From a customer perspective, banks have had a ‘good’ pandemic. How can banks build on that trust in the sector and its digital take up?
“If you want to make God laugh, tell him your plans.” This old fatalistic joke has always been particularly relevant to the risk assessment wing of banking, and it is arguably even more appropriate now.
Digital communication has made the world smaller and turn faster; everything happens quicker than ever before. This has had a dramatic impact on the ability of the banking sector to predict and plan for future events.
A risk shift in banking
The tendency for global events to look more like revolution than evolution has hit financial risk assessors. Their trade traditionally involved using historical data to form a long-term assessment of the direction of movement of markets, regulation, global politics and world events, but that slow approach simply will not cut it anymore.
While there have been other significant market shocks in the recent past, such as the Brexit referendum, the 2008 global financial crash and trade wars, none of them came close to that of the Covid-19 pandemic. And each twist that brought — each vaccine development, roadmap announcement, country lockdown and individual daily press conferences — had instant effects on markets and economies.
While both retail and investment banks still need to think about the longer term, increasingly their more pressing focus is on the short term and which curve ball may be coming their way next. That means they need to be agile in their decision-making, which in turn means they need perpetual access to the best and latest data. Real-time data movement is now essential to risk modelling, which presents a raft of new challenges.
The good news
Banks may not have seen Covid-19 coming — and their performances were not uniformly consistent — but from a customer perspective, they have had a ‘good’ pandemic. Most customers (62%) believe their bank has acted in their best interest during the pandemic and have a high level of trust, according to data from iResearch Services.
Customers have embraced the necessary pivot to tech-led rather than branch-based operations, and they do not look likely to go back: more than half of UK customers (54%) are now less likely to physically attend a branch.
Growing risks within banking
So, how do banks maintain and build on that trust in the sector and its digital take up? Well, first, they need to live up to the customer expectation that their data is safe.
During the Covid-19 pandemic, we have seen the bigger banks accelerating digital transformation to catch up with the tech advances made by fintech organisations and challenger banks. Radically changing working practices at pace — with the customer shift to tech paralleled by the sudden adoption of home-working practices — brings data security challenges. Those running these new or enlarged systems must be aware of the risks that rapid data movement itself brings and neutralise them.
The growing role that artificial intelligence plays with the application of auto decision-making also throws up issues around security, governance and compliance.
Away from global news events, perhaps the biggest challenge comes from the rising threat of cyber attacks. Ransomware and malware attacks are growing rapidly both in number and sophistication. Hackers are no longer seen as the tech-obsessed chancers or loners with a grudge they were once perceived to be; they can be state-sponsored, with vast resources and destructive agendas.
There are also new sector issues that must be factored in: the unpredictability of the cryptocurrency market and possible future regulatory shifts as the fintech sector grows new innovations. Therefore, to future-proof their operations, banks need to invest in good systems and knowledgeable staff.
Rise in digitalisation
With the established banks being increasingly alert to the business value of operationally building-in technology, there is a sector-wide tendency for convergence, narrowing the gap between what the big banks and smaller, newer challengers are doing.
The rise in mergers and acquisitions is also expected to accelerate, which will expedite this convergence. But there is also the possibility of movement the other way: of tech giants looking at the banking sector and thinking they could do it better. In May, eBay announced its intention to start offering personal and business loans, which is something that PayPal had already moved into. Who will be next?
It need not just be big banks buying up challengers and fintech organisations, or partnerships between these two worlds; that paradigm too could be reversed. The banking sector’s own future looks as difficult to predict as the future events of the unstable wider world. The only certainty is that there will be continued surprises to challenge and drive the industry forward.
The success stories are bound to be based around real-time data used securely to optimal efficiency. That is the strongest weapon we have to predict and mitigate risk. We cannot go backwards: this must be the start of lasting and meaningful change.
Rachael Kinsella is an editor at data agency iResearch Services.
