Twenty-nine years of uninterrupted economic growth in Australia has come to a halt as a result of COVID-19. The economic effects of the lockdown, job losses and income uncertainty are being deeply felt by Australia's highly leveraged businesses and households. Australian banks are playing a vital role as economic shock absorbers having put in place 6 month payment deferrals (on mortgages and business loans), which has been extended by a further 4 months. They have also rapidly responded by transitioning to new working arrangements for staff, scaled support services and enhanced digital channels to provide critical access to banking and payment services for their customers.
A prolonged economic downturn will inevitably test the resilience of the banks’ balance sheets, with mounting credit losses and customer remediation costs remaining high, downward pressure on industry ROEs (return on equity) will persist. Prior to the crisis, boards and executive teams were contending with the fallout of the Banking and Financial Services Royal Commission and rebuilding trust with all stakeholders.
In the short term, our banks will remain focused on supporting their customers and the economy in their recovery. In the medium to longer term, they will have to continue to enhance the customer experience (with a focus on digital channels) at the same time as address their profitability by accelerating their cost, simplification and operational resilience efforts.
We have identified six key trends against which banks’ performance will be critically important as they position themselves for the future.
1. New distribution channels
New distribution channels reconfiguring the landscape
As society becomes more cashless and digitisation accelerates, banks may need to evaluate their branch networks and ask themselves fundamental questions about what their physical outlets are actually for. Are they sales points or service centres? Core to the brand or nice to haves? In a much more digital model, products and services may need to be reframed, allowing greater degrees of self-service, enhanced product functionality and fulfilment, and a new approach to selling and advertising to attract customers.
2. Digital economy
Harnessing the shift to a digital economy
As we accelerate to a global digitally connected economy, banks must operate across virtual and physical domains seamlessly. They will need to harness the potential of new electronic payment mechanisms, digital currencies and contactless payments as use of cash rapidly declines. But as much as this creates opportunity, it also poses threats – with a generation of new technology based service providers coming into the market, banks may need to devise strategies to prevent themselves from becoming disintermediated. They must find ways to remain relevant to their customers and create new use cases for payment revenue opportunities.
3. Cost and operations reimagined
Cost priorities reimagined, new operating models emerging
In an exceptionally low interest rate environment, operating expense will likely become an ever greater area of focus. Banks will need to find a way of decreasing costs while also building capability to support growth – ‘smart cutting’. A focus will fall on leveraging technology to achieve both of these aims, through greater use of automation and AI. Simultaneously, banks can more aggressively evaluate their operations by moving to greater use of shared service utilities owned by consortiums or third parties, as well as managed services and outsourcing. Everything could be up for debate as banks look for the operating model of the future.
4. New reality of work
New ways of working becoming the norm
COVID-19 has seen a cross-sector working from home ‘revolution’ – including in banking. Going forward, banks should identify the optimal mix for the operating model and ensure they have sufficient infrastructure to facilitate long term mass flexible working. In turn, this means that the purpose and use of corporate real estate will need to be re-evaluated. At the same time, the labour force is likely to become ever more automated, with resiliency paramount. Organisational culture and leadership, on-boarding, training, upskilling, and the attraction of new talent – together with tax implications due to reduced Global Mobility and higher levels of remote working – all need to be factored in to a complex set of dynamics.
5. Risk playbook
Writing a whole new risk management playbook
If there is one thing that COVID-19 has taught us, it is that almost anything can happen. Banks will need to fundamentally re-evaluate their resiliency across the complete spectrum of risk – operational, liquidity, capital, market, and credit risk – to model for the next unforeseen event. As we enter a likely recessionary period, regulatory requirements could rise. How much capital should banks hold over and above regulatory mandates? Are their customer portfolios sufficiently diversified? Meanwhile, as banks increase the use of AI and digital technologies, are they cyber secure? New risk models and strategies need to be developed as well as processes and protocols to accompany them.
6. Purpose and values
Values and purpose front and center
As governments, businesses and citizens start to look towards the new reality of life with COVID-19, considerations related to environmental, social and governance (ESG) issues are central to the agenda. The days when financial institutions were almost exclusively evaluated by their growth, profits and go-forward prospects are receding. Today, what customers, investors and stakeholders increasingly want to know about – alongside financial strength – is the company’s culture, values and purpose. Societal responsibility, ethics and support for progressive climate related products and services are vital. Much progress was already being made pre COVID-19 – banks need to retain these gains and build on them for the future. At the same time, as banks become more digitised and the world moves towards a cashless society, banks may need to ensure that no one gets left behind.
KPMG's Banking and Capital Markets practice is helping the industry navigate these challenges, and capitalise on the opportunities today's evolving landscape is creating. To discuss these trends and their impact on your business, please contact us.