Although we are still in the midst of the Coronavirus crisis, we need to be looking forward and preparing for the economic recovery. While the net effects of COVID-19 have yet to be fully realized, we can assume that it will forever change the way many businesses interact with their customers.
Even before the Coronavirus outbreak, a digital transformation was already taking place. We’ve been seeing major technological advancements in most industries – including healthcare, banking, and hospitality. Without a doubt, the COVID-19 crisis has and will expedite the shift towards digital services and touchless customer engagements.
In the third installment of my series, here are some insights about the future of banking and what small business lenders should prepare for in a post-Coronavirus economy.
More Contactless Customer Experiences
In some ways, consumer behaviors will have changed forever. We’ll likely see businesses continue certain practices for having less physical contact with their customers, as well as less contact among fellow customers themselves. The existing trends of offering paperless options and digital services are no longer just about “going green” for the environment, but it will also keep people healthy.
When it comes to a paperless economy, most people have already become comfortable with the absence of cash and coin. According to economists, it’s estimated that only about 8% of the world’s currency is physical cash. The rest of the world’s money exists digitally in electronic accounts around the globe. There’s a very good chance that bank tellers will soon stop counting cash, and coin-counting machines will cease to be placed in major supermarkets.
Banking will be different from now on, as audiences demand embedded features and more electronic services. Customers are looking for seamless, digital experiences and immediate results, whether they’re depositing a check or applying for a loan. Community banks need to take these concepts and move them into reality. Most financial activities – and entire loan application processes – can be handled electronically (including proof of identity, document verification, fraud identification, e-signatures, and more).
Digital banking technologies are becoming more automated and less visible. Financial transactions are being incorporated into other technologies and blending into everyday activities. An article by American Banker calls it “The Rise of the Invisible Bank.” The “Internet of things” is growing and becoming more commonplace. Companies have introduced Wi-Fi and Bluetooth to a variety of household appliances – such as refrigerators, generators, thermostats, and doorbells. Virtual assistant products (like Amazon’s Alexa and Apple’s Siri) will likely lead the rise of voice banking, changing how people spend and manage their money.
Most big banks have already gone digital, and community banks also need to do so to compete. Payment processing, fraud verification, and customer communication needs to be as frictionless and seamless as possible. In several years, everything will be connected, and there will be no more barriers between an individual’s various financial accounts. It’s going to be a ‘bionic’ banking world, which means that old, traditional banking structures need to be revamped to provide the digital access and instant service that consumers demand.
Three Types of Emerging Small Businesses
Banks are generally perceiving a sharp downturn in consumer and small business loans for the immediate short-term. However, in the long-term, there will be a major uptick in small business loan applications. Lenders will need to rethink their risk modeling and determine how negative behavior resulting directly from the COVID-19 crisis will be counted.
Banks should take a close look at the makeup of their lending audience. Due to the impact of the Coronavirus pandemic on the economy, we will likely see three types of businesses emerge: the evergreen, the weathered, and the conventional companies.
1. The EVERGREEN businesses that will outlast everyone.
You could call them the powdered milk of small business. (According to the USDA, apparently powdered milk can be stored indefinitely.) These businesses are deeply integrated into the economy and are critical to the basic needs of the economy. A lot of these businesses provide mission-critical services and products. These may see a small decrease in business, but for the most part, they are invincible. Some examples are plumbing services, delivery-based restaurants, and funeral services.
2. The WEATHERED businesses that learned to adapt and survive in these hectic times.
This is somewhat a Darwinian group, and while they didn’t grow or flourish, they did endure the crisis. They have gone through the struggle and are ready for the next step. These businesses will be better, faster, and stronger in a post-COVID economy than others. We can draw wisdom from the famous quote in the film Rocky Balboa, “It ain’t about how hard you can hit, it’s about how hard you can get hit and keep moving forward.”
3. The CONVENTIONAL businesses are those that will not survive this period or have adapted too late.
Some will be able to ride out the COVID-19 epidemic, but their outlook will be questionable in the ‘new normal’, post COVID-19 economy. For instance, this may include 5-star restaurants where most revenue is earned from in-house dining. Businesses that depend on an on-site experience will see a sharp downturn in their “through-the-door” population until the public is fully comfortable being in close quarters again.
As a lender, you want your clients to be survivors. The businesses that took the hit but made it through will be valuable assets. Banks should be identifying who withstood the storm, and then be looking to reward those customers with some sort of loan or other financial activity. You want to foster those relationships and help move those businesses to where they can thrive.
We Will Need Startups
Many businesses will disappear as a result of the Coronavirus crisis, but that doesn’t mean the economy is doomed. Companies go out of business all the time, and they’re replaced by another wave of startups. Keep in mind that a large percentage of “new” companies in this next wave will be piloted by recurring business owners – repeat entrepreneurs who have started a number of different ventures throughout their careers.
On a typical day, community banks may not like the idea of startups. However, the economy will need startup businesses to help us recover. We will begin to see an onslaught of startups in the next 6-18 months, and banks will have to figure out a solution for addressing them. When considering a client, lenders should look at the entire history of the entrepreneur and where they’re coming from. You want to think about the big picture – how does the business support the customer, and how does the bank support the business?
An article from the Cato Institute addresses this issue as well, stating, “When we are over the worst of the health crisis, attention will turn to rebooting the economy. We will need an army of startups to help create that V‐shaped growth trajectory that unemployed workers will desperately need.”
Banks will need to decide whether they’re in the startup game or not. If these startups don’t get help from their community bank, they will go to other places (such as FinTech companies) for loans if they have to. Even the FDA has relaxed some of its regulations in order to allow progress to happen faster (such as approval processes for face masks and ventilators). Why would banks remain rigid when there are entrepreneurs out there who can help rebuild the economy?
Consider how a rocket takes off – it encounters the greatest resistance when it’s close to the Earth’s surface and uses most of its fuel just to get past the atmosphere. Determining the rocket’s escape velocity is critical. The entire mission depends on it. Lenders should be ready to assist the coming wave of startups that will need the bank’s help, so their businesses can help customers and grow the economy. Don’t lose out on developing those crucial relationships.
Once the COVID-19 pandemic is over, some customers will go back to using traditional experiences (in-person and phone services), many will stay partially digital, and some will go fully digital (perhaps having been traumatized by the experience or because they love the technology). Advancements in wearable tech (wristbands, watches, etc.) and embedded AI will continue to grow and expand their reach as people demand more seamless digital engagements.
Banks should be asking their younger customer base what they want from their bank today, and how they want to do their banking in 5, 10, and 20 years. Digitally integrated banking will be the way of the future, and community banks need to think in that direction.
We will get through this crisis, and it will take the help of a mighty force of startup businesses. But we can rebuild. We have the innovation and technology.
If you would like to hear more about this topic, please join me on May 7, 2020 for a webinar, “Ensuring Small Businesses Survive and Recover: Helping small businesses today. Building a more resilient lending infrastructure for tomorrow.” It is part of FICO’s free Virtual Event; register here: https://www.fico.com/en/virtual-events.