Global review: How the consumer banking sector can rise beyond Covid-19
Some countries in Asia are starting to see the light at the end of the tunnel with no new Covid-19 cases. Various governments are starting to reopen their economies in Malaysia, Thailand and Singapore. Still, the pandemic will leave significant and long-lasting economic repercussions across many industries. The top priority for the financial services sector is to circumvent the negative impact that Covid-19 has had on consumer confidence, financial operations, and workforce productivity.
The last global recession in 2008 showed us that a steady hand at the helm is invaluable. As companies gear up for a tougher road ahead amidst broader global economic uncertainties while approaching the pandemic with determination, positivity and a clear plan helps banks and financial services providers gear up for the tougher road ahead.
As the consumer banking sector formulates strategies to manage the economic impact of this pandemic, they can adapt some of the best practices and learnings from the previous recession. With major changes in technology and shifts in consumer behaviour in recent years, the changing context also presents a window of opportunity for leaders to build on the past to shape the future of consumer banking. Necessity will be the mother of invention for innovation, and consumer banking professionals will have to be agile in adapting to the evolving situation to rise above the pandemic.
Covid-19 has inadvertently become the force behind the largest remote working exercise humankind has ever seen, driving the mass adoption of digital processes.
The largest shift into digital payments took place in India during its demonetisation exercise in 2016. Necessity forced digital payment adoption in the country. Since then, these habits have stayed with Indian consumers. Covid- 19 might actually prove to be the catalyst for consumer banking players in Asia to ramp up digital acquisitions.
Rebuilding legacy applications for the cloud and moving to fully source and service customers digitally could therefore be the priority for banks anticipating a reduction in acquisition cost. This digitisation exercise could support not only new customer acquisition but also enhancements of customer experience by making the process more seamless.
One big learning from the 2008 financial crisis is the necessity to re– calibrate banks’ appetite for credit risk in the face of economic uncertainty. This exercise should be picked up by consumer banking institutions with immediacy.
Today’s machine learning (ML) methodologies provide financial institutions with the ability to quickly calibrate customer scorecards with incoming data, a capability that has only been available recently. These ML methodologies study changes in consumer behaviour and credit requirements to inform necessary adjustment to the scorecard assessment process.
This is a great time for organisations to strengthen their ML practices in consumer credit by investing in this capability for the future. At the same time, organisations should not overlook the use of alternate data in evaluating consumer credit. These additional data points are likely to offer significant information on more vulnerable economic groups, allowing for better decisions and swap- sets in this segment.
Economic downturns also present an opportunity to re-examine credit limit management and collection functions. Some consumer segments are likely to be more affected than others, especially those belonging to the lower-income group.
Facilities like bank overdrafts and credit card limits tend to see peak usage during economic downturns as consumers adapt to tougher market conditions. Taking a more customer–centric approach and making sure that the limits for these revolving credit lines are actively managed makes good business sense.
Ensuring a clear and optimal collection strategy is another necessity. Adjusted strategies targeting vulnerable consumer and business segments will help banks better manage the collections process. This could range from granting customers extended repayment periods to implementing instalment holidays or evaluating portfolio sales.
The key is to avoid making short– term decisions. Though ignored during growth phases, the collections function will play a significant role in determining banks’ outlook in the current climate.
Government action during the last recession impacted the financial services sector the most. Interest rate changes, money supply fluctuations as well as support packages to specific consumer segments tend to create big shifts in the industry. Financial institutions that are attuned to these big shifts will be able to make the best of government intervention, resulting in a positive impact to their consumer bases.
We have seen the unveiling of record support packages aimed at directly crediting funds to vulnerable segments to protect them and maintain consumer demand in many countries. Malaysia made headlines this month with the announcement of an additional $11.4 billion stimulus package. Singapore has also rolled out its fourth package of Covid-19 measures to cushion the impact of the pandemic. If banks are able to consider these actions while formulating their strategies, it will enable them to gain a strong tailwind.
Given the supply side disruptions that the pandemic has created, it has become evident that strong actions — even beyond what has been put in place — are needed to support small and medium-sized enterprises ( SMEs). In anticipation, banks should invest now to bolster their capabilities to support this sector. In general, SME banking capabilities have been a little more manual compared to the consumer lending space and this could be the time to invest to grow these capabilities.
As we try to make the most out of the current situation, we will do well to remember the key learnings from the past. Recessions have the tendency to make or break organisations. This is largely driven by each organisation’s ability to formulate an action plan to face the change and weather the storm with agility. Banks and financial institutions in Asia should respond to these challenging times with decisive measures to build their organisational strength for the next phase of growth to come.