Spanish banks are emerging from the pandemic with the twin challenge of the digital transformation and ultra-low interest rates. Their traditional model ceased to be profitable a long time ago. The lockdown has made the convenience of mobile banking – which fits in your pocket and where branches are barely visited – more popular. In contrast, between the reconversion, the ghosts of the past, the threat of the large technology companies and a certain post-electoral demagoguery, the banks find themselves forced to reinvent and, above all, to advocate for their own services, their support for the economy as a whole and their support on the social front. It is time for traditional banks to seduce their customers once again.
There was a time, back in April 2020, when Spanish banks had recovered their pride. This was in the midst of the lockdown, during the worst health crisis the country has ever gone through in recent times. Banking was considered another essential service at that time, and institutions were able to structure a system to offer a service and financial assistance in record time, and this was recognized by society in general as exemplary. After almost a decade of walking in the shadows, they legitimately felt like the stars of the solution to a crisis, instead of part of the problem. A roaring success, after public imagination had viewed them as directly responsible for, and the usual suspects of, the undercover bailout of the Spanish economy in the second decade of the 21st Century.
This was the time of applauding healthcare workers and those who provided some form of public service, although banking professionals barely mustered the occasional clap. In fact, pride and corporate vindication were a mere illusion. In less than a year, the moratoria and the guiding role for financial assistance from Spain’s Official Credit Institute, the substantial provisions made in accordance with the instructions of the regulators and the activation of corporate operations have become old hat. They have even been questioned over some 20 odd doubtful cases out of total assistance to more than 600,000 companies.
The banks complied, with discipline and even enthusiasm, with the recommendations to grease the wheels of the economy while strengthening their structural foundations. Then, almost from one day to the next, the same sources that encouraged them to carry out this work, that urged them to explore mergers, seek synergies and gain in size, now questioned a good many of the steps taken in this direction. They are once again reproached for a certain lack of social empathy, a marked propensity for inbreeding and zero sensitivity towards the job market.
As if this were not enough, the situation of the banks over the last 12 months has become significantly more complicated. All banking institutions were undertaking ambitious digital transformation plans back in 2019. What was then a chance to gain the upper hand became an urgent obligation to avoid failure. In the last round of results presentations, one of the banks reported that, over the past two years, the number of transactions at branch offices had fallen by half. Meanwhile, the accelerated adoption of digital channels by customers has increased exponentially since the outbreak of the pandemic.
“Over the past two years, the number of transactions at branch offices has fallen by half”
This same bank underlined that, in the same period, digital transactions had more than doubled. And their cost barely accounted for one tenth of the equivalent of a transaction in a branch office. This is an essential aspect at a time in which banks as a whole in Spain cannot cover the cost of capital. And there is widespread scepticism regarding a hypothetical change in EU policy that will lead to higher interest rates, which remains the basis for banking businesses.
This is the reason why banks are in an accelerated race to reduce costs. This, in turn, amounts to lay-off plans and closures of branch offices. In recent weeks, several banks have started to openly talk about a restructuring of the sector. While it is true that the term has only appeared since the government criticized the collective bargaining agreements currently under way, it is also true that these are only the latest two trends that have been repeated in a loop, successively bank by bank, for nearly 10 years.
Despite the foregoing, it has sufficed for criticisms of the banks and the re-emergence of their ghosts from the past in the election campaign in the Madrid region for banking institutions to go silent again. A reactive policy which, for better or for worse, has been applied since 2012.
The collateral damage of such a prolonged Sicilian defense over time is a clear loss of focus. In a particularly uncertain and volatile economic period, banks are letting slip a chance to explain their function, their role and the overriding social need that they represent as conduits for the digital transformation of finance to be truly inclusive, fair and universal.
Although General Shareholders’ Meetings do not tend to give rise to much in the way of news or headlines, it is fair to say that generalities at bank AGMs have reached their maximum expression. If we take, by way of example, the AGMs of leading banks this year, and we eliminate from the exercise which chairman or CEO announced the results, it would seem clear that the message will be highly generic and similar to each other, as can be seen in the following examples:
- The new organizational structure seeks to align all banking teams to further increase our customer-based approach, and improve our capacity to provide a response to their needs.
- A quality service and a special form of customer relations will be adapted to the new technological substrata, but the basis for our actions and our values are the most important competitive factor.
- It is our great vocation for service that has brought us close to our customers and to society as a whole at the time they needed us most.
- Digitalization, environmental respect, the incorporation of women in managerial positions and achieving return on capital are today’s fundamental elements on which sustainability is based.
