Published on April 20, 2022 by Vipul Gupta
Retail banking was at the core of critical services that kept the world functioning through the pandemic, ensuring on-time processing of payments, disbursement of loans, the functioning of supply chains and access to money in general. Retail banks displayed extraordinary resilience and agility amid the crisis, moving many parts of their operations online and using the internet, mobile connectivity and video. Digitalisation has played a crucial role in reshaping the face of banking, with the pandemic accelerating this significantly.
Factors driving change in retail banks:
Increase in consumer debt and credit risks:
The Federal Reserve (Fed) reduced the benchmark rate to record-low levels during the pandemic, and mortgage rates reached 2.68% in December 2020 (for 30Y FRM) – their lowest level in almost 30 years. This led banks to reduce interest rates to record lows and ease debt repayments. US consumer debt increased to c.USD15.6tn by December 2021 – the steepest growth in decades. Home loan origination and refinancing were at record-high levels in 2020-21 as buyers raced to lock new loans at interest rates at their lowest in history ahead of an expected rate increase in 2022. The Fed approved a 0.25 percentage point rate hike on 16 March 2022, the first increase since December 2018.
To combat cost escalation, banks are turning to cost-cutting strategies such as re-examining their branch footprint and workforce efficiency. For instance, Wells Fargo & Co. announced its four-year expense-reduction plan, aimed at reducing annual expenses by over USD8bn. The savings plan involves eliminating layers in management, making workforce and branch cuts, and reducing up to 20% of office space by end-2024.
Changing customer behaviour:
More reliance on digital channels and social-distancing norms would result in reduced footfall at branches, rendering many of them unviable. Areas of banking such as payments and business lending are likely to become digitalised rapidly.
Working from home and the hybrid work environment
This have become part of the new normal, not only for back-office employees, but also for customer-facing staff such as advisors and customer service agents. A combination of factors such as limited office capacity and changing employee preferences is contributing to this trend. A large UK bank recently found through a survey that nearly 60% of its staff strongly preferred working from home, rather than coming to office.
While different strategies have been adopted by banks operating in different geographies and market segments, we believe the following themes will be common in retail banking across the world:
To enable digital transformation, banks need to accelerate and scale up automation of business processes and modernisation of legacy systems. Before the pandemic, automation and modernisation initiatives were viewed as medium-term goals, but banks now need to significantly accelerate and scale up these objectives.
A key priority for all banks would be to streamline and simplify the digital banking experience for customers. Online and mobile banking apps need to be designed so they could overcome barriers to digital and financial accessibility, especially as older generations engage more through digital channels. Digital apps would need to incorporate far more features than traditional ones, which only had features such as providing account balances and facilitating money transfers. This is as more complex transactions are carried out, for example, changing terms of mortgages and opening complex savings products, digitally.
Use of data to personalise customer engagement:
As digital channels become mainstream and application programming interfaces (API) open up the banking marketplace, competition for new businesses would be even fiercer. Real-time availability and predictive analysis of data would help deliver appropriate advice and pricing, optimise risks and drive highly relevant micro-campaigns on tap, to support business growth.
Advanced artificial intelligence (AI), machine learning (ML) and digital analytics:
Technological innovations such as robotics, AI, ML, advanced analytics, cloud computing and mobility can play a crucial role in a bank’s digitalisation journey. Branches may even be transformed into service lounges in the near future. For example, HSBC recently implemented intelligent automation to set up conversational banking processes and incorporated AI and ML capabilities to reduce the number of calls employees had to respond to.
With banks increasingly shifting from product-centric to consumer-centric approaches, conversational banking is gaining in popularity. Engagement tools such as chatbots, voice assistants and virtual assistants are enhancing the customer experience with personalised services. For instance, Bank of America’s virtual financial assistant Erica handles customer service queries such as on credit report updates and balance information, sends notifications, facilitates bill payments and shares money-saving tips.
Building an intelligent workspace and workforce
Banks saw a major shift in the execution of their operations due to the work-from-home setup. The pandemic increased training requirements to make employees tech-ready and proactive under pressure.
The adoption of digitalisation and technology also requires employees to be agile and drive the bank’s digital vision. From account opening to servicing, banks would need to adopt a paperless mechanism that would enable them to create more integrated networks.
Banks would need to invest in analytics and enable employees to effectively access and manage data. Employees’ ease of access to data through interfaces such as mobile phones and laptops would be a key success factor.
Leveraging external expertise
The rise of the digital ecosystem has led to unique opportunities. Partnership with fintechs enables banks to take advantage of a fintech’s technological advancements and implement emerging technologies such as robotics and AI in a cost-effective manner.
For instance, leading fintech company PayPal invested in popular Swedish open-banking platform Tink to collaboratively expand open-banking technology and offer seamless user experiences across Europe. Barclays has invested in fintech startup Flux that issues digital receipts.
Banks are increasingly leveraging offshore partners to reduce costs and application cycle time, manage higher volumes and utilise flexible staffing for spikes in work volumes.
Developing the next generation of smart governance
Resilience and security have always been a priority for banks and would become even more important when a part of the workforce connects from home and clients prefer to interact through digital channels, increasing use of cloud storage.
Banks would need to strengthen data security by eliminating the use of personal or rented devices by investing in virtual desktop infrastructure (VDI). To further layer this, they would need to implement a series of controls and frameworks to monitor employee activity and transactions through authentication.
Realigning staff requirements onshore and offshore would also be a key success factor. Banks would need to optimise staff onshore for client-facing roles while increasing capacity offshore to scale up operations. Offshore partners with multi-layer compliance, information security and IT infrastructure can help banks reduce expenditure on technology.
These steps would need to be taken along with integrated employee and customer education.
Retail banks have weathered the pandemic relatively well. However, the banking landscape is likely to change significantly over the coming months and years. The future of banks would be driven by their ability to collaborate with fintech and offshore partners to rapidly scale up the adoption of digital services and offer them to consumers quickly and reliably.
How Acuity Knowledge Partners can help
We have nearly two decades of experience in helping 400+ banks and financial institutions transform their operating models and cost structures. Within our Lending Services vertical, we launched retail lending support services in September 2021.
Our retail lending solutions help banks optimise their retail banking value chain across origination, processing, underwriting, closing and post-closing activities. We support all retail lending channels including consumer mortgage, credit cards, personal loans and auto loans. Our loan support officers standardise and streamline the end-to-end loan approval, underwriting and servicing processes, aided by tech-enabled platforms, and help identify red flags in loan applications, such as high credit card utilisation, late payments or lack of credit history.
Our retail lending solutions can help banks improve origination productivity and cycle time, manage higher volumes and utilise flexible staffing for one-time projects or spikes in work volumes.
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About the Author
Vipul Gupta has over 14 years of experience in working with leading global organizations in the banking and commercial lending domains. His expertise spans a broad range of credit analysis, financial modelling, portfolio management, leveraged lending, industry coverage and onshore client-facing roles. At Acuity Knowledge Partners, he leads a large portfolio management team for a mid-size US bank. He has previously led specialized leveraged lending credit analysis team covering diverse industries. Vipul holds a MBA finance and a Bachelor in Mechanical Engineering.
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