Eighteen per cent (18%) of the respondents in the World Economic Forum’s “Chief Economists’ Outlook” survey feel a global recession is “extremely likely”. Most chief economists expect moderate or strong growth in the Middle East, North Africa and South Asia, while more than nine out of 10 think that growth will be weak in the US and Europe.
With a global recession looming, we see banks and other financial institutions in a dilemma, needing to manage a slowdown in volume growth, increased costs, and rising delinquencies with reduced budgets and lower costs. They face a challenge to remain highly competitive, fight for business, retain customers and minimize losses while the money available for marketing, product development and operations keeps dwindling.
The question every decision-maker in the financial sector asks in such tough conditions is how tech can help banks and other financial institutions achieve these goals.
Throughout this article, we offer solutions to a critical question: how can banks and other financial institutions use technology to implement proactive planning and risk management strategies, enhance customer experience, and optimize costs? By implementing the solutions provided here as part of a comprehensive business continuity strategy, rather than in a fragmented manner, the leaders in the industry can gain a competitive advantage. As aptly put by McKinsey:
“Initially this crisis will be positive for banks’ earnings, and leaders will take rapid and bold steps in their attempts to outperform the competition. The time to act is now.”
Therefore, without any additional delay, let’s delve into how technology can leverage these important objectives:
1. Proactive planning and risk management
Proactive planning for banks entails anticipating market developments and responding accordingly, including identifying potential risks and devising strategies to minimize or eliminate them. Such risks may include increasing delinquencies and suboptimal asset utilization that negatively impacts profitability. Conducting stress tests is a crucial aspect of risk management while optimizing assets is a key step in proactive planning.
Improving stress testing
According to the McKinsey report quoted earlier, banks must reevaluate the assumptions underpinning their risk assessment models in a world where new risks emerge all the time. The report recommends incorporating new data, such as behavioral shifts observed on social media into these models and accelerating their efforts. Although the majority run stress tests on a semiannual basis under tight reporting deadlines, McKinsey’s study recommends “most banks would be well served if they could run stress tests and scenarios twice a month”.
This presents an opportunity for banks that leverage technology as a strategic tool to excel.
Banks can use technology effectively as a strategic tool in the following areas, to enrich the quality of their simulations:
- Data capture tools
- Sentiment analyses
- Data mining
During an economic downturn customers may struggle to repay loans when costs increase, giving rise to delinquencies. Some customers may even seek to restructure their loan agreements.
The McKinsey report states that “banks can rebuild the muscles needed to manage non-performing assets (NPAs), including skills to renegotiate loan terms and craft new customer assistance strategies”.
Leveraging AI and analytics banks can minimize the risk of NPAs and delinquencies. These technologies can be used to develop early warning systems to analyze and predict credit risk, detect and prevent fraudulent activity and monitor and manage existing loans to identify potential risks. Further, data from various sources can be analyzed using AI to help banks make better-informed lending decisions and provide tailored solutions to customers before they pose delinquency risks.NPA and delinquency risks can be minimised with the help of
- Data analyses
- Predictive analytics
- Artificial intelligence
2. Improving the customer experience
During times of economic instability, customers typically remain loyal to banks they trust and have established positive relationships with. Conversely, they are quick to sever ties with organizations that fail to provide adequate value for their money and may consider consolidating their investments with more satisfying options. As a result, banks that place a high priority on offering a positive end-to-end customer experience with their services, as opposed to providing satisfaction at various individual transactions or touchpoints, can not only manage churn but also gain growth by attracting customers from competitors.
One of the primary ways industry leaders achieves this is by treating their online portals in the manner of a product or a dynamic hub to personalize services for customers and grow new business. This enables dynamic interaction with customers and collaboration within the organisation to increase customer satisfaction. For example, it enables:
- sending personalized messages and offers on the portal
- facilitating collaboration among product, marketing digital and customer experience teams
- ushering favourable reviews, high Net Promoter Score (NPS) and a strong referral rate
Read about how South Asian investment bank Capital Alliance Limited (CAL) increased their digital sign-ups on their portal by 52% within three months
3. Cost optimization
Banks can leverage automation to lower overhead and operational costs while enhancing the efficiency of their operations and achieving their business objectives more effectively.