- We will remain at the forefront, with the best team, providing a service to our customers and developing innovative solutions based on technology and data to help improve the financial health of our customers.
How to move from the muse to the stage
It is not easy to change strategy, to become proactive and structure one’s own narrative that is different from other institutions and that can be explained, argued and defended to society as a whole. Banks have been debating how to do this for a long time, developing different plans and projects to recover from the reputational damage accumulated since 2012. There is no magical formula to achieve this, and there never will be. In this report, we have gathered opinions from certain journalists specialized in banking. From their opinions and observations we have extracted eight pieces of advice which, in their opinion, should be mandatory if financial institutions wish to abandon their traditional labyrinthine image. These would be a form of seductive principles to try and recover the affection of their customer base. In each of these, all institutions must strive to convey a genuine and distinctive message that can be taken on-board and interiorized by their different stakeholders.
“All institutions must strive to convey a genuine and distinctive message that can be taken on-board and interiorized by their different stakeholders.”
Establish values ahead of the digital battle that is to come
Journalists take it for granted that the digital offer from banks will be stepped up, including the use of specific digital brands. This will be the most visible step in the far-reaching transformation of the banking model that is already taking place. The general opinion is that this commercial battle in mobile banking will define a good part of 2022 and that it could cause some significant breakthroughs with regard to the current status quo of the sector. The thinking is also that the transfer to this digital focus may mean the beginning of the end for universal banking as it has been known until now.
What to do with the branch offices
It is well-known that customers visit branch offices less and less. Just referring to this reality no longer offers any new elements to the debate. What does still need explaining is how face-to-face services will be refocused in branch offices. It is thought that branch offices should be transformed into genuine financial advisory centers for customers, something that is as easy to say as it is difficult to achieve. Detection of business trends and opportunities associated with artificial intelligence will be one of the keys to achieving this. Such a radical change will require training, financial education, investment in technology, multiple channels and artificial intelligence, data analytics, conduct prediction and the maximum personalizing of the products and services offer.
Seduce and enthuse clients
The general opinion is that banks have spent too many years immersed in a dynamic typical of utilities, as if their products and services were indiscriminate and lacked distinguishing elements. Mistrust has existed about special offers from banks for a long time now. The cliché of the captive customer prevails, obliged to stay with the same institution because of their respective mortgages, even if the institution that attracts them never operates with their real needs in mind. It has been observed that the pandemic has increased the emotional indifference of a good many customers towards their brands.
Banks are also recommended to cease offering specific products and services and focus instead on offering financial solutions. Advice will be their new value proposition. Every customer wants support in their day-to-day routines and life cycle. This requires exhaustive knowledge of their needs. Artificial intelligence and big data will be fundamental to achieving this. Using data on their customer base will also be another pressing need, which, in turn, requires scrupulous respect for privacy in their management.
- Anticipate the future
Another essential question for banks is how to deal with new competitors that threaten to play in their own super league and leave them on the sidelines. This includes bigtechs (Amazon and Facebook, among others, which are already encroaching on financial services) as well as Paypal and other payment systems, plus fintech, financial product comparison sites, the neo-banks and automated investment management (robo-advisers). Bizum is the paradigm of how banks can face up to their new competitors on their own playing field. But there must be new elements in many other areas. That is why it is thought that banking institutions will play out a good part of their own future in potential alliances with fintechs and other operators.
“Banking institutions will play out a good part of their own future in potential alliances with fintechs and other operators.”
When the phase of adjustment is over, there is a consensus that power structures in banks will become much more horizontal in order to gain speed. They need to take decisions quickly, outside of their pyramid and sometimes rewarding structures they have relied on to date. This model is of little use when the threat of the major fintechs is knocking on their door.
To date, banks have placed more emphasis on cost-saving rather than on obtaining new revenue streams. But this process cannot go on forever because they need to make constant investments in technology. Hence, the path forward means revenue-based growth. More cross-slling in products and services, comprehensive advice, rather than just financial advice and moving into new businesses are just some of the possibilities that are beginning to be studied.
Banks and society
Henceforth, it will not only be a case of supporting their Foundations and social responsibility activities. For the new banking model, philanthropy and a commitment to return part of what is received back to society will no longer be enough. A lot more will be required: financial education, proactivity to ensure responsible borrowing and comprehensive financial advice that is not limited to selling the product that offers the greatest return for the bank even when it is not right for the client. The way is being paved for a new social contract in financial terms.
