Critical Initiative Delivery, Business Analytics & Data Management, Regulatory Compliance & Risk Management
8 minute read
Jan 12, 2021
Written by: Shawn Sweeney
For most of us, having 2020 in our rearview mirror is a welcome sight.
After the year started with relatively strong market conditions, the COVID-19 pandemic turned the nation – indeed, the world – upside down. With major lockdown conditions starting in March on both coasts, retail businesses and restaurants shuttered (many not initially expecting those closings would be permanent), leading to domino effects across the economy and record unemployment levels. Unprecedented government stimulus packages and assistance in the early months for consumers and businesses alike aimed to restrain a tidal wave of delinquencies and bankruptcies.
Nine months later, as the nation starts rolling out breakthrough vaccines that bring hope and potentially an end to the pandemic, our attention shifts to how the economy can revive itself in the new year. In mid-December, the Federal Reserve issued a slightly rosier forecast for 2021, including expectations of higher growth and lower unemployment than previously projected.
Recently, I sat down with Spinnaker’s three practice leads to capture their insights on banking trends, issues and opportunities for 2021. Our team features Brett Ludden, Business Analytics & Data Management; Rick Jaros, Critical Initiative Delivery; and Cara Williams, Regulatory Compliance & Risk Management. Here are some salient excerpts from our conversation:
Ludden: All banks, at all levels, will struggle with the same question: Is the economy going to get better, or is it going to worsen? And, if it gets better, will all segments improve uniformly? The challenge for the banking industry as a whole, and in particular for its executives, is the lack of historical data. We’re all operating in an environment we’ve never experienced before.
We’re seeing more and more companies filing for bankruptcy, getting debt relief and jettisoning employees. Those companies come out on the other side of bankruptcy leaner and more ready to compete, and I think we’re going to continue to see those bankruptcies and layoffs throughout 2021. That increases the importance of the federal government enacting the right type of stimulus and building on the initial trillions of dollars offered in relief, along with mortgage forbearance and student loan deferrals.
In the spring, if we don’t see the economy starting to come back and we don’t have a lot more cash from the government in the hands of those borrowers, then we’re talking about a material risk to the economy.
Jaros: I agree with what Brett pointed out as a direct impact from COVID. Hopefully, with the vaccine being shipped, there will be a return to normalcy going into the first half of 2021. Broadly, I see three major trends impacting our financial industry today. The first, assuming that Janet Yellen does become the Treasury secretary as expected, is continued low interest rates (at least for the foreseeable future). So the question is really going to be, “Where can we find new revenue, and how do banks control for their cost structure?” The second – again with the transition to a Biden administration – is within the regulatory environment, where we’ll see heightened activity.
Finally, we’re looking at the continued drive toward digitization of services and branch optimization, as COVID-19 has materially accelerated consumers’ adoption of digital tools. This last one is going to be tricky for banks to navigate. A lot of the gains in digital migration in 2020 were forced on the customer. In 2021, banks are going to have work hard to lock in those gains. It’s hard to gauge just how strong customers’ pullback to face-to-face will be.
Sweeney: As a business owner, I keep coming back to the personal toll of COVID and the impact it’s had on our people and internal teams this year. As we look toward what we want to accomplish in 2021 – the various priorities and strategic initiatives we’re eying like a pot of gold at the end of a distant rainbow – the journey will require that we take care of our people first. Before rolling into business goals at the start of the year, banking leaders need to find new ways to stay connected to their teams, and make sure their team members are effectively connected and communicating with each other.
Williams: In every conversation I’m having with banking leaders, I’m telling them to be ready for increased regulatory change and regulator scrutiny, the likes of which we haven’t seen in the last four years. The new administration will almost certainly lead to changes across the regulatory agencies, and to keep up with that pace, banks will need to pursue automation in the risk and compliance space to manage staffing needs and costs. This will enable them to be more proactive as they automate controls and monitoring, not to mention expand testing to a broader sampling. By being better positioned to more quickly identify and respond to breakdowns, they can get ahead of their peers.
Data analytics will also play a role in improving efficiency rates and costs as interest income continues to plummet. Disparate systems at larger banks sometimes add to complexity, making it tricky to get to a single source of truth and quality data to use in analytics. Leveraging analytic tools and capabilities can help them be more proactive in identifying and monitoring risks by tracking additional Key Risk Indicators, for example, and offers opportunities for more robust reporting.
Jaros: Building on what I mentioned earlier, everyone is wrestling with the question of “Are behavioral changes from COVID going to stick?” as more consumers access digital channels from the safety of home. The answer – which we just don’t have – could fundamentally reshape our industry. Customers who once resisted leveraging digital capabilities were forced to try them. But one bad experience could drive them back into the branches or to pick up the phone.
Banks need to double and triple down on their digital experience. We advise them to fight being lulled into a false sense of security based on their 2020 digital migration rates and begin to adopt front-line behaviors to help sustain the change. This is also a time to ensure that their front-line employees are ready to capture the leakage into the assisted channels and funnel those customers back into digital channels. To do that effectively, that staff needs to be well versed on digital capabilities and prepared to overcome customer resistance.
Ludden: Banks must simultaneously plan for both a worsening economy and the idea that our economy might be ready to take off. None of us is used to putting emphasis on both. Unfortunately, if banks don’t focus on growth and resist the urge for conservatism, they may get left behind, because someone else is going to take advantage of the opportunity as consumer spending begins to increase.
In the expected K-shaped recovery, where the economy doesn’t recover as quickly for some consumers and businesses as it does for others, banks need to figure out how to improve their modeling and decision-making. Most don’t necessarily have the data or modeling resources required to play out various scenarios and make these critical differentiations.
