China continues to be a world leader in e-commerce, digital payments and digital banking. Since the outbreak of COVID-19, the banking sector in mainland China has significantly increased its focus and efforts on digital transformation. Banks recognise the importance of getting this right in order to remain competitive and gain or maintain their market share. The banks that invested more heavily in technology and digitalisation in the last couple of years are already starting to emerge as winners, as they were less impacted by the pandemic and better positioned to service their clients through digital channels, and improve customer access and experience. In addition, many banks are increasingly leveraging fintech and emerging technologies, such as AI, data, cloud and blockchain, to transform their operating model enterprise-wide, increasing productivity and efficiency. Overall, most banks have set aside a bigger budget for digitalisation and technology in the coming years.
The Chinese government is also strongly promoting the digital economy. China is already essentially a cashless economy, with a large share of payments conducted through mobile phones and e-payment platforms such as WeChat Pay and Alipay. Recently, the People’s Bank of China launched a pilot of its own China Central Bank Digital Currency – the first in the world. All of these developments are disrupting the industry and presenting both opportunities and challenges to banks. The banking sector will need to step up their digital transformation efforts to adapt to the New Reality, maintain competitiveness and ensure long-term growth.
Hong Kong’s banking sector showed resilience in 2019 despite a challenging year for the overall economy. However, ongoing macroeconomic uncertainty and the effects of COVID-19 are likely to have a significant impact on profitability in 2020 as banks grapple with challenges in generating revenue, as well as rising credit impairment costs that cannot be avoided. As the industry responds, recovers and adapts to a New Reality, banks will need to place an increased focus on costs as the primary lever to manage profitability.
The move to a New Reality is causing many banks to think about their future operating models and cost base going forward, and how to make them resilient to shocks, but also more flexible. We expect banks to increase their focus on automation from a cost and resilience perspective. Ensuring that banks can continue to operate and offer their core services is key, and customers are also increasingly demanding more digital solutions for their banking needs, especially as COVID-19 has led to the increasing use of digital channels. To support this, banks are realising that more of their products and transaction processing will need to be digitalised.
Together with colleagues around the world, we have identified six key trends against which bank’s 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.