Next in Canadian banking

The need to invest in and take a more proactive approach to risk and regulatory matters continues to rise as Canadian banks face a growing number of increasingly interconnected threats, challenges and hazards. These include uncertainty about Canada’s housing market, liquidity risk and threats related to cybersecurity and financial crime. Also on the agenda are some of the broader global trends, such as geopolitical tensions and volatility, climate change and digital innovation risks, that are increasing the pressures on Canadian banks’ risk management functions.

As larger, systemic risks loom and the possibility of widespread disruptive events grows, banks face a rising need to invest in operational resilience that ensures they can withstand major disruptions. New requirements and guidance emerging from the Office of the Superintendent of Financial Institutions (OSFI) only add to Canadian banks’ to-do lists, all while navigating the challenges posed by more lightly regulated non-bank players in the private lending and investment space.

All of this points to the importance of streamlining, modernizing and carefully allocating and reallocating risk management resources across the bank. Opportunities to do so include:

• rationalizing controls and the number of reports being produced, some of which may no longer be necessary;

• upgrading data and technology infrastructure to create more connected governance and controls systems that reduce manual and siloed processes, increase efficiencies and enhance banks’ ability to detect and mitigate risks; and

• adopting generative AI tools, which have significant potential to support pattern detection that’s key to managing risks.

Adding even more impetus to look for ways technology can help streamline and improve risk management are the ongoing impacts of Basel III reforms to capital requirements. While Canadian banks have been working through this for some time, the rules place a greater emphasis on being able to quickly understand their capital positions and allocate capital accordingly. This makes it important to invest in more flexible and agile capital management systems and technology.

As Canadian banks come out of a challenging year in which cost efficiency programs throughout the business were the focus, many are looking at opportunities to strengthen their business models and sharpen their strategies to deliver improved financial performance and growth. With further business pressures on the horizon, now is the time to take a step back to identify the bank’s core areas of focus and be more targeted in managing costs while reallocating resources to its top priorities for growth.

Strengthening profitability likely means getting ahead of newer, more technology-enabled market entrants by further digitizing key areas of the business, including banks’ retail operations. While Canada’s banks have invested in digitizing self-service channels in recent years, many have yet to transform processes throughout the business. This means they still have fragmented, paper-based processes that require customers to go to branches in person for some of their banking activities, highlighting opportunities for more investment in simpler, automated and technology-enabled experiences that differentiate the bank with both current and potential new customers.

One segment banks will need to target for growth is commercial banking, which tends to be underserved—although new entrants are eyeing this area as well—and offers significant opportunities to provide more digitized and self-service capabilities across treasury and cash management, deposits and lending. In pursuing growth in this segment, banks will need to focus sharply on client-level profitability so they can identify their core customers, allocate capital accordingly and deliver more cost-efficient services and experiences. Another area of growth is in asset and wealth management, which is also an underserved segment where banks have an opportunity to create a wider suite of products, also with more seamless self-service capabilities, targeted at the growing cohort of affluent retail investors in Canada.

It’s not for a lack of trying that Canada’s banks still have some way to go in harnessing the full potential of technology to improve profitability, attract and retain customers, navigate regulatory complexity and strengthen business models. After a series of attempts, they’ve been frustrated by technology investments that have taken longer, cost more than planned and fallen short of delivering expected results. While legacy infrastructure is part of the challenge, other issues at play are holding transformation efforts back. 

Amid growing pressure on technology budgets and evidence from industry benchmarks that up to 75% of large bank technology programs fail, it’s even more important for industry players to pursue not just innovative technologies but also the bolder aspiration of flawless execution. With billions of dollars in technology investments at stake, even a modest improvement of 5% or 10% in delivery outcomes could materially separate a bank from its peers in terms of operating efficiency. By following four key principles, banks can increase their chances of success: 

• Planning for and forcing failure: Organizations deliver better outcomes when they hope for the best but plan for the worst through approaches like defensive coding, contingency planning and rollback testing. Borrowing concepts from organizations that deliberately anticipate and force failure is a best practice in complex transformation initiatives.

• Adopting data-driven delivery practices: Banks have made large investments in big data capabilities related to customer information and analytics, but few have applied a similar analytical lens to their own delivery practices. Our experience shows us that organizations that take the time to codify their own delivery data benefit from rich, actionable insights that can help predict and deal with challenges before they arise.

