July 9, 2020 | Written by: Mimi Poon
Categorized: Banking | Digital Transformation
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The COVID-19 outbreak is impacting all segments of the financial services industry from retail banking, transaction banking, corporate banking to investment banking.
Facing operational stress, concerns about employee health and working environment, market volatility and other issues, banks have responded with multiple actions including the shift to mostly remote working environments, enabling employees to assist clients remotely, allowing interest-only mortgage repayment, and granting loan repayment holidays to SMEs.
At the same time, banks are redirecting strategic efforts from revenue growth to radical cost reduction, risk mitigation, and collections/recovery actions.
While these short-term responses are essential, banks also have to prepare for the difficult post-pandemic environment — a result of the sudden and potentially severe recession, substantially lower earnings and significantly worse asset quality due to ultra-low interest rates, tighter credit conditions in the medium term, and expected higher defaults.
The Next Normal after COVID-19
Given these anticipated post-pandemic challenges, banks must embrace the Next Normal with the following characteristics:
Radically lower costs: Operating expense can become structurally lower when operations and operating models are transformed.
Extreme digitization on cloud: Digitized processes will be transformed into intelligent workflows. With a focus on data and the deployment of modular applications and open hybrid cloud platforms, banks will be able to securely build, run and manage apps and workloads in a consistent way, across any cloud.
Secure and compliant to the core: Security and compliance will be embedded in all aspects of operations and technology.
Reinvented customer relationship: Customer routines and expectations will dramatically shift in terms of digital adaptation while financial institutions will deliver enhanced customer experiences and interactions embedded in beyond-banking customer journeys.
Operational resiliency: This will be the critical capability to deliver E2E resilient operations that include external partners, as mounting risks of further pandemics, societal and geopolitical tensions, and climate change are expected.
Actions in the journey: How banks could arrive at Next Normal
But how can banks reach the Next Normal? In the medium term, banks need to take the following actions:
Radically reduce costs: Banks can initiate radical and structural cost reduction initiatives to deliver sustainable operational efficiencies. Data entry, data transfer, and data collection are routine tasks that banks have to automate quickly and cost-effectively.
Extreme digitization and migration to cloud: With accelerated online banking adoption and the sharp increase in the use of mobile, touchless and cashless payments, banks have to transform their traditional model into a digital one by adopting hybrid and public cloud services to enjoy scalability and flexibility.
Risk/Collections:To improve collection effectiveness, banks have to reconfigure risk models based on the changing operating environment.
Enhance customer experience: Banks can uncover new ways to service customers effectively by leveraging AI and gain transparency through proactive and regular communications with customers.
Longer term and the new business architecture
As banks continue this journey, they will need to focus on becoming future-ready in the longer term. To capitalize on post-COVID-19, banks have to reinvent customer relationship and radically transform overall operations effectively. With these done, banks will be future-ready by having built a new business architecture with the following key features:
Reinvented customer experiences: Reshaped, next-generation, and customized customer experience is embedded in customer ecosystems (banking and beyond banking) while banks are enabled by cognitive engagement and digitalized end-to-end journeys.
Transformed data environment: Advanced analytical tools and AI enable the transformed data environment with structured/unstructured and open/proprietary data.
Secure and compliant to the core: Risk and compliance operations are efficient and effective, using advanced technologies to reduce risks in security, compliance & operations dramatically.
Radically transformed operations: Digitally transformed, agile, intelligent processes with modernized applications and technologies are deployed on Hybrid Multicloud. Designed for zero operations, structurally lower costs , and new ways of working, such operations leverage external partner platforms for non-differentiated workloads.
The best time to take actions is now
While uncertainty will continue to reign, COVID-19 has expedited banks’ journeys to the new business architecture. It is time for banks to take actions to become future-ready because only digital leaders will capitalize on post-COVID-19 effectively and continue to succeed. While fast followers will recover but lose customers and risk relevance, lagging banks will fail to overcome legacy constraints and become dependent on outmoded and inflexible products and services as a result.