Purpose-driven banking: Looking beyond COVID-19

In March 2020 we published our Purpose-Driven Banking Survey report, in which we argued the case for banks to rediscover their original purpose: putting customers’ interests first and helping them manage their finances more effectively. Since then, the COVID-19 pandemic has swept the globe.

This is obviously a pivotal moment for banks. Many of their customers—especially consumers and small businesses—were struggling prior to the crisis. Today their situation looks even bleaker. The decisions and actions that banks take now and as the crisis plays out will have a big effect on customers’ prospects and will be remembered for years to come.

Because of the huge impact of COVID-19, we thought it would be worthwhile to revisit our original research. The second-wave study, in April 2020, surveyed more than 5,500 consumers and 1,300 small and mid-sized enterprises (SMEs). It confirmed, firstly, that banks’ customers are in dire straits:

Secondly, they’re not sure who to turn to for advice. Our earlier survey found that of those consumers who experienced a major life event with serious financial consequences, only 14 percent turned to their bank for help. In our follow-up study, only 35 percent of small-business executives said they depend on their bank for financial advice.

Thirdly and crucially, low customer trust is impeding banks from offering the kind of advisory services that customers clearly need and that hold the potential of creating new revenue streams. While most consumers and SMEs alike trust their banks to protect their data and execute their transactions correctly, there is a significant gap between that and their level of trust that banks will look after their long-term financial well-being.

An in-depth analysis of the consequences of this trust deficit revealed that 5 percent of retail banks’ revenue is at risk. This is the “bad revenue” derived from services that have hidden or opaque fees, or that result directly from customers’ poor financial habits and decisions. It is also the revenue that is being targeted by innovative new competitors and by regulators.

Low trust also makes it difficult for banks to capitalize on the potential 9 percent increase in revenue which we calculated the average retail bank could achieve by offering innovative digitally enabled advisory services.

The COVID-19 crisis is the ideal time for banks to show customers what they can do for them on their best day. Many have done great work under difficult circumstances. But as our survey shows, while trust levels have both risen and fallen among different groups of customers, the net result is banks have not succeeded in moving the dial in their favor.

As banks address their immediate priorities, they should also consider their future. Will they revert to business as usual or redefine their role, helping customers become more proficient at managing their finances? What new capabilities and attributes will they need? Where will growth come from?

We believe purpose-driven banking holds many of the answers.

The rationale for purpose-driven banking was compelling prior to COVID-19. The subsequent crisis has not only validated the key premise of our earlier report; it has also magnified the need for the changes we recommended and compressed the timeframe in which banks need to execute them.

To adopt an authentic win-win model that puts customers’ interests first, builds trust and unlocks the potential for new revenue streams, banks need a strategic plan based on the realities of the current crisis and on a vision of their future role. We believe it should include a set of actions that fall under two key pillars:

Pillar 1: Protect and grow market share. This comprises immediate steps to improve operational efficiency, increase transparency and help customers improve their finances.

Pillar 2: Create new trust-based revenue streams. At the same time as implementing Pillar 1, banks should start to plan the riskier but higher-return Pillar 2 initiatives: developing innovative ways to expand the scope of advice to meet customers’ needs.

Together, these two programs offer a promising path to recapturing customer intimacy and trust that will endure over time.

Now, during the COVID-19 pandemic, is the ideal time for banks to give their customers good reason to believe they are putting their interests first. Customers have seldom needed it more, shareholders are more accepting of the need for change and a strategic shift to purpose-driven banking is likely to yield benefits that will endure long after the current crisis has passed.

Embracing this opportunity requires bold leaders who are willing to play the long game. With traditional practices looking increasingly outdated, a new approach seems unavoidable. We believe purpose-driven banking is worthy of serious consideration—for the benefit of all.

If you would like to find out more about our analysis and the two strategic pillars for trust-based growth, read our report or reach out to our team.