There is no question that the banking industry will be significantly changed as a result of COVID-19. Many banks in Canada were already transforming to become more digital, to reduce costs and to improve the customer experience. But COVID-19 has vastly accelerated the drive to this new operating model; in a very real sense we have seen 3 years of digital advancement in about 3 weeks.
We can expect Canadian banks to play a role in helping drive a pan-Canadian digital ID solution that has clear standards that ensure interoperability of systems, security, and reliability. We have already seen the federal government leverage the banks for citizens to enrol in direct deposit. That is a big deal.
We can expect Canada's Payment Modernization program to continue full speed ahead, which will require Payments Canada and the banks to update their payment infrastructure to develop 'real-time' payment capabilities. With fears of COVID-contaminated cash, cash usage is way down and unlikely to come back fully. This will require the banks to seriously rethink their cash handling infrastructure.
Canadian banks have been quick to adopt new ways of working, upgrading both back-office and client-facing digital capabilities, and driving paperless approaches and automation. It's expected that a portion of Canadian bank employees will continue to work from home indefinitely, and as some of the largest users of corporate real estate, banks will be revisiting office configuration and work locations. In addition, banks will need to develop new distribution strategies that take advantage of increased digital client interactions.
COVID-19 has also highlighted the need for the banking 'risk playbook' to be rewritten. Going forward, Canadian banks, along with the rest of the world's banks will need to define new approaches for tracking and reporting liquidity metrics, different approaches to valuation, and new ways of monitoring obligors – just to name a few.
As society becomes more cashless and digitization accelerates, banks will 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 centers? 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.
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.
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.
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.
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 labor force is likely to become ever more automated, with resiliency paramount. Organizational 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.
As governments, businesses and citizens start to look towards the new reality of life after 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 paramount. 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 digitized and the world moves towards a cashless society, banks may need to ensure that no one gets left behind.
KPMG in Canada’s Banking and Capital Markets practice is helping the industry reimagine the way they work today in order to capitalize on the opportunities of tomorrow. Let’s do this.