Ready and resilient: Retail banking strategy for a COVID-19 world

It’s amazing that banks were able to disburse billions of dollars in stimulus funds with only a few days to prepare. But for many, the struggle to modify existing systems resulted in a lot of manual work to process the loans. The pandemic also revealed some shortcomings of past automation programs, in which banks deployed robotic process automation (RPA) as a point solution without looking at the bigger picture.

We recommend taking an end-to-end view of processes—from the client’s initial data input to closing, or from a customer’s initial request, to servicing their product, to closing the request with resolution. This approach requires investment, and it also might require reallocating some of the technology budget from front-office digital tools to infrastructure for back-office operations. When this is done right, the payoff can be achieved in as little as 12 months, and the outcome may include an operations platform that can scale up or down quickly.

There’s an inherent trade-off between operating simplicity and redundancy. Some banks are discovering they’ve added too much risk by concentrating their vendor programs too aggressively. But dialing supplier concentration up or down to prepare for life after the pandemic is only part of the story.

We expect to see a shift in thinking, in which banks will likely look to digitize and streamline their scale processes before even thinking about outsourcing. Whether you keep work in-house, turn it over to external vendors or take a hybrid approach, digitizing your processes may let you incorporate remote working as needed. For many, that means including the workflow technology, collaboration tools and new sourcing risk management capabilities that are currently absent in many organizations.

Going forward, we expect to see many banks diversify their sourcing strategies and move toward a multi-vendor, multi-location norm.

The pandemic highlighted the need to reimagine customer interactions. Some banks quickly innovated by using excess staff in branches to take calls and service customers, but that highlighted issues with training, access and inflexible processes, to name but a few.

Leading organizations now look to build a high-tech, high-touch customer servicing model that enables virtual work from home when needed, and over 90% of which involves non-human interaction. Making the new model work will require cloud-based infrastructure, supported by artificial intelligence (AI) and natural language processing (NLP) technologies, to quickly assess a client’s need and solve it as efficiently as possible. When done well, the new models can provide banks with better customer service, more flexibility for workers and cost efficiencies.

Retail banking customers, especially younger ones, increasingly consider transactional services, such as real-time payments and cards, as their primary account, not a deposit account. The COVID-19 crisis may only accelerate this trend for all demographics.

Rather than fighting these forces, you may want to take advantage of them, especially since the cost of organic customer acquisition has typically been so high. As an example, banks can make far better use of affinity marketing partnerships. Your brand may have powerful positive associations, but some high-value customers may trust a co-branded entity even more. By creating timely offers that align with a customer’s specific needs and a common bond, you may increase your bank’s relevance and ranking in your customer’s eyes.

In the COVID-19 crisis, most retail banks made changes to branch distribution and client service operations. The number of US bank branches had already been shrinking at a net rate of 1 to 2% per year, and the current crisis could condense years of additional branch network consolidation plans into a few months. As one CEO said, “Nobody expects that all of these branches will reopen at the end of the crisis.”

Branches remain the industry’s largest operating cost item, even before considering the new costs for facility cleaning and additional health safety measures. The catch is that, with few exceptions, banks of all sizes still count heavily on branches to anchor their new customer acquisition strategy and product sales. Retention could also become an issue. Bank customers are usually loyal to their primary bank, except when facing major life events like job changes, moves and personal relationship changes: changes we might expect from the pandemic.

So how can banks make digital acquisition work more effectively? Start by raising your expectations. Digital channels have been a great driver of service, but until recently, they’ve been an afterthought for attracting business at most banks. Now it’s time to use them to find the high-value customers your bank needs.

To do that, you’ll need to understand the drivers that matter on an individual level. Digital-only channels are now mature enough for banks to understand the variables beyond deposit rate—such as product type, convenience and brand—that can improve deposit quality. For some, the driver may be service quality. For others (even customers who are price-insensitive in other areas), it may be promotional pricing.

Instead of trying to create a virtual copy of the branch network you and your customers have known for years, ask: What new opportunities does digital-only distribution offer that we can’t access in our current model?

In the wake of the pandemic, there’s an even greater need for flexible data tools. Banks will likely expand the way they evaluate credit risk, potentially leaving them and their customers better off as a result. Banks can learn lessons from FinTechs, some of which can independently verify borrower information, help meet know-your-customer and anti-money laundering requirements and access payroll records.

There are opportunities to improve credit risk models to include real-time tracking of attributes and more sophisticated segmentation to help manage risk by household, industry and geographic vulnerability. Some banks may even want to layer in other criteria by population segment—in this case, COVID-19 data.

During the pandemic and beyond, it makes sense to have targeted treatments for different client segments—again, using objective criteria, with appropriate input from legal and compliance teams. Consider using a centralized team, as the relevant client relationships could span multiple business units. Without such a team, it may not be clear who has ultimate responsibility: the risk organization, the product P&L owner(s), an operations group or some other unit.

Most bankers have known for a while that their risk management tools weren’t nimble enough to adapt to overnight changes in circumstances. We recommend digitizing processes and creating monitoring dashboards—but we also explicitly recommend against treating this as merely a technology exercise, as the tools themselves are secondary.

Now, as you prepare to emerge from the crisis, start with the fundamentals:

• Get your team ready. Give your team incentives to balance performance and risk taking, and to generate ideas about how to extend digitization within risk management and compliance routines. Invest in digital, technology and analytical skills training.
• Enhance the operating model. Your product and process owners may not have the ability to manage and be accountable for risk. Give them the tools they need, along with access to the right information, by building integrated teams. You may discover duplicate efforts which can help you streamline further.
• Focus on process. Before you automate your controls, you’ll need someone to integrate taxonomies, control libraries, risk and regulatory inventories and data structures. You should have your controls designed for the big picture—one that’s based on end-to-end views and objectives.

With an end-to-end view of risk processes, you should have more accountability and better decision-making. You’ll also be more likely to see savings from reducing duplicative activity, eliminating manual testing efforts and limiting errors that must be researched and corrected.

Along with getting employees back to the workplace safely, some banks are considering a permanent hybrid working-from-home (WFH) model, with most employees working from home at least some of the time.

Remote work has implications for teaming, technology and tools and productivity. Be sure to implement collaboration tools that fit your culture, so you can help employees work as effectively as they did before the crisis—or even more so. You’ll also want to find ways to foster a sense of community in a remote working model across all of your facilities, and you’ll want to help your managers learn a new style of leadership. None of this will happen by chance. You will need to intentionally redefine the way you work.

The bank of the future will likely need workers with different skills, and that could require new approaches to recruiting, training and retention. The number of full-time employees will likely decline, as companies across the board try to make workforce planning more agile. The share of “contingent workers”, managed services and outsourcing arrangements will also likely increase. And more employees may opt for part-time work as they seek flexibility.

Talent acquisition will likely move toward virtual interviews and onboarding programs. That could be followed by changes to your learning and development processes. Remote work means that measuring productivity and managing performance will likely change as well. In this environment, managers will need to shift toward managing for outcomes rather than by face-time in the office.

Leaders need to reenvision the way they acquire and manage labor—not just to get work done, but to create a workforce that is more fulfilled, more effective and more resilient than the teams they have today.