Can banks turn today’s disruption into tomorrow’s transformation? Can banks turn today’s disruption into tomorrow’s transformation?

Authors
Jan Bellens

EY Global Banking & Capital Markets Sector Leader

Passionate leader on innovation in financial services, especially in emerging markets. Global citizen. Keen traveler.

Karl Meekings

EY Global Banking & Capital Markets Lead Analyst

Developing views on the future of banking. Fulham FC follower. Germanophile. Medievalist.

6 minute read 30 Nov 2020

Our Global Banking Outlook 2021 outlines key actions to help banks accelerate successful transformation.

In brief
  • Despite a tough year, banks have responded well to disruption and played a leading role in sustaining the economy.
  • Now banks have a once-in-a-generation opportunity to accelerate the transformation and cultivate the innovation that will build a more successful future.
  • Focusing on strategic cost management, greater resilience, and enhanced customer-centricity will position banks to drive sustainable change.

In last year’s Global Banking Outlook, we forecast profitability pressures for banks in 2020. What we didn’t expect was a pandemic. The onset of the COVID-19 pandemic has been a monumental challenge for all sectors, including banking. Even though heightened volatility drove record sales and trading revenues, lending fell significantly and average returns on equity remained in single digits for the first half of the year.

Still, there is reason for optimism. Banks have shown an astonishing ability to adapt to change and to play a leading role in sustaining the economy. And, now they have a once-in-a-generation opportunity to accelerate positive changes made during the pandemic, to get leaner and grow at the same time. To connect more deeply with customers. And, to cultivate the innovation that will drive a more sustainable future for the industry and for everyone.

But transformation amid such difficult conditions will not be easy and must come from a position of strength. Last year, our Global Banking Outlook highlighted how the world’s most consistently profitable banks focus on three key pillars – cost, resilience, and customer-centricity. As banks accelerate their transformation plans, they should take key actions in these areas.

Resilience to enable agility

The pandemic has been a stress test like no other, with many banks quickly enacting – and adapting – crisis management and business continuity plans. Most did well to swiftly move staff to remote working, manage a surge in demand for digital channels, and defend against increased threats of cyber-attacks.

But, for many banks, the crisis also highlighted an urgent need to reassess risk management plans that have not kept pace with change:

Key actions for 2021:
  • Evolve and expand stress-testing: Stress testing must extend beyond a bank’s financial position to test extreme, but plausible scenarios for third parties, cyber, operations and regulations. Critical vendors may need to be involved more directly in simulated testing. And reporting metrics will need to be updated to consider talent, culture, climate change, supply chains, cyber-attacks and data breaches. Financial reporting around adequate liquidity measures should be strengthened.

  • Test and enhance cybersecurity measures: The repercussions of the crisis, including remote working and economic hardship, have created what may be a perfect storm for increased cyber-attacks and fraud. Banks will need to review and improve cyber strategies, particularly as regulators make it clear they expect banks to improve controls.

  • Prioritize the sustainability agenda: While the pandemic shifted the immediate focus away from climate change, it did raise expectations that businesses, including banks, do more to protect workers and build a stronger economy and society. This is more than a reputational imperative. Investors and customers will increasingly use ESG metrics information to determine a business’s value.

As the pandemic eases, banks will need to address growing pressure to prioritize and disclose environmental, social and governance (ESG) factors.

Cost management that enables investment

The post-pandemic environment gives banks a fresh opportunity to rethink cost transformation by identifying targeted operational, structural and strategic cost reduction strategies.

Key actions for 2021:
  • Reshape a flexible workforce to build a more variable cost base: Moving to a more flexible talent model – with flexible rewards – can position banks to better match future customer and work demands, while reducing fixed costs.

  • Lay the groundwork for more intelligent operations: Banks should consider how to balance internal resources with external providers, use artificial intelligence (AI) to automate or accelerate manual processes, adjust the level of straight-through processing, and deploy automation to reduce dependence on individual third parties.

  • Realign fixed costs amid a changed operating environment: The success of remote working and digital channels means many banks may adopt a flexible, hybrid approach to working to both reduce costs and retain a competitive edge in the talent market. Deploying managed services, especially in areas that don’t provide a material competitive advantage, such as anti-money laundering (AML) checks or know your customer (KYC) services, can reduce costs and achieve greater scalability. Recent EY research found that 61% of banks are looking to co-source tax-related activities with third-party vendors.

