Jayashree Thandu
Principal Consultant & Practice Head,

Global recession and ultralow interest rates have constrained financial institutions’ ability to increase revenue, thereby squeezing banks’ margins. According to a Mckinsey’s Global Banking Annual Review 2020 report, on an absolute basis, compared with pre-crisis growth projections, the COVID-19 crisis may cost the industry $3.7 trillion.

While profitability may remain depressed, needless to say, strong fiscal support for economies in terms of liquidity injections and policy rate cuts during the pandemic in 2020, have aided economic resilience.

Credit losses being on the rise due to the pandemic, the return on average equity of banks globally decreased to single digits due to growth in loan loss provisions and revenue losses.

While an economic rebound is underway in 2021, uncertainty looms large with many countries affected with subsequent waves of the pandemic and impending lockdowns.

Implications for Financial Institutions

For financial institutions to achieve operational efficiencies, optimization of credit processes and automation of low end credit processes to enable straight through processing, help drive down costs as well as reduce credit processing time. Cognitive artificial intelligence (AI) technologies extend OCR capability in understanding the documents being read and in synthesizing the data extracted to drive efficiencies, cycle time reduction, and cost benefits.

Vendor outsourced technology and business process services have helped financial institutions achieve cost efficiencies not just in labor arbitrage and process standardization, but in migrating to a “platform-model” of delivering business solutions as well. Cloud modernization helps with reducing capex and costs incurred with maintaining legacy applications, in addition to providing scalability for future business growth.

Digital transformation

For the financial services industry, the pandemic was a catalyst for digital transformation and innovation in product and service offerings. From having to stand up digital services overnight to disburse government loans and grants, to data-driven collection strategies to mitigate credit loss, banks have had to reimagine traditional approaches of financing and client servicing through ‘digitalization’ initiatives.

In most cases however, digital front ends were provided as quick fixes to tide through the period of contactless service and sales, resulting in the digitalization of customer journeys that was at best, heterogeneous. Digital transformation is already on firepower for most financial institutions and the momentum needs to be sustained.

Implications for Financial Institutions

With customer experience becoming the new battleground for not just lending, but deposit growth as well, frictionless consumer journeys and contactless experiences are setting the ‘gold standard’ for customer experience.

In addition to focusing on channel experience, a holistic digitalization strategy involving ‘front to back office systems’ or ‘channels to core’ will help in realizing the true value of digitalization.

Digital front ends without the supporting back end capabilities will fail to deliver a true customer experience. Banks should embark on cloud modernization with micro-services based architectures to realize the benefits of digitalization. API led integration connecting horizontal stacks, will help lending organizations deliver speed and agility required for business growth and to extend their systems to partner ecosystems.

Competitive landscape

The pandemic has also driven some shifts in the competitive landscape. Fintechs have already captured the lion’s share in certain lines of business such as personal loans and mortgages from conventional banks.