Favoring payments innovation can bridge short-term revenue hits
What’s next for banks in this strange new world we find ourselves in? Forget the forecasts and predictions, we are in uncharted territory and the only honest answer is that no one truly knows exactly what is coming down the line.
But what we do know is that accelerating payments transformation initiatives to be more cost-effective, resilient, innovative and flexible in the face of uncertainty is key to delivering for customers and establishing a leadership position.
An immediate and critical priority for banks is to offset the impact of squeezed revenue streams, which are under pressure from all sides.
The threat of second waves and local lockdowns means that transaction volumes will remain volatile in the short term. As recessions start to bite, cross-selling opportunities will be limited as overall demand for banking products and services reduces. Margin pressure is compounded by historically low interest rates, and record rises in delinquency and defaults increasing exposure to non-performing loans. The global transaction business is likely to come under added pressure as trade corridors become much more local and additional disruption from U.S.-China relations starts to bite.
At the same time, banks must also be prepared to respond to rapidly changing customer requirements and provide them with greater control. Customers will need to be able to manage their money in different ways, instant access to credit and liquidity will continue to be essential, and instant data-driven decisioning absolutely critical to supporting the specific needs of individual customers at any given time.
But expensive and outdated legacy infrastructure is a roadblock to these requirements, making it hard to reduce operating costs and support innovation. Prioritizing and accelerating strategic payments transformation initiatives will mitigate long-term revenue constraints and, if executed correctly, reduce total cost of ownership (TCO) by factors. It will also enable the creation of differentiated, personalized, value-added products and services for customers and protecting profitability and positioning for market share capture as growth returns.
There is little resource, and indeed appetite, for high-risk, expensive long-term migration projects in such uncertain times. This is understandable, though it is uncertainty that should make payments transformation initiatives a priority.
Consider that many banks have struggled to cope with the increased load on digital banking services, which have pushed the resilience and stability of legacy architectures to breaking point. This has crystalized the importance of an "antifragile" approach to risk, with systemic contingencies and buffers to meet demand surges. Ensuring operational resilience will be particularly important given that we can expect renewed regulatory focus on the potentially catastrophic impact of outages during crises.
Banks must also contend with the challenges of enabling secure, efficient remote interactions at a previously unimaginable scale. This includes the huge redistribution of workforces, keeping customers safe from fraud, and enabling effective digital service provision through artificial intelligence and machine learning.
Given the sheer scale and immediacy of the challenges, over-engineered and monolithic solutions cannot deliver the flexibility required. The good news, however, is that banks don’t have to look far for a low-risk, low-cost alternative.
Cloud-native, agnostic challenger banks have been able to move quickly and flexibly through these uncertain times in a way that incumbent banks have not. This should provide a best-practice model and roadmap for the industry. Investing in open-source, Cloud-native infrastructure is how banks secure their place in the digital era, enabling them to operate and deliver in more agile, scalable and innovative ways.
Banks must also prepare for radically altered economies and a new position within them. Governments across the world, regardless of political persuasion, have necessarily embraced socialist policies, with banks facilitating the distribution of massive government stimulus, relief and requisition packages directly to corporates and consumers.
With the risks of relying on global trade for essentials exposed, economies will likely become more autarkical. After many years of industrial decline in some countries, we can expect a significant uptick in investment and output to shore up supply chains. Banks, along with governments, will have a critical role in financing and supporting this domestic growth.
Conversely, there are stark questions about commercial viability.
"Nonessential" businesses across the hospitality, travel and beauty industries are being hit the hardest, precisely because they aren't being treated as essential. Yet, it is a haircut, a stiff drink and a holiday (not necessarily in that order) that many of us most looked forward to while locked down. Relaxed liquidity buffers and capitalization requirements provide flexibility for banks to deliver economic stimulus until good times return.
In addition, to a large extent some of the lowest-paid and least-appreciated sections of society are now rightly recognised and valued as key workers. And it is often these same workers who can’t afford a mortgage deposit, for who credit is expensive and whose savings are limited. Calls for fairer, more sustainable economies may push banks to promote financial inclusion and provide access to financial products and services on better terms.
It is clear that banks cannot expect to carry on with business-as-usual approaches. Indeed, there is a generational opportunity for banks to reshape public opinion toward the industry.
The recession we are entering, and the longer-term "new world," will have nuances not seen before. While defaults on loans will unfortunately rise, unusually banks will enter the situation with rising deposits as customer struggle to spend or are simply unwilling to risk normal levels of spending. This provides opportunity for investment and change in approach. We do not know what will come next. But there are clear steps that banks can take to enhance their ability to effectively respond to the unknown. In the face of significant uncertainty, financial institutions accelerating transformation to reduce costs, deliver innovative new customer experiences, and increased agility and resilience can establish leadership positions in a strange new world.