Banking with purpose: A new social contract

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With banks and consumers navigating a crisis they did not cause, their relationship with each other is more hospitable than it was 12 years ago during the mortgage market meltdown that kicked off the Great Recession.

“I think in the pandemic and its aftermath, the banks have an opportunity to be a source of stability,” said Kevin Buehler, a senior partner at McKinsey. “They enter this crisis with much stronger capital and liquidity positions that they’ve built over the last decade.”

A McKinsey survey in April indicated that banks have the benefit of public goodwill at least for now, with 87% of respondents trusting that their banks will “do the right thing” during the pandemic. About two-thirds also said they trust their banks more now than before the coronavirus outbreak.

Many banks have taken direct action to help consumers and businesses, from suspending loan payments to refunding fees. But even so, their most visible role has been one of “a channel for fiscal policy” through the Paycheck Protection Program and the Main Street Lending Program, said Alan McIntyre, senior managing director for banking at Accenture.

“The real challenge for the banks is going to be in the fall where it’s more down to them to decide how to react,” he said. "That’s where I think that the reputational risk really starts, which is foreclosing on mortgages that people can’t pay, foreclosing on car loans, taking a harder line around the restructuring.”

The key then will be making “smart trade-offs,” McIntyre said. Banks can neither be too aggressive in managing risk, nor can they be too lax. “I think the industry is going to have to thread the needle a little bit here in terms of providing appropriate support to businesses and consumers who have good medium-term financial prospects but just need to bridge the gap,” he said.

Underlying all of this is a moral balancing of the prevailing profit-driven, shareholder-focused approach against a more humanitarian view. With entire industries — retail, airlines, oil and gas — in turmoil, and unemployment at levels that rival the Great Depression, banks will face tough decisions on which customers to help.

Banks are also under mounting pressure to take action against racial and income inequality, amid waves of protests set off by the death of George Floyd at the hands of Minneapolis police officers.

McIntyre said he makes a point of talking to bankers about “purpose-driven banking,” which takes a holistic, long-term view of customers’ financial health and proactively helps them manage it. Some fintechs and challenger banks have already stepped into this role to a degree, he said.

The philosophy is one that has been gaining ground with more banks over the years as well, and this is the kind of moment that could cause it to go mainstream. Right now, voluntarily or not, many banks are “trying to help the customer rather than making it a win-lose,” McIntyre said. “I think a lot of that stuff will stick.”

Though this "new social contract," as McKinsey refers to it, puts people over profits, the approach isn’t entirely altruistic, Buehler said. “A series of foreclosures at this time would yield depressed values and might be counterproductive,” he said. “So I think banks can both do the right thing for their customers and for their own enlightened self-interest as we work through this challenge.”

McKinsey's research suggests there are other benefits to the more enlightened approach as well. About two-thirds of the respondents in its survey said they’re influenced to buy a brand or product "based on the broader actions and beliefs of the company," said Marie-Claude Nadeau, another McKinsey partner. ”So this is something that will attract customers not just help them."

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Analysts agree that success is predicated on banks’ improving their analytics to get a more detailed view of customers’ finances, which the pandemic has complicated.

“The muscle around sophisticated credit management has atrophied because we haven’t really been in this situation for the better part of a decade,” McIntyre said. “So I do think that the banks are having to rebuild their capabilities around working out a recovery.”

Buehler predicted that the use of highly granular analytics — particularly for assessing businesses in hard-hit industries like oil and gas, where banks will need to understand the economics “basin by basin and producer by producer” to make informed credit decisions — will take off and prompt even more change.

“That’s part of the creative destruction that needs to occur for us to work through this economic disruption,” he said.

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One of the challenges on the consumer side is that the data typically used by banks is not as predictive as it was before COVID-19.

“The pandemic has taken a turn that nobody expected and that doesn’t have any resemblance to what’s happened in the past 20 years. So a lot of banks are pivoting in their use of data, what data they use, how they look at their customers and understand what’s happening,” said Nadeau. “I think that’s going to have a long-term impact for the better in prompting them to be more creative with data analysis.”

Channeling empathy into a revised product mix with incentives that align banks’ and customers’ well-being should be the ultimate goal, she said. Sales incentives could be reimagined to encourage customers’ financial health.

This would require modifying or even eliminating certain products — for example, moving away from subprime credit cards with high interest rates and toward personal loans with a heavy emphasis on advice and budgeting.

It also means directing more resources to underserved populations. Amid the heightened scrutiny on income inequality, Berkshire Hills Bancorp in Boston, for example, is working with the nonprofit Runway Project to launch a Friends and Family loan pilot program to help jump-start minority entrepreneurship while U.S. Bancorp recently pledged to lend $100 million to Black-owned businesses this year.

How banks treat their employees is just as crucial and requires similar levels of empathy and circumspection. Workforce diversity is part of that. With the recent protests calling attention to racial injustice, banks are taking a harder look at their shortcomings in hiring and promoting people of color. To that end, Wells Fargo has pledged to double the ratio of Blacks in senior management from the curent 6%. CEO Charlie Scharf has pointedly told members of the bank's operating committee that their compensation will be tied to how successful they are at increasing diversity in the areas they oversee.

The banks best positioned for success, Buehler said, will be the ones with “leaders who can show their own humanity and their understanding of the professional and personal stresses that their employees are going through” while also projecting a sense of calm and coming across as guardedly optimistic.

“This is a time when leadership truly matters,” he said.