COVID-19: Banks recalibrating for the future

The banking industry, today, is grappling with the uncertainty of how long the COVID pandemic will continue and to what extent it will impact the global industry. 

According to a World Economic Forum’s research report, the current containment measures are having an inversely proportional effect on the economy. We are faced with a situation where, ‘economists cannot even begin to predict the end of the recession that is now underway.’ While suggested solutions to keep the economy afloat are aimed at sustaining consumption and keeping people in work, via methods like Helicopter Money, this is placing a burden on governments to find ways to raise that money.

Flattening two curves

How can banks lead economic recovery

We believe banks could immensely benefit from the philosophy inspired by Maya Angelou, the poet and civil rights’s activist’s words, "I've learned that people will forget what you said, people will forget what you did, but people will never forget how you made them feel.” Because, financial institutions have an opportunity to play a lead role in the global economic recovery.

We sat down to visualize COVID-19’s impact on banking systems to identify two things - where are the points of interdependency between different agents of the economy and what are the steps being taken to better manage the impact across the industry’s ecosystem. 

Impacted areas and government’s intervention to address the economic impact. Image inspired by Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes

On the financial institutions front:

• Central banks are playing a key role in ensuring there is sufficient flow of money in the economy.
• Financial institutions can play a key role in bridging the gap between people who want to invest money and businesses looking for investment.
• Financial businesses can benefit from creating new financial products/solutions and play a lead role in the global economic recovery.

Banking in the ‘Next Normal’

Here is an overview of how the banking ecosystem is changing -

• Poly-skilled workforce: Rise in demand for multi skilled employees - T-shaped skilled people who have a wider knowledge and skill set.
• Relationships reimagined: Relationship management driven by customer empathy with focus on protecting and  monitoring current portfolios.
• Remote working: Working from home is the new norm and perhaps for the first time, banks' core systems are being accessed via corporate VPN.
• Digital-first customers: Digital is slowly becoming the preferred medium of Interaction. With more customers moving to cashless transactions, tech adoption rates are going up. This is facilitated by Bigtech's simple-to-use products and the push for financial and digital literacy. The caution is however how inclusive this shift will eventually be - elderly or poorer sections of society.
• Role of SMEs:  Ability of SMEs to pivot and transform part of their business to meet market demand, i.e. manufacture masks, sanitizers, ventilators, has been crucial during this crisis.

• Availability of services: Self-service channels, collaboration with multi-platform players and hyper local players are bridging the last mile connectivity to ensure continued service. An instance of this is how Cipla is tying up with Dunzo and Swiggy for hyperlocal delivery.
• Even more granular risk profiling: Higher levels of uncertainty are leading to more granular and frequent risk profiling that’s more individualized and accurate. This is helping banks  visualize, gauge and re-calibrate  the overall credit and liability.
• New credit products:  Like Wellpay’s patient financial hub, timely financial products can help pay for urgent medical bills (or  online education etc.) encouraging financial security.
• Business and technology metrics: Metrics used prior to COVID-19 will likely change as more customers have moved online and are using more self-service tools. As these become primary revenue generating channels then new measures will need to be put in place to judge performance such as service availability, customer drop-off and dwell times etc.

• Revaluate business models: ‘Preserve cash and capital will continue.’ The ubiquitous embrace of digital channels is responsible for Umpqua’s Human+Digital Platform that’s a perfect fit for the COVID crisis. Add to this, the rise of Interactive Teller Machines (ITMs).
• Viability of unconventional commercials hubs: The long term work-from-anywhere approach will lead to less dependency on individuals working in offices. Banks will need to re-look at their service offerings. In India this could mean banks needing to have a stronger regional presence. 
• Reduction in fee-based income: Lower income and continued expenses will impact income to expense ratios. Reduced Assets Under Management (AUM) will affect wealth management portfolios.
• Hyper scrutiny on cash outflows: New initiatives that address the current crisis might impact other ongoing transformation initiatives.
• Data driven decision making: Data driven decision models will need to be implemented so that financial organisations can adapt and recalibrate to changes in the market.  This will require more investment in data initiatives & programs. It could also result in staff being made redundant or redeployed plus it could facilitate the closure of non profitable channels and branches etc.

• Digital initiatives: There will be a rise in investments aimed at creating and rolling out new digital products, features - self-service and assisted. This will be accompanied by an increased focus on digital communications.
• Cybersecurity: Increased remote working necessitates enhanced focus on data and cyber security measures.
• Bank mergers and acquisitions: Smaller banks and fintechs might not survive the COVID-19 crisis. An instance of this is RBS closing its challenger bank experiment.
• Ecosystem collaboration: Increased demand for individualized and customized, holistic solutions will see increased interaction between functions like savings, credit, investments and insurance.
• Business continuity: An extension of the current operating model will force banks and regulators to move their infrastructure to cloud as more people access banking systems from home, attackers are liable to exploit the multiple remotely accessible entry points.
   

Recalibrating banks should focus on these 6 themes

In an earlier article, Thoughtworks had recommended that banks focus on being empathy driven, embracing the ecosystem, embedded banking and elevating trust to stay relevant in an increasingly digital future. Given the current scenario that the industry is in, we are recalibrating the above 4 focus areas to present the 6 themes that banks should focus on.


 

Empathy driven engagement

Empathy and emotion driven engagement assumes greater significance given the current crisis.  Banks should focus on  livelihood based financing and offerings targeted to the vulnerable and impacted segments of the society. They should go beyond traditional financing of SMEs and focus on helping enterprises resume business, survive the impact and grow.
 

Embedded finance

Embedded finance is not just about banks playing an important role in a customer’s daily life. Banks should aim to become a partner in a customer’s life journey. Let’s look at the opportunity of partnering with a customer in their pursuit of a dream home. Banks should go beyond providing mortgage options and step into that journey (with the customer) right at the beginning. From searching for a dream home to financing and helping with moving in process. Additionally in times of crisis, banks should help customers plan difficult decisions on sale, lease, rental or mortgage refinancing options for their properties.
 

Embracing the ecosystem

Actively partnering with fintechs and other organizations has helped financial institutions evolve towards Banking as a Platform and Banking as a Service business models. This trend is expected to continue with extensive collaboration in areas where there is a potential surge in demand like mortgage refinancing. The collaboration should also extend to other important ecosystem partners like government agencies, the community and sectors like healthcare etc.
 

Elevating trust

Building trust should be a key priority and banks should focus on these 4 areas -
Physical, where employees and customers trust that physical spaces and interactions through branches, ATM and cash are safe, secure and sanitized. Digital, where customers are assured of the highest levels of security and data privacy. Emotional, where banks operate with high levels of empathy, ethics and contribute back to society.  And finally, Rational, where customers and employees alike trust in the bank’s ability to address needs and expectations - financial and otherwise.
 

Emerging tech acceleration

Banks that have focussed on comprehensive digital strategies and investments over the last few years have been more successful despite the ongoing crisis. Firms should step up investments in data and AI to improve business outcomes. Furthermore, banks need to ramp up investments in emerging tech like 5G, IoT, blockchain, contactless technology and quantum computing to establish differentiators in a COVID-afflicted future. 
 

Enterprise adaptability

Enterprises are going to have to go beyond agility and leverage adaptability. Given the uncertainty ahead, it's important for banks to create and sustain frictionless operating models,  be ‘digital’ and ‘remote’, draw up robust business continuity plans and develop a comprehensive risk management framework across credit, operational, reputational, market and compliance risks.