Knowing your customer is the foundational capability underpinning banking. Financial services regulation requires banks to verify customer identities and analyze financial transactions to fight money laundering, terrorist financing, and tax evasion. Beyond regulatory compliance, banks also need to know their customers deeply to identify suitable products, assess lending risks, and devise the right sales and service strategy. Unfortunately for banks, COVID-19 has torn up the know-your-customer playbook, invalidating assumptions upon which segmentation, lending, risk, and predictive models are based.
In 2021, banking executives will:
- Misinterpret shifts in consumer behaviors and mistakenly pivot to digital-only. COVID-19 has undoubtedly accelerated consumer digital behaviors. For instance, Forrester Analytics Consumer Technographics® data shows that 14% of US online adults banked online for the first time as a result of the COVID-19 pandemic. Given that most were satisfied with their online experiences, those new digital behaviors will stick. However, many banking executives, faced with intense cost pressure, are reading too much into this data and pivoting to digital-only. We think that’s a mistake. Banks shouldn’t abandon the branch but instead refocus it to drive customer and employee engagement. Before COVID-19, withdrawing and depositing cash was the top activity US online adults did in a bank branch. As digital payments become the norm, we expect the branch to become a place for meaningful conversations about customers’ financial well-being.
- Overhaul their data and analytics and credit decisioning capabilities. Current uncertainty is exposing the weakness of one-off risk assessments and static underwriting models. Banks will need to conduct loan portfolio diagnostics to assess borrowers’ capacity to repay loans on an ongoing basis. For example, UK business lending bank OakNorth partnered with US bank PNC to roll out COVID-19 vulnerability ratings to enable commercial lenders to counter risk and re-underwrite loans based on 130 COVID-19 subsector scenarios. Banks’ ability to assess the impact of stress factors such as unemployment, supply chain disruption, and increasing debt will determine their loan performance and uncover new opportunities.
- Balance advocating for customers with managing risk. In 2021, we expect customer trust in banks to fall from its post-COVID-19 highs. Banks responded quickly and empathetically to COVID-19, providing assistance and credit to customers and allowing flexibility around loan repayments. When responding to a Consumer Technographics survey in May about how banks handled their response to the COVID-19 pandemic, 63% of Chinese online adults and 55% of UK online adults believed that their bank had acted in their best interests. But this honeymoon period won’t last. In 2021, banks will move from benevolence to risk management: increasing foreclosures, cutting down on small business lending and high loan-to-value mortgages, and introducing negative rates on deposits in some countries. To avoid becoming the bad guys, banks must continue to advocate for their customers: focusing on customers’ financial well-being, revamping their collections journeys, and advancing their debt management solutions.