Move away from the cash till
So far, these are just the usual and well-known recommendations. However, banking institutions are at their most important cross-roads and urgently need to look for new solutions. The only remedy is to move away from their comfort zone, leave the cash tills where they have spent more than a decade hidden away, move out of their shell and do other things. The more differential, the better. In this romantic manual, we will offer some of the potential proposals that we can begin to discuss.
Recover dialogue with society
Far from being praised for having resisted the worst sector crisis in almost 100 years, banks that survived the 2008 crash have been under permanent suspicion ever since. They have spent so long constrained that they are probably unable to remember what it felt like to move freely.
It is not easy to understand and explain what this phenomenon is down to. It may in part respond to the exhaustive regulation they are subject to. Each opinion and value judgment of the European Central Bank, a court or the government has limited channels for banks to communicate with their customers, who are increasingly more conditioned by this parallel official message. In all these years, communication between banks and society has become increasingly more constricted. It is now almost non-existent, replaced by this dreary rhetoric and this constant aggressiveness with which social agents refer to them.
First they suffer demands from Brussels and the very strict supervision of the European Central Bank. They follow the equally verbose guidelines of the Spanish regulators, from the Bank of Spain to the CNMV and the CNMC. This has been augmented by legal rulings, both from the Supreme Court and from the Court of Justice of the European Union.
And lastly, political pressure. This began in the Spanish Lower House of Parliament, which spent two years drawing up a ruling based on the work of the Committee set up to investigate the financial crisis in Spain and the financial assistance program. The work concluded without the main parties taking any responsibility for what happened with the savings banks, aside from the habitual reproaches from each party toward the others. Two years later, it has been the government itself and each of the political parties, without exception, that have once again brought out the heavy artillery against the banks in recent weeks.
Banks are left with no options to alter this discourse. This has become a cliché as inflexible as the vast majority of the banks themselves. It does not matter what arguments or evidence they put forward to refute this. The other side closes off the debate with a yes, but…, yes, but if we bail them out; yes, but the directors only look out for their own salaries; yes, while we get stung with fees.
The only alternative in the fight against this spiral of silence is to change the narrative. There is a pressing need for the banks to recover, once and for all, direct dialogue with their customers and with society as a whole. Because, in reality, financial services have always been essential so that people and companies can meet their targets and live better. There you have an alternative dialogue that can only be held between society and the banks themselves. It is never too late to start to talk. The sooner they emerge from the customary damaging narrative and the banks recover and even lead this aspirational narrative, the quicker they will emerge from the current cycle.
“The only alternative in the fight against this spiral of silence is to change the narrative”
Banks have traditionally been shy to spell out their successes. They may well have fallen into a false modesty whereby of the less they speak about themselves the better. The problem is that, in the long run, these omissions will end up back-firing. The replacement plans they have carried out are a good example of this. Every time a lay-off scheme is negotiated, the employer is obliged to propose a replacement plan. This is almost always considered to be a mere formality, even by the trade unions, and until now no-one has resorted to it.
However, there have been banks that have managed to replace all of the people laid off in a specific redundancy plan in record time. This commitment, these cases and this narrative are not publicized. No-one seems to have concerned themselves to date with shedding light on this. However much it could change the perception and opinion on the way banks are managed, no-one has risked telling the tale.
That is why it is so urgent to reverse these customary clichés and change the perspective. Let’s look at another example. It is likely that the closure of some rural branch offices in under-populated Spanish regions will foster exclusion, but at this stage the problem is far more complex and transcends the mere existence of one branch more or one branch less. Perhaps Internet connections, proximity to other public services and administrative facilities will be much more important now than having a bank teller or not.
Banks can and must take part in this reflection on under-populated regions. To date, they have been particularly sensitive to fostering inclusion and catering for those segments of society that are more vulnerable than on standing on the sidelines. Henceforth, they should also head up this other debate on the quality of life, jobs in sparsely populated areas, their adaptation in response to the rise in remote working and other forms of socialization, or the search for more sustainable demographic models.
Time to talk clearly.
Journalists Rebeca Gimeno and Marta Soria proposed this in a clear and simple way in their blog on the economy: “Have we managed to send a probe to Mars but are unable to draw up a contract for an account/card/mortgage such that it can be easily understood? I don’t believe it, and this generates mistrust”.
In the United States it has become quite fashionable to complement the technical language of contracts with an alternative, much simpler version that reduces formal expressions to clear and direct phrases that explain the real scope to the signatory. Without going to that extreme, most Spanish banks now collaborate, one way or another, with the Royal Language Academy. So asking for the collaboration of academics to draw up a code of good banking drafting practices would not be a bad idea at all. They could surely profit from this very quickly in terms of their image.
Juan Carlos Burgos