Over the last few months, many banks have moved to a more remote, automated and digital operating model. However, many banks regret that they had not done more of this sooner and have resolved to never be this unprepared again. Banks are still shackled by legacy IT. Their approach to decision making has not, in any meaningful way, been sufficiently data-driven. Many banks are now seriously considering a move to the cloud, despite compliance and regulatory challenges (often internal), as they appreciate the need to be more agile. Plus, there are significant opportunities to reinvent the way people work, with all the implications that holds for culture, property and virtual management.

What can banks do to drive down cost and protect profit?

• Develop a variable cost structure. Most banks are aware of what’s required to move to cloud platforms, hybrid or otherwise, and how they’ll manage their service providers. They’ve just been cautious. If nothing else, the last few months have shown that banks can implement programs that they would never have considered before. As-a-service capabilities in payments or credit can accelerate operations transformation programs and flatten investment curves. Banks should also make the most of the current situation to work through their legacy technical debt, and consider their mainframe exit agenda. This could be a good opportunity to write off prior year investments and set new goals. Cloud providers are prepared to offer partnership investments to speed up the change process.
• Use AI to streamline application processes and manage credit risk. Banks should consider how they can exploit chatbots to help automate thousands of loan applications under the various pandemic programs and avoid manual involvement and error. This will streamline loan processing by automatically extracting application data and entering the information into the relevant loan origination portal quickly and accurately. Regional US banks are already seeing loan processing improvements from three weeks to three days. For a North American investment bank, we built a new robo-adviser platform offering client onboarding, investment strategies, portfolio rebalancing and performance monitoring. Account growth has exceeded the client’s original expectations, with the solution currently servicing half a million accounts.
• Digitize process end-to-end. Banks are now moving to a model of a digital-by-default setting and a contact-light physical presence but balancing this with a human touch for complex processes and advice. Banks that have digitized their end-to-end processes will experience significant benefits in the new environment, especially in digital lending (loan origination and monitoring). The benchmark for end-to-end digital product originations used to be 50% to 60% for the world’s leading digital banks but it is now 70% or more.
• Reinvent the branch and go local. Given that many bank staff are working remotely, now is a key time to assess which combination of models will be used going forward: remote, office or hybrid. Banks have proved that they can operate with no footprint. For those not needed at head office, the existing branch network could be reinvented to accommodate local office workers and act as a workplace community hub, given the trend in reducing customer space in branches and the testing of ‘micro-branches’. There may also be benefits in having product specialists present at or local to a specific branch.

These are areas that require serious scrutiny as the banking sector experiences reductions in both revenue and profit. According to Morgan Stanley, “only 20-30% of the cost base is flexible today and only 5-10% can realistically be exited in the near term (versus 20%+ in the Global Financial Crisis).” Lower profitability and depleted capital could result in serious solvency issues for some banks over the next 12 months. It’s time to rethink your banking strategy.

Learn more about Avanade’s approach to banking in these turbulent times, and specifically how to lower cost and protect profit.