COVID-19 accelerates the race to all-digital payments future

Image courtesy of Brett King.

You don’t have to be a futurist to know that, sooner or later, digital banking will be the new normal. But thanks to COVID-19, the new normal may be coming sooner rather than later – and that may be bad news for traditional banks.

Recently at a financial services industry (FSI) virtual summit assembled by Huawei Technologies, futurist and author Brett King – whose most recent book describes the coming all-digital FSI world as “Bank 4.0” –  spoke about how the onset of the COVID-19 coronavirus has impacted several key trends that he says will accelerate the global shift towards digital payments and digital financial services.

An obvious example is the worldwide spike in e-commerce due to COVID-19 lockdowns, from buying essentials and groceries on Amazon, Lazada and Dingdong Maicai to ordering food deliveries from Grab, Go-jek and FoodPanda. King noted that while brick-and-mortar retailers are suffering from the lockdowns, Amazon alone saw its Q1 2020 results up 26% year-on-year – and that’s despite the fact that Amazon placed restrictions on orders and delivery times.

Another example is the debacle in the US over the $1200 stimulus cheques issued by the Internal Revenue Service to provide financial assistance to people impacted by COVID-19 lockdowns. The problem: the cheques were sent via the postal system that is also experiencing delivery problems due to COVID-19.

“In some cases, people who applied for the stimulus cheques in April have still not received these paper cheques to be able to deposit these in their account,” King said. “This is really using 19th-century technologies in a 21st century world.”

Meanwhile, banks in various countries like China, the US, the UK and Australia have been closing branches temporarily due to COVID-19. King says many of them are unlikely to reopen – partly because a significant amount of bank branches were unprofitable even before the pandemic, and are likely to stay that way once people get used to the habit of doing their banking online.

“The question is, as people become more and more dependent on digital tools and digital banking, will they be less reliant on banks and bank branches in particular? And the answer to that is: probably,” King said, adding that branch closures are likely to happen at a much faster rate than before, while any new branches that open up will be much smaller in terms of square feet.

No going back

The upshot is that digital payments and online banking services – which were already seeing serious growth before COVID-19 kicked in – will grow even faster as the coronavirus essentially forces people to use such services.

“Everywhere in the world we’re seeing an uptick in mobile payments as a result of coronavirus,” King says. “This will teach people to use these systems safely. They’ll see it’s safe, they’ll develop confidence in this, and they’re not as likely to go back to physical cash or physical interactions.”

King emphasizes that the shift to digital payments was already happening. In China alone, the combined mobile payments ecosystem – driven mainly by big guns like Tencent’s WeChat Pay and Alipay – processed $41 trillion in transactions, while credit card companies like MasterCard and Visa saw just $22.5 trillion in transactions [GLOBALLY OR IN CHINA?]

The momentum towards digital financial services, open banking, contextual finance and mobile-first banking has been accelerated by COVID-19, and will be sustained by the fact that consumers who switch to digital payments and banking won’t revert to the world of physical cash and bank branches once the pandemic has subsided.

“It’s not likely that we’ll go back to normal,” King says.

Go digital or go home

That’s good news for the digital-native fintech players that have been leading the charge. Whether it’s bad news for traditional banks, financial institutions and credit card companies will depend on how well (and how quickly) they can adapt to a market that King says will reach critical mass sooner than expected.

King says the banks that thrive in the near future will be the ones that shift from the traditional model of encouraging customers to spend more money (via things like cash-back rewards programs) to a model that helps them save more, spend less and manage their financial resources longer, “especially when considering that the economic recovery from coronavirus will probably take longer than the recovery from the disease itself.”

Banks will also need a very strong digital identity infrastructure, King adds. “Ultimately a digital identity infrastructure is required for people to be able to safely transact and safely bank in these environments – the old signature on a piece of paper, the date of birth or the social security number, those sort of underlying data points we’re used to, that’s just not sufficient enough for the digital world.”

The thing is, digital-native payments firms are already set up for that – banks have to adapt to it. And that requires such a massive cultural shift that King isn’t optimistic of their chances. 

“By 2025, there will be more people who have a digital bank account on their smartphone than people that have ever walked into a bank branch,” he says. “When you put that together with the acceleration of the trends we were already seeing, it’s likely that by the middle of this decade – and certainly by the end of this decade – the leading banks in the world will all be digital-first, technology-first companies. They won’t be banks that have adapted to technology, because that requires a big cultural shift. The number one bank in the world will be a technology company – that’s my bet.”