How COVID changed everything
It already seems like a foregone conclusion that the socio-economic changes ushered in by the COVID-19 pandemic will rewrite previously enshrined industry rules in banking. More to the point, it has fundamentally changed how banks, their customers and employees interact on a daily basis, and therefore altered that most vital element of financial strategy: risk management.
However, to say that this aspect of banking was not already undergoing significant challenges prior to the global crisis would be insincere: unfavourable interest rates, political unrest, and fintech driven market disruption were already conspiring to make old industry paradigms progressively less viable. “The pandemic has only exacerbated these difficulties and placed additional importance on the means of resolution,” states Anthony Mancuso, Head of Risk Modeling at SAS’ Risk Research and Quantitative Solutions division. He believes that two key areas of impact have been:
- “Fundamental assumptions about [banks’] customer base and behaviour will have to be reconsidered. In many ways the challenge is akin to starting a new firm from scratch.”
- “The pandemic exposed that existing models lack a connection to shocks originating outside the system (exogenous events), such as supply chain disruptions or trade friction. Without a way to incorporate exogenous events, significant risks can and have gone unnoticed and unchecked.”
The ability to seamlessly connect at an individual and business level has never been more urgent. It is in recognition of this that banks with a previously hesitant attitude to digital transformation have accelerated their efforts; in late October 2020, Quadient warned that the window for incumbent organisations to improve their digital offerings was . Rafa Plantier, Country Manager (UK and Ireland) at open banking platform fintech Tink, is critical of banking’s tardy efforts prior to the pandemic, believing that greater foresight could have mitigated the initial frontline pressure: “Banks have been challenged operationally because of a rise in the volume of credit requests. The automation of information gathering and streamlined onboarding processes could have helped banks manage requests more effectively.”
The overwhelming influx of online requests was primarily caused by the closure of bank branches, making the prioritisation of digital channels essential. Achieving operational efficiencies has also become paramount at a time when employees are working remotely and customers expect online experiences on par with digital leaders (Google, Amazon, etc) across the board. According to Falk Rieker, Global Head of the Banking Industry Business at SAP, this extra weight of expectation adds yet another pressure to modern banking: “Banks are on the front lines, supporting and guiding their customers through the crisis in a variety of ways, including transmitting government stimulus measures, offering forbearance and emergency funding to clients, and donating to relief efforts. Banks must remain aware of the reputational risk they face if customers feel they don’t get the support they need.” These factors will only be exacerbated by customers in older demographics, many of whom could be engaging with digital channels for the first time.
Clearly, the customer-bank relationship needs redefining for a new era.
Preparing for the future
Plantier is adamant that improving banking’s current state of risk will be contingent on open banking, “Tink's acquisition of Instantor, a credit-decisioning fintech, shows that we believe open banking can help organisations improve risk analysis with holistic and real-time financial data.” Collaboration and tech innovation, then, are to be carefully invested in; the problems of digital finance can seldom be addressed by banks in a siloed manner. But, in such a complex and critical industry, where should they start?
Fortunately, although reimagining a centuries-old institution like banking could be an immense logistical challenge, products and solutions to address new forms of risk already exist. “SAS didn’t engage in significant solution development, our current portfolio of industry-leading risk solutions is well-equipped to help our customers to traverse the pandemic’s turbulence,” explains Mancuso. Instead, the company adapted and retooled so that customers can take proactive steps against further disruption, recover equilibrium through the use of low/no-code digital environments (), and prepare for future risk scenarios using exogenous model .
SAP has chosen to bridge the ‘bank-customer-employee’ experience gap by offering everything from predictive product offerings to online and mobile channel solutions, which aim to improve a bank’s existing customer experience without necessarily replacing existing legacy bank architecture. “With SAP’s , banks can identify and close experience gaps across the customer and employee journeys. Financial performance will take a hit across all types of P&L and risk dimensions – fees, interest, loan losses, expenses, credit exposures, liquidity, etc. To understand the financial impacts of these drivers, SAP software supports stress testing and scenario analysis together with real-time, dynamic monitoring of financial risk metrics,” says Rieker.
Levelling-up the playing field: challenger vs incumbent
Although they operate along the same basic principles, there is some disparity between challenger and incumbent banks’ positions in the debate. For one thing, according to a survey by digital-only banks appear to have a distinct advantage in terms of online user experience and service quality. Mancuso equates this to challenger banks being “fresher, with business models that often place significant emphasis on digital engagement. This makes them nimbler in terms of technology and, perhaps more importantly, process.” Plantier is in agreement: the level of digitalisation is uneven between the two factions due to different starting positions on the path of digital transformation. This is not to say incumbents don’t also have a natural advantage, “Challenger banks naturally have a better starting position, but even they are still short of where they want to be. Conversely, incumbent banks have a better starting position on deposits and net interest margin generation.”
This has given rise to a ‘’, a competitive race where one strives to achieve greater customer engagement through digital channels (incumbents), and the other (challengers) seeks to gain credibility and financial security. Neither party can afford the existential risk of neglecting to improve. “We have seen several digital challenger banks cease operations, citing difficulties with raising capital in this current economic environment,” Rieker states, echoing Plantier. “Incumbent banks have a cost issue and need to take a page from challenger banks’ playbook by moving operations to the cloud to reduce cost, reducing data silos and re-examining the holistic customer experience.”
An opportunity to reboot banking
Opinions on banking’s medium-term recovery prospects run from cautious optimism to just plain caution:
Mancuso: “Remember, the pre-COVID banking environment was not benign. Wiser banks recognise the pandemic as a strategic opportunity to recreate themselves for the future and are seizing it.”
Rieker: “Banks have had to adapt quickly to function during COVID-19. The industry is still too reliant on manual processes to operate efficiently and effectively in a virtual environment. COVID-19 should be an opportunity to reset and reposition our institutions for the future.”
Plantier: “I believe recovery will depend on the effectiveness of vaccination operations. Tink is optimistic and believes that we will see a significant recovery in 2021 and that open banking will play a key role in this new world of finance.”
Therefore, the onus rests squarely on banking leaders to engage with digital transformation and arm themselves with the tools and expertise that will help them negotiate the risks of today, and perhaps even tomorrow.
“I have ultimate responsibility for market strategy, product requirements, project implementation, and advisory consulting for all risk solutions relating to model development, deployment and governance. My team works closely with internal and external colleagues to develop product pipelines, support pre sales activities, and provide training and knowledge transfer.”
“I have global responsibility to advise and recommend SAP and Partner products and services for new and existing customers. My role is to guide our banking clients through a successful digital transformation and intelligent enterprise journey.”
Plantier is a Brazil-native and was Stripe's former head of EMEA banking. He now leads Tink’s ambition to equip financial institutions and fintechs with best-in-class technology solutions that will allow the UK and Ireland to continue to lead the way as pioneers of open banking.