Seven ways “saving” has changed during the pandemic

Coronavirus is still very much with us, thanks in part to the Omicron variant, however, we can now see the true fallout from COVID-19, and understand which of the changes we’ve experienced through successive lockdowns will disappear and which are likely to remain as lasting effects.

Whether it’s working from home, hybrid working, mask wearing or online shopping, we’re beginning to understand how the pandemic has changed our lives for good.

The changes brought by the pandemic will drive long-term changes for savings providers

At Newcastle Strategic Solutions, we’re constantly analysing trends in the savings industry to identify the key insights which allow us to respond quickly to disruption in the market.

Over the course of the pandemic, we’ve charted the shifts in consumer behaviour which are leaving savings providers facing a “new normal”, requiring higher levels of digital agility and market flexibility than ever before if they’re to continue to deliver a market leading savings experience.

Here are some of the changes we’ve seen during the pandemic which are likely to drive long-term changes for savings providers:

1. Savings are once again being recognised as a critical source of funding

Overall, the period of the pandemic has presented operational challenges to savings providers, with sudden requirements for greater levels of funding, even if temporary, and greater degrees of volatility in customer activity. In ways reminiscent of the 2007/8 financial crisis, during the early stages of the pandemic some non-bank lenders suddenly lost access to wholesale funding and securitisation markets, albeit temporarily. For those who were impacted, this served as an uncomfortable reminder of the value of retail savings as a source of funding.

Banks rushed to increase funding and to provide additional buffers in case funding levels were under threat, which resulted in increased activity for a short period. In the early stages of the pandemic, we at Newcastle Strategic Solutions handled a 305% increase in certain areas of customer activity. Providers also faced the further challenge of managing product ranges, and being able to swiftly launch and withdraw products during such economic uncertainty.

2. Firms are evaluating legacy tech and operating models to build back better

Many providers were already examining their operating models and how they manage their savings books but, from our own discussions with various providers, it appears the environment caused by the pandemic has encouraged others to conduct strategic reviews with more urgency.

In a number of cases these reviews are the result of issues created by legacy tech. At a time when providers want to focus on those areas of their business which produce the most value, managing savings books based on old technology can be a distraction requiring a disproportionate amount of attention. The knowledge and skills to maintain legacy systems are in decline, meaning that such technology proves expensive to manage and provides an increased risk of error.

Managing regulatory change is also more complex when using outdated tech. Indeed, managing change generally is costly and provides a greater risk of error during transition periods, with the required investment to upgrade also becoming a challenge with other competing priorities.

3. Increased scrutiny for new banks

Even before the pandemic there was growing regulatory attention to the development of new banks, labelled Fast Growing Firms (FGFs). In its Thematic review in 2019, the Prudential Regulation Authority (PRA) found that most challenger banks were overly optimistic on stress events and the potential impact on impairment, ability to raise additional capital and widen margins.

Furthermore, in its consultation paper in July 2020, “Non systemic UK Banks: The PRA’s approach to new and growing banks”, the PRA reminded new FGF’s of the standards required in managing new banks as they grow and mature.

The effect of these reviews is that the regulatory bar is, rightly, perhaps higher for new bank applications than previously.

As the pandemic took hold investors became increasingly nervous, creating other barriers as investment for new banks became harder to secure, resulting in some ventures falling by the wayside as well as others already in the application process with the regulators taking longer to progress.

4. And new opportunities… in areas shunned by the major banks

Despite increased regulatory scrutiny and less investment, the pandemic may actually result in greater opportunity for new banks.

In the aftermath of the financial crisis, mainstream banks retrenched and reduced their involvement in certain parts of the mortgage and SME markets which created opportunity for the new breed of challengers, all of whom had to generate funding to enter their chosen, under-served markets.

Post COVID-19, as the banks and the country deal with the inevitable economic fall-out, could there be a repeat, creating opportunity for further new banks?

5. For many, savings have surged as a result of increased caution due to the pandemic

Compared with before the pandemic, many savers now understand the importance of having an emergency savings pot, having seen many suffer personal financial shock due to COVID-19. For those who did maintain a stable income, spending was restricted, which for many led to excess savings and an accumulation of wealth throughout the last two years.

Andy Haldane, then chief economist at the Bank of England, stated that households had accumulated some £150 billion of excess savings during the early stages of the pandemic as spending had been restricted.

At Newcastle Strategic Solutions, we experienced record funding inflows in the first three months of the pandemic, as clients reacted to the crisis by drawing in more volume. It is yet unclear how much of this excess will ultimately be spent, however, many may wish to maintain a buffer of some kind to protect against unforeseen circumstances, having seen first-hand the consequences of failing to do so.

6. The expectation for digital solutions increased exponentially

Even before the pandemic our expectations for digital solutions were rising, with the growth of services such as Amazon and Netflix. The use of cash was already in decline, with digital forms of payment increasing in popularity, and within the banking sector we saw the emergence of new, app-based digital banks such as Monzo and Starling.

The pandemic only accelerated this shift into digital channels, with customers now expecting simple, great experiences, all the time. This shift is clearly visible in the increased number of downloads of banking apps. For our clients who have taken up our mobile app capability, this is certainly true for their customers.

Overall, customers are now putting more focus on digital, health and sustainability trends, as was found by PwC in its “Global Consumer Insights Survey 2021”. The result: savings providers are now having to consider whether their own digital offerings are meeting the needs of savers, and whether they can be developed to not only remain relevant but to enable the further evolution of those services.

7. Extra respect for companies that cared during the pandemic

With many of our clients seeing a significant increase in customer contacts, the pandemic was a chance to connect with customers in a crisis and demonstrate support through strong customer service.

A recent McKinsey article similarly stated that leading organisations made rapid changes during the pandemic to meet their customers’ primary needs, such as safety, security, and everyday convenience.

By taking steps like prioritising reachability and encouraging customers to interact via digital channels, alongside introducing product innovations to improve safety and providing pragmatic help such as payment holidays for customers in financial distress, companies were able to demonstrate empathy and build lasting connections with their customers during the pandemic, earning appreciation and loyalty as a result.

The pandemic has had a profound effect on savings providers

The disruption to the savings market caused by the changes highlighted above have not only required short-term agility to navigate; they’ll require savings providers to implement long-term change, accelerating their strategic roadmaps and in some cases considering fundamental changes to their operating models.

At Newcastle Strategic Solutions, we work with and help savings providers to put in place the transformational changes they need to keep up with and anticipate customer expectations. To find out more about how we can help, visit our website.