  • Review portfolios: Significantly increased provisioning costs have so far the limited impact on capital due to forbearance rules and governments’ lending support. But as banks emerge from the crisis, freeing up capital through strategic growth and divestment opportunities will be critical. Some banks may sell stressed loan portfolios, and we expect consolidation across almost all markets.

Rise of managed services

61%

of banks looking to co-source tax-related activities with third-party vendors.

Greater customer-centricity

The COVID-19 pandemic has dramatically changed how customers access financial services. Branch traffic is down, digital solutions have surged, and digital payments have achieved as much as 10 years’ growth in four months. Meeting the needs of customers in a world changed by the virus will require banks to first understand new banking habits and then develop the right business models to accommodate these.

Key actions for 2021:
  • Hyper-personalized products and services: With many customers worried about their financial health and overall wellbeing, banks must reassess how new concerns and needs will change the demand for banking products.

    For example, we expect more customers to seek subscription services, income insurance, and risk management products – and less people to want vacation insurance. Banks that proactively adapt their products, and how they are offered (i.e., via digital channels), can help build customers’ financial security, boost their confidence, and strengthen their own competitiveness.

  • Support corporate customers through tough times: In an economic downturn, banks will need to consider how to adapt products and channels to meet the changing needs and specific pain points of corporate, commercial, and SME banking services (CCSB) customers. These customers may also seek support to evolve business models, including through advice on industry partnerships, fraud prevention, or risk hedging.

  • Protect the bank and support the economy: Global banks are collectively forecast to record credit losses of US$2.1t between 2020-21. Amid these challenging conditions, banks will need to strike the right balance between protecting their interest and reputation, and playing their part in building systemic support for economic recovery. They will need to take a more considered approach to collections while making tough decisions, including repricing loans or reducing underperforming segments of their portfolio.

  • Enable supply chain transparency: Trade is likely to recover quickly as the pandemic eases but, as it does, we’ll see a rise in credit and counterparty risks. This may lead to firms seeking more structured trade finance instruments to enhance end-to-end supply chain visibility and mitigate transaction risks. Banks will need to accelerate the digital transformation of trade products to meet growing demand.
  • Embrace the ecosystem: Beyond supporting customers to navigate immediate challenges, banks should consider how to build a more customer-centric model over the long term, including by investing in ecosystems, underpinned by application programming interfaces (APIs). Banks should consider how redefining business and operating models can help them best interact within ecosystems to bundle banking services with other day-to-day activities, thus capturing new revenue streams and growing the customer base. It is also a way for banks to implement what consumer companies have been doing for years and “lock-in” their customers.

    Platform models – particularly in e-commerce – gained strong traction through the pandemic, and it is now critical that banks consider their strategy in this space. Platforms that leverage data from multiple sources, combined with advanced analytics, can connect customers to hyper-personalized value propositions, such as loan forgiveness solutions or innovative pricing options for products.

Impact of COVID-19

US$2.1t

amount forecast in credit losses for global banks from 2020 to 2021.

Winning the race to innovate and the race to scale

Banks that double down on strategic cost management, enhancing resilience, and becoming more customer-centric will build a strong core that will serve them well in recovery and beyond. This is an opportunity that banks may not have again to accelerate the transformation and gain a competitive edge on challenger banks. Many of these newcomers have led the sector’s innovation in recent years, but their lack of scale has weakened some during this crisis. Traditional banks that strengthen now can win the race to innovate, and position for future growth when market conditions improve.

Summary

Banks face a once-in-a-generation opportunity to accelerate the transformation and drive the innovation that will build a successful, sustainable future. But banks will have to do so from a strong foundation. Investing in strategic cost management, measures to build greater resilience and enhanced customer-centricity can help banks strengthen their core, and drive the innovation to navigate recovery and build a better future beyond the pandemic.

About this article

Authors
Jan Bellens

EY Global Banking & Capital Markets Sector Leader

Passionate leader on innovation in financial services, especially in emerging markets. Global citizen. Keen traveler.

Karl Meekings

EY Global Banking & Capital Markets Lead Analyst

Developing views on the future of banking. Fulham FC follower. Germanophile. Medievalist.