Surveys Indicate Business as Usual May Be A Death Wish for Community Banks in the Now Normal
In a world where simple math is used to judge the value of an organization over weeks (not months or years), the greatest threat management faces is a tendency to become nearsighted. This condition is very difficult to avoid, given stock price, compensation, and/or a combination of other variables typically constructed to create a focus on the short-term performance of many organizations.
This nearsightedness often creates a type of tunnel vision that avoids making any changes that could upset efforts to meet the short-term goals. This reinforces the “we’ve always done it this way” institutional mindset that prevents innovation from taking root. Community financial institutions must mitigate the tendency to think short-term. They must set aside the practice of only embarking on projects and processes that are within their “comfort zone.” The pandemic had profound impacts on bank customers that are not likely to fade away. The impacts on the expectations of customers regarding digital experiences are particularly profound. The potential fallout from not demonstrating a commitment to meeting these expectations is not trivial. A short-term mindset by the leadership of an institution may expose a bank or credit union to this fallout.
A recent Harris poll found a 15% increase in new digital banking users over the year and a 35% rise in the use of digital channels by established users. Some executives may see this data and conclude it is good news as consumers are moving from costly brick and mortar to digital storefronts in order to manage their finances. These executives also might conclude that investments made in digital channels might be reaching a tipping point that could offset the costs. After all, new digital banking users, and the closing of select branches, would equal lower operating costs. Leadership might conclude that the best course is to “ride the wave and leverage current technology to lower operational expenses.” If the institution’s digital experience addresses the post-pandemic wants and needs of its customers or members, then this is a viable path.
However, many banks offer customers a digital experience that falls short of demand. This gap is amplified by the fact that the pandemic raised the bar on what an acceptable digital experience involves. During the height of the pandemic, customers were not only increasing use of digital with their banks, they were also increasing their use of offerings from savvy e-tailers. These e-tailers provided them with food, clothing, cars, and more during the pandemic. Those savvy e-tailers – e.g., Carvana, Apple, Amazon, et al – were treating them to a digital experience that stands well above what most financial institutions offer.
The disparity between what is and what is expected could be disastrous for some financial institutions. Results from the Harris study mentioned above indicate 40% of respondents would leave their primary institution for a better digital experience. The majority of the 40% were from households with more than $100,000 of income. When asked to agree or disagree with the statement “I prefer local banks but their digital banking does not meet my needs.” 47% agreed. The majority of those respondents had household incomes of $75,000 to $99,000.
Such high stakes indicate an objective view of an institution’s digital offerings compared to providers of great online experiences is a matter of survival. To complicate things further, the pandemic accelerated the timeline for digital transformation. So, whatever the gap an institution faces when moving from its current digital experience to one that approximates that of an e-tailer, the time available to close this gap has shrunk from between three and five years to 18 to 24 months.
A financial institution focused solely on satisfying stakeholders’ performance metrics in the short term and adverse to ideas that run contrary to how things have always been done will struggle to effectively address this challenge. Failure to address this challenge will have profound, possibly terminal consequences. Institutions determined to avoid these consequences are engaging with FinTechs and other innovative early-stage players. These companies offer options that can add value that is tangible and quantifiable in weeks, not months. It is not the way these institutions have always done it, but it is the way they will go if they are to survive.