as published in the Fall 2021 issue of West Virginia Banker magazine
As the world (hopefully) comes out of the COVID-19 pandemic later this year, the way we conduct business is changing. The banking industry, described by one commentator as “the most old-school of the old-school professions,” is criticized as being resistant to change. As one article described it, “the fundamental ways that financial institutions function have not changed with the times.”
These observations don’t consider the changes that have been happening in the banking industry for years and those accelerated by the pandemic. Several of those changes present both hurdles and opportunities. The banks that embrace these opportunities may be the long-term winners. We highlight below three opportunities we see in the banking industry.
1. Sustainable Banking / Environmental, Social, and Governance (ESG)
Sustainable banking or “banking with a purpose” refers to banking in a way that takes into consideration the economic, social, and environmental effects of the bank’s products and services. Sometimes called Environmental, Social, and Governance (ESG), this type of banking is becoming a requirement for financial institutions as customers become interested in doing business with companies—including banks—that “do good.”
This issue is politically charged, and we leave that debate to its proper time and place. Regardless of one’s politics, there’s no denying that sustainable banking is a hot issue banks are facing.
Although U.S. banks have been criticized as being slow to adopt sustainable banking compared to their European counterparts, they now are stepping into this realm in a big way. JPMorgan Chase’s commercial banking arm has created a “Green Economy” team that provides services to companies that produce environmentally friendly goods and services. Wells Fargo has been entering into multiple agreements to purchase renewable energy from producers in many states. Bank of America has developed an Environmental Business Initiative to deploy $1 trillion by 2030 to aid in the transition to a low-carbon, sustainable economy. Fifth Third has joined the Partnership for Carbon Accounting Financials, a worldwide group that addresses standards for financial institutions to assess and disclose greenhouse gas emissions associated with their products.
The move to embrace sustainable banking isn’t limited to the big names in banking. Aspiration Financial makes sustainable banking its core focus. It operates entirely on a digital platform, and its website (www.aspiration.com) opens with the announcement “You can change Climate Change,” “Leave your bank, save the planet,” and “Aspiration is 100% committed to Clean Money.” It offers its Zero credit card “that rewards you for erasing your carbon footprint.” It promises to plant a tree every time a customer swipes his or her debit card and offers its “Conscience Coalition” program that provides up to 10% back for purchases at “mission-focused merchants.”
At bottom, both the big names in banking and the up-and-comers are incorporating sustainable banking into their operations. Banks that haven’t yet done this should consider the benefit to doing so.
2. The Shift to Digital
One area where the pandemic had demonstrable effects is in the rise of digital, or contactless, payments. VISA’s Back to Business Survey interviewed small businesses and consumers in eight countries regarding their payment habits and preferences. The study showed that, almost overnight, consumers made COVID-19 safety measures their top priority. That translated into digital and contactless payments being a preferred option. Two-thirds of consumers in the Survey stated they would prefer to use contactless payments more than they currently do. Nearly half of consumers stated they will not shop at a business that does not offer a contactless way to pay.
These attitudes may be here to stay. Only 16% of consumers said they would revert to their old methods of payments after the pandemic is over. The small businesses that were surveyed are working to meet the consumer’s changed attitudes. Over four-fifths of small businesses “had embraced new forms of digital technology to meet changing consumer behavior.”
The Back to Business Survey is a lesson for banks, and EY’s Future Consumer Index confirms that lesson. The Index tracks consumer behavior toward banking and, not surprisingly, reports that the pandemic has changed consumers’ banking behavior. Forty-three percent of people surveyed for the Index stated that the pandemic changed the way they bank. While the Index suggests that most people haven’t yet committed to digital banking long-term, it revealed that approximately one-fourth stated they expect banks to operate more digitally in the future.
Another lesson from the Index relates to the future of cash. “The end of cash has never been closer,” according to the Index. Consumers have switched to online shopping. Apple Pay reports more than 380 million users, and WeChat Pay has more than 800 million.
Add to this the push to create a digital U.S. dollar and the projects worldwide by over 80 countries to create Central Bank Digital Currencies. Apart from central banks and official currencies, the slow march of companies that are starting to accept bitcoin and other cryptocurrencies as payment options adds to the cash alternatives and the appetite for bank customers to operate only on a digital platform.
The digital push isn’t limited to just payment options. For the past few years, the word “blockchain” has been thrown around cavalierly as a catch-all elixir to every perceived operational shortcoming. Nonetheless, the possibility of implementing distributed ledger technology to traditional banking operations holds promise that cannot be dismissed. Big names like JPMorgan Chase, HSBC, and Goldman Sachs have joined blockchain consortiums or have announced they are working to develop their own blockchain initiatives.
The above drive home the point that banks should evaluate their digital customer experience and other ways to incorporate the shift to digital into their operations.
3. Cybersecurity
The instances of cybercrimes against banks are continuing to increase. Last year, 80% of financial institutions reported seeing a rise in these crimes with card cloning being a top issue. A recent report on cybercrime warned that cyberattacks on U.S. financial institutions are increasing in frequency and severity. In fact, a study by the Federal Reserve Bank of New York found that cyberattacks happen against financial institutions 300 more times per year than against other businesses.
The increase in digital operations discussed above brings increased points that are susceptible to cybercrimes. The pandemic forced people online, and that made more people vulnerable to these crimes. The Merchant Risk Council sounded an alarm that is nothing short of shocking: “[O]ver 80 percent of credit cards currently in people’s wallets have already been compromised.”
Like other businesses and industries, banks aren’t going to be able to eradicate their vulnerability to these attacks. However, regular cyber resilience audits and routinely evaluating potential threats will help banks combat the likelihood that these attacks will be successful. Banks should ensure they are making cybercrime prevention and response a focus going forward.
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