Global day-to-day purchases have seen a drastic reduction, even though e-commerce is booming. This, coupled with regulatory changes – such as the Bank of England reducing interest rates from 0.75% to 0.1% – means banks have experienced declining revenues. Therefore, many banks will have to adapt business models to the realities of pandemic-centred economies by digitizing most client-facing operations, says GlobalData,a leading data and analytics company.

GlobalData payments analyst, Vlad Totia, commented: “Consumer behavior has shifted towards buying online and having deliveries at home, which reduces the likelihood of them making the impulsive, small-scale purchases typically made in physical stores. This has created a drop in revenue for financial institutions that rely on customers actively making payments.

“To add to the revenue bleeding that fintechs have been experiencing in the past few months, the Bank of England’s decision to drop interest rates and New Zealand’s decision to drop interchange fees both have the potential to hurt these institutions. Although banks are not obligated to pass the interchange fee reduction down through small businesses to consumers, this could disproportionately affect challenger banks as they are building their customer base on highly competitive and easy to use services.”

Challenger banks are facing a conundrum. More people are opening digital bank accounts with them, but their revenue is dropping due to the pandemic. One solution to staying on the path of profitability would be to make a subscription model – i.e. Revolut Premium – more attractive to the average user by incentivizing the subscription with more cashbacks and rewards.

Totia continues: “As spending is down for the average consumer,  the reduced number of transactions impacts revenue for banks. With lockdowns and restrictions not going away anytime soon, and the prospect of an impending recession, the industry will be affected by losses in income for the foreseeable future. Either way, financial institutions will need to understand that the revenue model needs to mirror a consumer who buys more online and in bulk, rather than smaller purchases made more often”.