Digital Transformation During a Downturn: Why Banks Need to Step Up the Pace

The COVID pandemic was perhaps the worst global crisis in a generation. Fortunately banks and fintechs with the right technologies and strategies not only weathered the storm, but came out on top. As we navigate this period of economic uncertainty, this blog considers how digital technologies and new working methods can drive change and continual improvement – even during difficult times.  As François-Henri Pinault, CEO of Kering suggests, “In a recession, you must be able to call into question everything you've done before.”

Headlines are often misleading – bad news makes a good headline while incremental improvements usually go unnoticed. The latest economic forecasts from the Organisation for Economic Co-operation and Development (OECD) are slightly more optimistic than many expected. However, global growth is likely to remain below trends for 2023 and 2024 (at 2.6% and 2.9% respectively). With U.S. annual GDP growth projected to be 0.8% in 2023, and 1.5% in 2024, the global economy is likely to remain fragile.[1] Furthermore, persistent inflation, financial market turbulence, and supply chain problems all contribute to a climate of uncertainty that creates a big challenge for banks making digital investment choices.

Global Trends, Regional Differences

Not all banks are equal. While global banking is a hyperconnected industry, banks in different regions face specific challenges and have unique priorities. For example, recent conversations with banks in Singapore and Australia reveal that the APAC banking industry is currently very strong but is undergoing a period of rapid change. Against this backdrop, there’s growing demand for risk identification, mitigation, and management services throughout the region, particularly in Australia.

Bank regulators are increasingly aware of the integrated nature of global banking and the inherent risk of importing adverse economic conditions. Furthermore, all banks must monitor and manage a range of currencies, interest rates and other macroeconomic variables that are determined by a combination of internal and external factors. Technology provides an effective means to tackle these challenges in parallel – and cost effectively – as part of business as usual.

Banks throughout the Philippines, Thailand and Hong Kong are keenly interested in the opening of the payments market and regulatory integration to facilitate easy cross-border payments (increasingly in real time); these developments will be of benefit to all players in the region. Globally, there’s also growing interest in technological advancements such as artificial intelligence (AI) and machine learning (ML), both of which will shape the bank of the future, whatever the economic climate.

The Best Generals Are Made in Battle

Managing through a downturn is not for the faint-hearted, but it is essential and a true test of business leadership. Businesses need modern digital tools at their disposal to reduce costs, manage with greater precision, and meet customer needs more fully than ever. Now is the time for banks to optimize and transform their operations.

• Digital optimization involves working with existing business processes and functions to drive improvement, boost efficiency and achieve better outcomes. This includes digitizing and fine-tuning existing processes or products to harness the power of data to make decisions based on customer insight. Digital optimization represents an ongoing program of continuous improvement or “kaizen” based on the three pillars of housekeeping, elimination of waste, and standardization.
  
  In a climate of uncertainty, digital optimization needs to become part of business as usual, enabling banks to flex to accommodate change and seize new opportunities. Banks that pursue digital optimization will become more lean, agile and customer centric. They will be better able to handle changing market conditions that compress business margins or call for products or services to be adapted.

• Digital transformation involves reimagining the bank around digital capabilities. This type of investment can make the bank even more customer centric. The most successful digital transformations focus on the total experience, where the bank’s customers and employees share the same data and view of the business.
  
  Digital transformation is essential to turbocharge innovation and become a data-driven bank. A bank that invests in digital transformation will use data to inform roadmaps and strategies and identify new growth opportunities.

Digital optimization and transformation are highly complementary – they can and should be pursued in parallel to develop a continuous cycle of improvement or growth loop.  

Digital Transformation in a Downturn

In an economic slowdown, banks need to transform more than ever. A digitally enabled bank is more cost-effective. During a downturn, margins are likely to be compressed and marginal business becomes inviable. Digital products can be developed, launched and managed far more cost effectively than previously possible. This means that marginal business lines remain viable, and innovation can continue even during strained times.    

Securing the Future

Security remains paramount. Banks must invest to continually prevent and detect fraud, improve cybersecurity, and mitigate an expanding array of operational risks. 

Cloud Is Critical

Cloud computing, an essential plank of digitalization, allows processing costs to be controlled with precision. The unique elasticity of cloud means that costs are always aligned with use. But cloud is about much more than costs – it’s the gateway to modern methods and new technologies – including AI and ML – and harnessing data as a factor of production.

The Bottom Line

Global banking is transforming from a closed and vertically integrated industry to an open and horizontal ecosystem powered by collaboration. To successfully participate, banks need technology that is open and collaborative, with a carefully crafted application program interface (API) strategy to facilitate cost-effective innovation and collaboration.  This is particularly critical for organizations working with hybrid solutions.

Today’s strategic investments in modern technology will empower incumbent banks to compete better than ever when the upturn comes.  

[1] https://www.oecd.org/newsroom/economic-outlook-slightly-more-optimistic-but-fragile.htm