Sweeney: Alongside every new challenge or crisis is opportunity. Banking leaders should be thinking about new customer needs uncovered or newly realized during the pandemic. Organizations that spend the time thinking about how to address those new needs will come out of COVID in a stronger position.
Jaros: Many banks still don’t fully understand their customers and how to reshape their behaviors, which is key to making the right investments. Before the pandemic, a large majority (66%) of Millennials had visited a branch in the last six months. There was a reason why they sought out face-to-face interaction. If that reason hasn’t been addressed, there’s a risk of traffic coming back in.
To that end, everyone across a bank needs to be involved in the digital transformation journey to ensure they’re prepared to compete – and win – customers in the post-COVID world. Again, if they don’t train their front-line workers and adopt best practices for this new normal, they not only risk eroding their progress to date, but they’ll also lose customers to competitors that do it better.
Williams: Automation remains a huge hurdle because organizations can easily get overwhelmed by the magnitude of setup work, but it can be a game-changer in the long term. Part of the setup work entails ensuring a governance structure is in place to manage the risk of automation, and, before diving in, it’s also important to have the right control framework in place across the organization. Banks need to know they don’t have to necessarily bite off everything at once. By taking a risk-based approach, they can start with their highest-risk processes to get more bang for their buck. Automation will further mitigate overall risk and significantly drive down residual risk.
Ludden: Bank leaders need to understand that they can’t have their heads in the sand as they prepare for whichever direction the economy takes – and then make optimal decisions using the data in front of them. They must also be appropriately cost conscious, because any growth will be constrained even if the economy starts improving.
Too many banks have really dug a big hole from an efficiency perspective, both in operations and product development. Turning that corner starts with finding the right data. Credit bureaus, for example – which traditionally supply a lot of data – have a wealth of additional information that many banks just aren’t using. My caution for banks is to be careful with where you find that data so that you’re using clean, accurate information to make smart, compliant decisions.
Sweeney: Tightening purse strings – smaller budgets or more limited human resources – forces a laser focus on prioritization. Banking leaders need to ask themselves, “What are my top two to three priorities?” and then align resources accordingly. That means getting rid of pet projects that zap their focus and finding religion around budget. It also means being explicit on which projects to carry forward and those that need to be paused: Don’t assume prioritization will happen on its own.
Williams: Just as customers’ behaviors are different amid this pandemic, it’s yet to be seen how we’ll need to navigate the remnants of a post-COVID work environment. In the pandemic’s first days and weeks, banks and their vendors sent home workers who had never worked from home before. Decisions were made in the moment, and regulators were rather lenient.
Now, particularly if employees are never returning to those operations and call centers, banks need to be thoughtful and deliberate as they review the business impact analysis that underlies continuity planning. We also need to recalibrate and set a new norm on how we manage risk as we move into potentially permanent work-from-home situations and other post-pandemic adjustments.
Ludden: Banks also gave their third-party contact centers a “Get out of jail free” card on contractual agreements, which historically require vendors to operate in a secure location where customer data can be protected, so they’ll have to manage both compliance and operational issues once COVID ends. There’s also an expectation from employees to maintain work-from-home setups since they want more flexibility in their lives and they have proven technology and skills to work from anywhere now. This will be a driver in the ongoing search for the best talent.
Sweeney: When we look back at similar black swan events, they’re often predecessors to regulatory refinement. COVID identified several areas of weakness in the banking industry, and the regulators will take this as an opportunity to learn from and correct those mistakes moving forward. Bank leaders must prepare for this inevitability and begin shoring up areas of potential weakness. Operational risk should be a high-priority area of focus and, in particular, going through operational contingency planning to address remote workforce information security. Alongside that exercise, leaders will want to assess enterprise risk frameworks to ensure they’re reflective of their current risk appetite.
Jaros: Take as much cost as possible out of the system to drive down the efficiency curve. Tap into outsourced partners for Collections and Recoveries and conduct a comprehensive, end-to-end audit of all practices to ensure you’re capturing all fees.
Williams: More than ever, we see the importance of building a strong culture that integrates risk management into decision-making and strategy-setting across the organization. Make sure your fundamentals are shored up and your house is in order to minimize the risk of what are sometimes the largest costs of non-compliance: business disruption, missed revenue and lost productivity. The last thing any bank wants right now is to catch a regulator’s eye and face fines or formal corrective actions. That will only further complicate and delay getting back to business as usual.
Ludden: We know that amendments to Regulation F will take effect late this year and change debt agency practices. Right away, there’s the question of whether banks will apply these debt agency requirements to themselves, and this comes on top of potential increases in consumer defaults depending on economic recovery. As we face additional new regulations, there will be questions, and analytics can help banks test the best strategy once they decide what they’re allowed to do. The downstream impacts could mean lower collections, reinforcing the need for moving to digital channels to get back some of their efficiencies.
For better or worse, 2020 has been a reactionary year where the best guidance was often to take a wait-and-see stance. 2021 has a different tenor – it’s a year for taking charge. That means making educated guesses – leveraging historical data to inform forecasting, applying lessons learned from regulatory fumbles and creating new offerings to meet consumers in a post-COVID era – to move your organization forward. Between FinTech’s roaring to go and legacy banking institutions with pent-up demand, there will be a sea of new opportunities in 2021, and banks can no longer afford to wait and see.
Our Spinnaker team provides tools and resources to help banks operate more efficiently and compliantly, which translates into enhanced profitability. As you kick off your 2021 strategies and corporate imperatives, contact Spinnaker to find out how we can help you optimize the return on your investments.
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