The latest scandals involving large banks picked up by the press – the illegal eavesdropping ordered by the previous BBVA chairman, the unsuccessful appointment of the Santander´s incoming CEO and the lawsuits filed by investors who have lost their money in Banco Popular shares or mandatory convertible bonds – portray how Spanish banks continue to be affected by serious reputational problems.
This is despite the fact that the three largest operators, Santander, BBVA and La Caixa, are among the top 10 ranked in best corporate reputation according to Merco, based on 38,000 interviews with the general population and stakeholders. Or maybe it´s simply that bank customers in Spain are much more loyal to their banks than customers in other countries, something exemplified by the fact that 86% of the distribution volume of investment funds originates from bank branches, according to Inverco.
This situation is worrisome, however, because banking is the mainstay of the economy, being the financier of consumption, real estate investments and general business activity both public and private. In Spain´s case, the largest banking operators have expanded widely to other regions such as Latin America, so that the effects of their reputational crises at home are transferred abroad.
Change the Business Model
After the financial crisis in 2008 there was a severe economic recession in Spain which lasted until 2013. In the wake of the crisis, the cycle transformed towards a growth phase in which we remain today. The banking system´s role in this improvement was fundamental, as the low interest rates, the abundant liquidity and the household saving rate due to deleveraging in the private sector boosted credit activity and with it the consumption.
The crisis had another consequence, namely a profound transformation of the banking business model. Banks had to adapt their revenue generation model to anticipate lower margins because of higher regulatory costs, greater amount required in technology investments and the emergence of competitors with much more efficient cost structures.
A report by the Boston Consulting Group noted that between 2009 and 2017, the global banking sector had to pay fines to regulators amounting to 320 billion dollars as a result of bad marketing practices. On the other hand, McKinsey estimated the impact of Fintech competition on conventional banking to be in between 29% and 35% of revenues, due to both the loss of customers and the reduction of margins.
These factors explain the banking sector´s strong commitment towards digitalization. Such is a key tool with which they can improve customer experience, challenge competition from Fintech and raise the quality of service towards customers while reducing costs.
The digital transformation that the banking sector undertakes is also causing other changes to the financial ecosystem, as the importance of front-office processes in customer service models is progressively reduced due to commercial pressure and the high costs they reflect on the income statement.
Logically, this lower front-office effort means greater attention to the middle-office and back-office processes, which are the ones that need higher levels of automation and control in aspects such as risk management and cost reduction.
The future of the sector is therefore to implement solutions that provide greater agility, flexibility and orientation towards customer satisfaction to create greater value. Accenture translates it as banking´s evolution towards the “commoditization” of some services, the aggregation of data and new models of transaction processing, based on distributed ledgers (blockchain) and databases.
In the case of Spanish banks, they have been pioneers and enthusiasts when it comes to implementing new transformative trends in business models. Therefore, banks need to communicate effectively their beneficial role as the engine of the economy and the impact of the major changes they´re implementing to adapt to the new age of digitalization, regulatory changes and increased competition.
Banks also needs to effectively communicate the cost-cutting procedures and customer experience enhancements they are carrying out, so that these efforts are positively received by the customer and thus by society as a whole.
Only in this way will it be possible to change the negative perception of banks across social groups and classes. Such is the perception that prevails whenever incidents occur related to banking malpractice, solvency problems or deficiencies in the commercialization of products, all of which affect banking recurrently.