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4 Digital Transformation Lessons that Banks Need to Learn from Covid-19

Finextra | Leon Gauhman | May 20, 2020

post covid lessons for banks - 4 Digital Transformation Lessons that Banks Need to Learn from Covid-19When COVID-19 is finally brought under control, several key sectors will be remembered for the way they stepped up and took responsibility during the crisis. Healthcare is the most obvious, but supermarkets, corner shops, logistics companies and postal delivery networks have also played a critical role in preventing the country sliding into meltdown.

By contrast, British banks have done little to merit a spontaneous round of rainbows and applause. Branches up and down the country have been closed and banks were slow and seemingly reluctant to process SME loan applications under the government’s Coronavirus Business Interruption Loan scheme (CBILS). It’s a brutal indictment of the sector that the government has had to intervene with its 100% ‘bounce back’ loan guarantees to try and salvage the UK economy.

The key question now is whether traditional banks can learn lessons from Covid-19 that will help them establish any kind of status as a part of the SME life support system. In my opinion, they can – but only if they take their lead from the increasingly influential fintech sector. Here are four areas of digital innovation I believe banks should embrace in the post-pandemic era:

1. Greater openness to digital collaboration

Just as problematic as banks’ resistance to lending to SMEs has been the speed at which legacy lenders are processing applications. Weeks after the government’s Coronavirus Business Interruption Loan scheme (CBILS) opened – only 13% of companies which tried to access a loan had been successful. High volumes of enquiries go some way towards excusing this, but the problem also lies with the shortcomings in banks' internal digital processes.

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Getting these digital processes right is not the equivalent of investing millions in R&D to find a Covid-19 vaccine. A skilled and well-resourced team could swiftly connect the software, algorithms, data and servers required to build a robust and secure digital platform. Companies like Onfido and Validis, and solutions such as Google Big Table and AWS EC2 are all waiting in the wings to help with various elements of this process.

The reason many banks haven’t done this is because they are not sufficiently agile to innovate at speed. Post Covid-19, a key challenge for banks will be to really collaborate with fintechs and third party vendors and allow their internal capabilities and culture to be challenged and improved so they can respond more quickly to emergencies like Covid-19.  The partnership between Starling Bank and Funding Circle to offer an additional £300m of loans to SMEs under the CBILS scheme is a good example of the collaboration established banks need to embrace going forward.

2. Adopt digital solutions like Whatsapp queuing solutions

Banks can adopt digital solutions like WhatsApp queuing solutions by integrating the platform into their existing systems and processes. The bank can use WhatsApp's built-in features such as automated greetings and quick replies to streamline the customer service experience. Banks can also leverage the use of chatbots to assist with common inquiries and provide instant support 24/7. Implementing a WhatsApp queuing system can also help reduce the number of in-person interactions, which can help to reduce the spread of COVID-19. 

3. Prioritising customer experience

Bank advertising talks a lot about being there ‘for the journey’, or ‘listening’, or ‘making it happen’. But that certainly hasn't been the experience for many SMEs facing collapse because of Covid-19. The reality is that part of the banks’ failure to react to the virus effectively is because they have not attempted to create a customer-centric model. When it comes to SME customer experience, banks fall down in a number of areas – including lack of personalisation, relevance and ongoing dialogue in their products and services.

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Once again, it has been left to fintechs to fill the gaps. It is the fintechs, for example, that have devised products that most closely match the needs of businesses at specific moments in time. Good examples include invoice financing, provided by the likes of US fintech Bluevine, or loans that link directly to business performance (think PayPal Working Capital). It’s also the fintechs that have led the charge in providing added value to customers beyond lending. New players such as Coconut (which is just for sole traders) and German bank Penta have developed innovative solutions helping SMEs with the day-to-day business activities such as cash flow, tax management and incorporation, based on the nature of the individual business, rather than purely on turnover.

4. Smarter use of customer data

High street banks no longer resemble Gringotts in JK Rowling’s Harry Potter universe. But their inability to embrace data-powered banking solutions means they seem just as outdated. Fortunately, the introduction of Open Banking legislation changed the rules of the game, making it possible for fintechs to secure access to data and provide SMEs with support.

A key area of innovation has been faster and better credit scoring solutions. By accessing a wider range of data points than traditional banks, fintechs have found ways to lend to viable SMEs that are deemed uncreditworthy by legacy lenders including customer feedback and transaction history from online marketplaces.

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While broadening the pool of data used to assess SME creditworthiness is important, the emergence of AI and Open Banking means there is a unique opportunity to build predictive elements into the SMEs customer experience. By taking a holistic view of a company’s business, it becomes possible to alert customers when there is a potential problem on the horizon – perhaps the order book in June is down 20% on the previous year. Take a lender like Kabbage as an example. By working with real-time banking and accounting data, the platform can spot when clients are at risk of default and offer solutions before trouble hits.

Imagine a world where this data is linked to wider developments in the SME sector – so these can also be factored into financial planning (for example, a fall in the price of a commodity, strike action affecting a key supply chain).

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