Lower customer onboarding costs
Digital onboarding, customer assessments and approvals will be cost-effective and more efficient than labour-intensive paper-based methods. A fast and easy onboarding experience will lead to customer satisfaction, which will support customer retention goals. With this strategy, banks may, by incurring minimal additional costs of expansion, overcome restrictions such as:
- physical branch availability
- operational hours
- lack of resources.
Lower overhead costs
McKinsey report shows “banks can manage inflationary pressure on salaries and other costs, working to win over employees through offers of re-skilling and location flexibility”
Banks can offer location flexibility to staff by implementing remote work policies, and the use of digital tools and platforms that enable them to perform their duties securely from any place with an internet connection.
Cloud computing will be a scalable, flexible and practical solution to reduce costs associated with hardware, maintenance, and upgrades. During a recession, banks may experience fluctuations in demand for their services, and cloud computing can help them scale their resources accordingly. Cloud computing can help banks:
- quickly adapt to changes in customers’ needs and preferences,
- collaborate with other banks and financial institutions to share data and resources to reduce risks and associated costs.
- better protect themselves and their customers against likely increases in cyber threats during a recession by providing an additional layer of advanced security.
Cloud-led savings in the real world
One European bank was able to deliver the same output with 20 to 30 per cent smaller teams, after onboarding them on DevSecOps and cloud. Another bank in Asia that migrated more than half of its workloads to the cloud can now develop and launch multiple new products rapidly and at scale in international markets. And another European bank has partnered with a leading cloud service provider (CSP) to develop AI-based cyber-defence capabilities to improve security for its customers.
Fortune 500 financial institutions alone could generate as much as $60 billion to $80 billion in run-rate EBITDA in 2030 by making the most of the cost-optimization levers and business use cases unlocked by the cloud.Source: Three big moves that can decide a financial institution’s future in the cloud, Chhavi Arora, Aaron Bawcom, Xavier Lhuer, and Vik Sohoni, McKinsey Digital
Lower operational costs
Banks can increase transparency and security in financial transactions using blockchain technology thereby improving efficiency and reducing costs brought about by security breaches, fraud and financial crime. A key enabler in this area will be blockchain technology.
By adopting blockchain technology “for instance, financial institutions could completely redesign time-consuming and expensive processes such as post-trade reconciliation and settlement”Max Di Gregorio, Technology Consulting FS Lead Middle East & North Africa, PWC
The banks can reduce manual intervention in data aggregation, amendment, and sharing as well as in regulatory reporting and audit document preparation, reducing operational and human error-related costs, with blockchain technology.
The McKinsey report mentions that “in the months leading up to a change in the business cycle, leading banks do better than others at building resilience”. We discussed how tech can support building this flexibility within the cost constraints in key areas such as planning proactively, managing risks, improving customer experience and optimizing costs.
Industry leaders will prioritize the digitalization of their services as a means of achieving their business objectives efficiently at a lower cost, whereas followers may make the costly mistake of viewing digitalization as a necessary step to keep up with modern banking practices. A strategic approach to digitalization will help financial organizations ride the global economic slowdown by minimizing costs, losses and churn while optimizing budgets, other resources and the bottom line.
WEF_Chief_Economists_Outlook_2023.pdf, https://www3.weforum.org/docs/WEF_Chief_Economists_Outlook_2023.pdf Are Europe’s banks ready for the recession? https://www.mckinsey.com/industries/financial-services/our-insights/banking-matters/are-europes-banks-ready-for-recession Risk of Global Recession in 2023 Rises Amid Simultaneous Rate Hikes, https://www.worldbank.org/en/news/press-release/2022/09/15/risk-of-global-recession-in-2023-rises-amid-simultaneous-rate-hikes The Role of Artificial Intelligence in Preventing Non-Performing Assets in Banking: https://www.gnani.ai/resources/blogs/technology-in-banking-how-ai-can-help-prevent-npas/ Blockchain: A new tool to cut costs, https://www.pwc.com/m1/en/media-centre/articles/blockchain-new-tool-to-cut-costs.html Three big moves that can decide a financial institution’s future in the cloud https://www.mckinsey.com/capabilities/mckinsey-digital/our-insights/three-big-moves-that-can-decide-a-financial-institutions-future-in-the-cloud What is CX https://www.mckinsey.com/featured-insights/mckinsey-explainers/what-is-cx