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An Industry in Transition: A Look at How Two Major Events Changed Banking

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To say the financial industry has shifted since the beginning of 2020 is quite an understatement. You’ve seen the headlines. You’ve read the articles, watched the videos, and listened to the podcasts. Banks and credit unions have had to shift into high gear to quickly transition to digital banking – and you’d be hard pressed to find someone in the industry who hasn’t felt this change in some shape or form.

But, is this shift as unprecedented as it seems? This pandemic rapidly forced banks and credit unions to adapt, but let’s not forget about another event in recent history that forced industry change: the 2008 recession. How does the fallout of COVID-19 compare to the consequences of this other big crisis the financial industry recently faced?

While COVID-19 and the 2008 recession each come with their own unique sets of circumstances, they both put a spotlight on the crucial need for banks and credit unions to stay agile enough to adapt as times change.

The Acceleration of the Digital Transformation

It’s no secret that the COVID-19 pandemic has exponentially increased the pace at which the world is turning digital. In what felt like a split-second, COVID-19 forced the adoption of online and mobile; created a tipping point for digital and contactless payments; and hurried along the evolution of the underlying market structure.

In 2017, the United States saw the promise of real-time payments and P2P was just starting to pick up steam. Over the next couple of years, credit and debit cards continued to be the mainstay for payments, and bill pay continued its growth with the introduction of items like eBills. Then 2020 came along and supercharged payments in a way the industry had never seen before.

During COVID-19, the industry has seen 35% of consumers increase their online banking usage; and Mastercard reports more than 40% growth in contactless transactions during the pandemic.

The Transformation That’s Here to Stay

The digital trend doesn’t seem to be going away. Of the 48% of consumers who have shifted their shopping online, 86% intend to stick with those experiences and 63% plan to maintain at least some of those digital behaviors. And as Americans continue to avoid cash and point-of-sale (POS) terminals, it’s not surprising that 60% of consumers expect merchants to offer a way to pay in-store without interacting with a card reader. In fact, McKinsey & Company estimated classic POS payments volumes could drop by as much as 30 – 40% in the short term (especially with foot traffic down by more than 70% for retailers at the beginning of the pandemic).

In March 2020, CUInsight’s research firm conducted a survey to assess how the pandemic had been impacting the operations of credit unions and banks. The firm followed up with a second survey four months later to investigate the evolving consumer landscape in digital transformation, specifically in payments. According to their research, 65% of surveyed credit unions and banks have seen an increase in card not present (CNP) transactions and 76% reported the same for mobile payments. No respondent saw a decline in either category.

In the same two-part survey, CUInsight asked credit unions and banks to rank their focus in five areas. Nearly 66% of respondents rated “Expand/Improve Digital Channels” as their top priority and their most critical initiative moving forward. This is in most part due to the number of consumers expected to maintain their digital behaviors even after more branches open across the United States.

Even before the COVID-19 pandemic swept the nation, developing a seamless digital experience that resolves a customer’s or member’s need the first time around, “without forcing them to resort to a phone call or branch visit, is key for any financial institution looking to stop leakage.” Digital must be a focus that continues to reach across the entire bank or credit union. Future needs won’t be satisfied just through online and mobile. Though these changes in consumer behavior were heightened by the pandemic, this shift in how customers and members operate with their finances was already in the works, and therefore, here to stay.

A Popped Bubble Spurred Change

Before the housing bubble popped and the 2008 recession took hold, there was another shift in the industry. All of a sudden, it was much easier for consumers to take out a home loan. Before long, both domestic and foreign banks were feeling the heat from the amount of defaults occurring on subprime mortgages. By 2010, the number of defaults rose to 11% of all mortgage loans. While there were signs of what was to come by 2007, not many could have predicted the scale of change that was about to occur.

After the collapse, the amount of government debt swelled across many countries, not just the United States. However, similar to the COVID-19 pandemic, the United States issued fiscal stimulus packages and increased social welfare payments. The result? Global government debt more than doubled from 2008 to 2017, reaching $60 trillion.

Change Forced Through Regulation

To the average customer or member, it might not seem as if the industry changed much after 2008 crisis – but it did. Similar to what we’ve seen happen during pandemic, after (and during) the recession, banks and credit unions needed to change … or get left behind. While it’s true most of the change was driven by regulation rather than consumer need, it still created a deep divide between the banks and credit unions that took great strides to improve versus those that didn’t.

Regulations that limited the risks investment banks could take on were put into place. This resulted in many balance sheets half as large on a risk-adjusted basis. While less risk means less chance of a 2008 recession happening again, it also means less profits. In 2017, Harvard Business Review noted that combined revenues of investment banks were down by 25%, which is the equivalent to $70 billion.

Another big change that consumers can’t quite see from the outside is the increased spending on controls, like compliance and risk. As of 2017, investment banks report spending about $300,000 a year on these programs, while pre-recession spending on these programs was under $200,000.

The Digital Transformation Was Born

Putting aside regulatory changes, it became clear another area of focus in the rebuilding of the investment banking system was keeping up with changing technology. While it wasn’t quite the scale of digital transformation we’re seeing now, it was still a huge step. The recession’s digital transformation was less outward-facing and more focused on internal processes. Since 2008, many banks and credit unions have been in the process of digitizing their back-office operations to increase efficiency and mitigate risks like those that contributed to the recession. It’s not the digital transformation we’ve watched unfold over the past year, but it was the birth of change towards a more digital-focused industry.

Impacts of the 2008 Recession Vs. the COVID-19 Pandemic

While the ramifications of the current pandemic are still unfolding, it’s clear that within the past year, we’ve experienced a rapid amount of change across the industry – much more quickly than what unfolded in 2008. This could simply be due to the availability of technology today that simply wasn’t around in 2008. This could also be due to the type of impact this current event has made. While the changes that occurred post-2008 were mostly felt internally due to massive internal changes and new regulations, the changes that occurred as a result of COVID-19 were much more external facing. Consumers and borrowers were able to see that their banks and credit unions now offered digital banking options. They were able to go through the mortgage processes almost completely remotely and the new chatbot on their bank’s or credit union’s homepage.

Stay Open to Change

When looking at the industry effects of these two events, it’s important to note one big similarity: the financial industry is always changing. If there’s one lesson for banks and credit unions to learn from the 2008 recession and the COVID-19 pandemic, it’s that being open to change (regulatory or otherwise) is the key to survival.


For tips on staying nimble in this ever-changing industry, check out these other blog posts from Jack Henry:

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