Some say recession is coming. Others say it’s already here, while still others don’t believe the economy will suffer much in the near-term. No matter what the future brings, financial institutions need to develop a strategy that can recession-proof and future-proof their current business models.
If the economy takes a deeper dive inaction will make it harder to catch up and will put financial institutions further behind the curve as to where the industry is going. It will also make it hard to keep pace with the changes impacting the industry today and goiong forward.
The banking industry has a once-in-a-generation opportunity to transform legacy business models to become more competitive and more resilient during economic upheaval. By integrating data, analytics, advanced technologies, automation and an up-skilled workforce, banks and credit unions can become more future-ready and agile in a crisis. These institutions will also be able to take advantage of unique marketplace opportunities.
To get a perspective on how organizations can become more resilient for the future, Ron Shevlin, Chief Research Officer with Cornerstone Advisors was interviewed for the Banking Transformed podcast. Below is an excerpt from this interview.
What is the biggest threat to banking as we enter uncertain economic times?
Shevlin: I think building the demand and the pipeline for loans may be the biggest concern. It’s the driver of profitability in most financial institutions. It’s also the part of the business that’s going to be most at risk in a downturn. A strong pipeline, a strong backlog and a strong portfolio from a loan perspective drives so many other decisions for the banks and credit unions.
What characteristics do the most prepared organizations share?
Shevlin: One of the characteristics is clarity of strategy and focus and an understanding who the customer or member base really is. I look at an organization like USAA and am always kind of amazed at just how well they execute. I think a good reason for that is because they have a very clear picture of who their member is and who they serve.
The second characteristic is the degree to which a firm has accomplished some level of digital transformation. The ones that have done the best job so far of providing digital account opening and digital banking capabilities go into a downturn in the economy on a stronger set of legs because they’ve dealt with some of the efficiency and effectiveness issues around delivery.
In the past, preparing for an economic downturn meant cutting costs. Is this still the best strategy?
Shevlin: The industry has recognized, with proliferating channels and different mechanisms for customer and business contact, that you have to make the investment to deliver services more efficiently. This means organizations have to invest in cost cutting. This is why I believe that those organizations that have made the investment in the past five years — not just the past two years — upgrading their digital delivery are the banks and credit unions that are going into this period with an advantage.
Organizations are not going to be able to let go of people enough to drive cost reduction. In fact, many will be hiring people to help in digital transformation efforts. And since many have also made significant moves toward increased back office efficiencies, I do not see the level of cost cutting we have seen in past economic downturns.
How do you see fintech firms doing if we have a sustained economic downturn?
Shevlin: The fintech firms that have been spending their money wisely in terms of building capabilities and marketing — and those that have a good business model to generate revenue — are going into this downturn stronger.
I think the fintech firms that may suffer are those that are really at the startup seed stage and may not have proven out capabilities. I think in general, the VC market is a little bit more pessimistic about fintech firms in general right now, so those further along will get the limited funds.
How important are third party providers during uncertain economic times?
Shevlin: I don’t think financial institutions can get it done today without fintech partnerships or the help of traditional vendors, as well as the involvement of parties to help with the regulatory environment. To achieve the level of speed and scale required to be prepared for the future, you can’t get it done without the help of partnerships.
As a result, if you don’t have the ability to identify, vet, negotiate, deploy, and scale partnerships to deliver an improved customer experience, you’re at a serious disadvantage.
Why is embedded finance more important now?
Shevlin: First of all, I see embedded finance as the integration of financial services into the products, apps, deliveries and processes of non-financial institutions. It is important today because consumers want it.
They want the level of convenience that comes with embedded banking. They want the integration of banking capabilities with the household brands they already use. We surveyed 2,500 consumers about their interest in getting financial services from brands like Ford, and GM, and Home Depot, and Xbox in various different consumer categories. And while the level of interest definitely differs by category of business, there is very strong demand for a wide range of financial services from these non-financial companies.
The growth opportunity is just absolutely immense. There are relatively small banks in this country that most consumers have never heard of that have millions of customers, or I should say millions of accounts, because the customer is really the nonbank brand — that’s who they’re serving. And, they’re able to grow their business at an acquisition cost that is significantly lower than what they would have to spend in order to grow to that size business traditionally.
How do traditional banks and credit unions remain relevant in the future?
Shevlin: Financial institutions need to figure out who they intend to be relevant to. Once that is figured out, relevance has a lot more to do with product design and delivery than it does with web design or app design.
Banks can have the slickest design and the best looking website, but the reality is if the product isn’t delivering the value that the consumer’s looking for, they’ll lose.
Any final advice?
Shevlin: If you’re a financial institution and you’re looking at the situation right now saying, “what do we do if there’s a downturn”, you’re already too late.