The new normal for banks: What is next for the finance function?
20 October 2020 | The Edge Markets
Increasing complexities of customer expectations, interconnectedness of societies, and technological innovations have disrupt the banking industry. Banks need to adjust to rapidly evolving customer expectations with differentiated product pricing, innovation, and customer experiences.
Increasing complexities of customer expectations, interconnectedness of societies, and technological innovations have brought disruptions to the banking industry.
Banking institutions can expect stiffer competition from new digital banks and Fintech companies. Late last year, Bank Negara announced the issuance of up to five licenses to establish digital banks, off the heels of regulators in other ASEAN countries. Fintech companies are also disrupting various aspects of the traditional banking value chain such as payments and lending, challenging the incumbents with differentiated product pricing, innovation, and customer experiences.
Banks will also need to adjust to rapidly evolving customer expectations. Customers are demanding real-time 24/7 access to banking services through self-service channels as well as personalised products and services. Core banking systems need to be nimble and flexible to support these demands.
The COVID-19 pandemic has forced further changes on banks and their customers. The shift of consumer behaviours to digital services such as self-serve online channels has accelerated. During the movement control order (MCO), some banks shuttered their branches while some shortened their service hours. This in turn led to a significant increase in demand for basic banking services through call centers and online channels.
At the same time, banks also needed to balance the need to support their customers during the pandemic as well as manage shareholders’ expectations. In March, the government announced a six-month loan moratorium to support businesses and consumers to weather the crisis, and has further announced an extension in July for those who lost their jobs. This combined with weaker asset quality and higher provisions, has caused banks to report significant year-on-year decline in 2Q profitability and a weak outlook.
In addition, reduction in the Overnight Policy Rate from 2.50% to 1.75% between March and July 2020 will negatively impact banking margins going forward. Having robust scenario planning and tighter management of capital, liquidity, and cost will be critical for banks in navigating the uncertainty.
The pandemic has also highlighted the need for banks to rethink their workforce strategy. At the height of the pandemic, local banks reportedly had more than 70% staff working from home. This trend is expected to continue post pandemic. As such, banks need to invest in IT infrastructure, such as cloud-based solutions and collaboration tools, to enable their workforce to be able to work efficiently, remotely. Banks will also need to raise the level of technology and digital capabilities within their workforce composition, intensifying the competition within this scarce talent pool.
What does it mean for CFOs?
Over the last few months, CFOs have had to make quick decisions to respond appropriately to the immediate crisis at hand, while ensuring timely reporting to senior management and shareholders. As we move into the next phase of the pandemic, CFOs need change their mindset to focus on recovery, and more strategically how to thrive in the new normal. Based on interviews conducted with CFOs across SEA, we have identified five imperatives that CFOs should look at.
Reimagine and adapt business model
With consumers forced to use web or mobile banking alternatives, there is no better time to shift focus to digital banking. CFOs recognise that the ability to respond quickly to market needs with new business models is key to enabling them to gain a competitive edge.
Consumer buying patterns have radically shifted as a result of social distancing measures. The most nimble financial institutions have innovated and scaled alternative digital models to stay engaged with their customers during this period. However, the real challenge is to analyse customer behaviour and find the right offerings, as well as marketing and promotion channels to fulfil customer needs. CFOs should assess these opportunities and ensure that the appropriate budget is available for the business to make the necessary investments and secure its profitability.
Invest in digital transformation
COVID-19 have accelerated the focus on digital. CFOs also recognise the importance of having digital finance systems in place to make informed decisions as they look to unlock value and growth in the new normal.
Reporting activities have increased, as C-suites, Boards, and even regulators demand more frequent updates and projections. To provide more informed forward-looking estimates, CFOs will need to take into account the impact of the stimulus package and the uncertainty associated with the pandemic trajectory, especially in areas such as capital, liquidity, and asset quality. Boards and management teams have begun to ask many more “what if” questions. Scenario analysis is therefore critical as finance needs to be able to understand impact of different business initiatives, taking into consideration the macro conditions, as well as the changing consumer needs. Banks have increasingly realized that bringing scenario planning to life requires integrated, flexible, and dynamic enterprise-level planning and governance tools and capabilities given that they have very disparate systems and data sources.
Rethink the Future of Work
While banking services are regarded as essential service, more than 70% of banking staffs worked from home during the MCO. This arrangement was deemed impossible only few months back but is now being considered as a permanent option for certain staffs or function.
The marked shift towards digitalisation is an opportunity for CFOs to rethink the ways their finance team and the rest of the organisation pair humans and emerging technologies, such as artificial intelligence, and approach them not as a substitute for human skills, but as a means to augment them. This view can enable organisations to streamline costs while enhancing value creation by the workforce.
Increase risk and cyber resilience
With COVID-19, certain key accounting and disclosure considerations may arise both in the short and long-term. Impairment testing for financial assets using the expected credit loss (ECL) Model, in particular, emerged as one particular area of concern among CFOs.
Liquidity and credit risks are perennial top-of mind issues for CFOs especially when taking into consideration the impact of BNM’s loan moratorium. While banks are given ample time to rebuild their liquidity buffers until 30 September 2021, it is important that they perform comprehensive stress testing and scenario analysis to assess its vulnerability to different stress scenarios. CFOs also need to consider optimisation of risk-weighted assets, setting up early warning systems as well as reviewing the current capital and liquidity contingency menu of options and refining the available recovery indicators.
With most CFO’s recognition that cyber security risks are magnified during a crisis and its aftermath, they will need to review their business continuity programmes, pandemic scenarios, and management practices and ensure that they are defensible and aligned with the applicable cyber security and privacy requirements, fiduciary duties, and industry expectations – even in a remote setting.
Restructure to stay relevant and seize M&A opportunities
Given the emergence of new consumer behaviours and increased e-commerce uptake during the pandemic, the consumer sector is one industry that is expected to witness increased M&A activity. This, in turn, could also have spill-over effects on other financial service players such as payment platforms and other FinTech players. CFOs should consider strategies to collaborate or acquire nimble Fintech players to safeguard existing markets, accelerate recovery, and position themselves as market leaders.
In the long haul, the above priorities for the CFO will be critical as they are expected to play greater roles as strategists and catalysts for their respective organisations, partnering with the CEO on big picture issues and charting the way forward.
The views and opinions expressed in this article are those of the authors (Deloitte Southeast Asia’s Consulting Executive Director, Timothy Ho, Deloitte Malaysia’s Consulting Executive Director, Cheng Yen Chu, and Deloitte Singapore’s Audit & Assurance Partner, Joshua Yan), and do not necessarily reflect the view of Deloitte.