• Fostering transparency: Technology teams with repeated success benefit from leadership that encourages transparency and honest dialogue about the status of a project and the need for intervention when it’s on track to fail. The key question for banks is whether their incentive structures foster this critical transparency.

• Building for operability: While the latest customer or business feature or digitized process is at the heart of every project’s goals, the best technologists focus just as much on ensuring what they build has world-class resiliency. In the increasingly complex technology stacks that financial institutions are building and buying, monitoring and recovery can’t be afterthoughts. It's also critically important to involve technology operations teams at the earliest stages of the development life cycle to collaborate on designs and prepare for their service delivery roles.

Canadian banks can also benefit from looking at the practices of the world’s largest technology companies, which focus not just on the latest innovations like generative AI but also the fundamentals of engineering and delivery. It’s no coincidence that these companies have technologists at the highest levels of their organizations advocating for the highest standards in engineering practices. We believe Canadian banks can take inspiration from their successes by elevating the role of the chief information officer to report directly to the CEO. This would put greater weight on technology as a critical business imperative, improve board oversight of the bank’s transformation and execution capabilities and empower the CIO to pursue innovations that enhance execution outcomes and turn technology delivery into a true source of competitive advantage.

One technology Canadian banking leaders are paying close attention to is generative AI, which has the potential to significantly transform how Canada’s banks operate, notably when it comes to redefining work processes and creating efficiencies in key areas such as call centres and software development. We saw this reflected in our Global CEO Survey, in which 67% of banking and capital markets executives who participated said generative AI will increase efficiencies in employees’ time at work. But even as generative AI offers significant opportunities to manage costs, it can also benefit Canada’s banks in other ways, such as increasing sales through greater personalization of their services.

So far, Canadian banks are taking a measured approach as they carefully assess the risks involved—including cybersecurity breaches, legal liabilities and bias—and watch for regulatory guidance that will shape their approach to generative AI. Caution towards widespread adoption is warranted since the impacts of a failure of a generative AI tool can be very significant. In the meantime, banks are focusing on applying generative AI to internal processes to learn more about the technology and start taking advantage of the efficiencies it makes possible.

Properly balancing the risks and opportunities will require investments in strong data governance, as well as generative AI monitoring and management practices. One opportunity for Canadian banks to accelerate progress on generative AI-driven transformation is to elevate the role of key players involved in adopting it—notably the chief data and analytics officer—within the organization’s structure. Doing so will help strengthen generative AI governance practices across the bank and allow it to scale up the types of use cases that offer the most benefits throughout the organization.

Conversations around climate change in the banking industry have evolved quickly, and actions have followed. The level of sophistication in Canadian banks’ reporting on environmental, social and governance (ESG) issues like climate change has increased significantly, even compared to just a year ago. And executives tell us they’re taking key actions to support their goals, with 60% of banking CEOs who participated in our recent Global CEO Survey saying they had completed or were making progress on initiatives to innovate new climate-friendly products or services.

All of this comes as Canadian banks face heightened scrutiny, expectations and requirements around climate change. Key considerations on their climate change agendas in 2024 include:

• preparing to comply with OSFI’s B-15 guideline on climate risk management;

• measuring their progress against interim targets to reduce greenhouse gas emissions, a task that’s coming very quickly for banks that have set 2025 goals;

• ensuring they have credible climate transition plans that set out how banks will meet their climate objectives;

• positioning themselves to harness the commercial opportunities the climate transition creates, notably when it comes to helping bridge the gap between the amount of capital required for organizations of all types to meet net-zero emissions goals and the funds allocated globally so far;

• clarifying their use of sustainable finance, in particular how it relates to their decarbonisation objectives; and

• better measuring the physical impacts of climate change on their businesses and incorporating these risks into financial planning.

Canada’s largest banks have already made significant progress in these areas, although smaller financial institutions may be at early stages of the journey. But even for larger banks, there’s more to do, particularly when it comes to preparing to face rising standards, growing scrutiny and calls for greater transparency around their ESG data and disclosures. Those that invest further in strengthening their ESG reporting controls, processes and governance will be in the best position to take informed action in support of their climate goals, tell a compelling story about their plans and performance and capitalize on the market opportunities to help finance the energy transition.