployed in 2020 were all driven by the pandemic: increased limit of contactless payment, implementing fully digital processes, appointment bookings in branches and digital ID&V.
- There is no doubt that this will affect ways of working permanently – we’ve outlined some of the expectations and ways to adapt in our Future of the Workplace post.
And the new year will bring new headlines. Here are our 10 predictions for 2021…
1. The economic outlook will be largely driven by external factors resulting from the pandemic, Brexit, and the economic overhang from 2020 leading to ongoing anaemic growth. Interest rates will remain low, unemployment will increase, tax rates will rise and public sector support will be withdrawn (e.g. the housing market will slow when the stamp duty holiday expires in April, or possibly later).
2. We'll start to see a return to the workplace in the first half of the year. Organisational structures and work places will stabilise but they won’t go back to how they were. As we've previously stated, most large businesses will converge on moderate change; not too radical, but recognising that the environment is evolving.
3. Impact from decisions made in 2020 will unfurl – we see a reasonable chance the FCA will investigate poor customer outcomes as a result of mortgage payment holidays – our joint survey with YouGov in April showed 40% of respondents didn't fully understand the financial implications of taking a mortgage holiday.
4. The current environment may even lead to some M&A activity which the sector hasn’t really seen in a while - market values have reduced, driven mainly by fears over a potential surge in defaults linked to the Covid crisis - particularly in SME lenders with overweight exposure to BBILS.
5. The focus will remain on managing cost bases down to protect CIR. Consequently, investment spend will be at a premium and will revolve around legal, regulatory, mandatory, digital and data. Attempts will continue to change the channel focus but banks / building societies won’t shed branches too quickly. However, providers will take the opportunity to accelerate digitalisation and self-serving capabilities, using Covid as an excuse, for example taking paper out of the process.
6. FinTechs will continue to make lots of noise around better CX but won’t actually make a dent in the market; established players continue to be selective in improvements to customer journeys.
7. We'll see further deployment of AI with mixed results. Using AI successfully takes trial and error.
8. ESG will be a topic of increasing conversation around senior management tables… although we don’t expect this to translate into much of a day to day effect yet.
9. Banks and building societies will take operational and cultural learnings from 2020 and become ever more agile (regardless of their starting position). You can hear our teams thoughts on successfully delivering Agile programmes recorded at our webinar in May.
10. There is no doubt some of our predictions will not be realised, but we hope you’ve enjoyed our exercise in the impossible!
We’d love to hear your thoughts on this edition of our monthly Banking Headlines and do let us know if you have any of your own predictions for the next 12 months.