Like most businesses in 2020, the biggest banks in the world have suffered due to the COVID-19 pandemic. Banks are always going to struggle during a recession. While there have been too many occasions on which the big banks have been the cause of a recession, they end up in the middle even when the triggers are unprecedented.

A vicious cycle is generated during a recession. More people and companies need loans than ever. At the same time, millions of people are defaulting on their debt repayments. The banks have less to give, but still need to continue lending if they (and the economy as a whole) are to survive.

At the same time, world governments place a lot of responsibility on the banks. This is both a blessing and a curse. On the one hand, banks are pressured into lending more than they can afford. On the other hand, governments are likely to bail them out in worst-case-scenario events.

It should come as no surprise then that, while the world’s biggest banks crashed at the beginning of the crisis, most are steadily clawing their way back to profitability. In addition to helping the banks directly, governments provided stimulus checks which helped people continue repayments on their loans.

However, traditional banks do not only have COVID-19 to worry about. Even before the pandemic caused the world to stand still, big banks were already facing significant threats.

The long-term threats to big banks

Change needs to occur if the world’s big banks are to recover and thrive again. The writing has already been on the wall for the past decade, and it seems likely that the pandemic will accelerate it.

There are three major factors that have hamstrung the traditional banks.

Firstly, interest rates have been consistently low. Since traditional bank profitability is positively linked to interest rates, low interest rates necessarily mean lower profits.

Secondly, the regulations placed on banks in the wake of the 2007 financial crisis have kept banks from chasing instant gratification above all else. These regulations did leave banks in a far better position to face 2020, achieving what they were implemented to do. However, while that is incredibly important in the long run, it still eats at big banks’ yearly profitability.

Thirdly, and perhaps most crucially in terms of the future, a slowness in the traditional banks’ digitization has put them at a huge disadvantage going forward. Many big banks have relied on their status, longevity, and political protection to compete, rather than improving their products for the digital age.

In fairness, before 2020, it seemed like they still had plenty of time for change. After all, while technology is evolving at a terrifying pace, humans tend to stick to what they know.

But due to lockdowns and stay-at-home orders, the online world has flourished during the pandemic. People who would have never wanted to shop, work, and bank online, have had few other choices but to learn. And in doing so, they have realized they prefer it this way.

Which is where online banking comes in.

Why is online banking growing at such a staggering pace?

During the pandemic, online banks have grown at a rate never seen before. While they have been steadily on the up for some time now, the COVID-19 crisis has greatly accelerated that growth. There are a number of reasons for this.

The most clear-cut reason is that people have been advised to stay home as much as possible, and only go to establishments in person when they absolutely have to. A high percentage of people who still go into bank branches are of the “baby boomer” generation, and at a higher risk of complications due to COVID-19. They have had the most incentive to learn alternative means of banking.

But access is far from the only reason people are moving to online banking. Especially with the general trend towards online alternatives in 2020, many clients of traditional banks are simply seeing far more benefit to online banking. Online providers, including Canada’s EQ Bank, are drawing customers away from traditional banks because they actually provide better value.

Online banks offer products that rival the traditional bank offerings, but with added features that give customers greater variability and control. An EQ Interest Plus Account, for example, not only comes with a high interest rate for savings, but enables easy and unlimited e-transfers, week-round customer service and, most significantly, immediacy in terms of access to data and functionality.

Furthermore, in an increasingly online world, online banks are better able to integrate day-to-day activities, such as online shopping, peer-to-peer transfers, and monetization of online endeavors.

Is this the beginning of the end for the traditional big banks, or does their sheer size protect them from insolvency, even as they become increasingly irrelevant?

Can big banks turn it around?

Outside of North America and Europe, we have already seen many examples of big banks digitizing even before the Fintech revolution. African countries, in particular, offer a number of models that big banks across the world can follow.

This digitization occurred mostly due to environmental factors. In many African countries, the informal economy is as crucial as the formal economy. The big banks had to start offering digital products in order not to be left behind, providing mobile solutions to vendors who had long relied on cash before they even started asking.

Access is another major factor. With banks unable to set up branches in many parts of the various countries, online banking made it possible for millions of people to actually start banking in the first place.

Banks have also had to adapt to other health crises, including the HIV/AIDS epidemic, over the past few decades, which is why they are so ready for change.

Of course, traditional big banks in Canada and the US have a lot of catching up to do, but it can certainly be done, especially with the resources these banks have at their disposal.

For now, online banks are going to continue growing while big banks struggle to make up the ground they have lost in 2020. We are far from calling time on the traditional banks, but even if they embrace digitization, the online banks are going to start pulling ahead.