As the pandemic is still unfolding many uncertainties lie ahead. One difference from the 2008 financial crisis, is that banks are not the genesis of the COVID-19 crisis and will be required to work with governments to save the world economy. In order to do so, banks must survive by making fundamental changes to their business and technology operating models to withstand the coronavirus and its aftershocks. Here are some thoughts on what the new normal for banking might look like.
Digital acceleration – banks are already going through a process of digitisation but this crisis will amplify this trend and in particular cloud enabled services. In the past we have seen servers overloading and crashing due to increased trading activity related to geopolitical events. The corona virus not only created increased trading activity but also created the additional stress of entire workforces working digitally online. In the short term we will see a shift of budgets move towards improved IT infrastructure, digitisation and operations to safeguard its RTB capabilities. To further fast track digital innovation banks will look towards buying and investing in the Fintech community, which is great news for Fintech firms where traditional VC funding will be less readily available post pandemic.
Infrastructure localisation – many financial institutions are reliant on far offshore locations for their operations and IT services e.g. India. However once these resources had to work from home during lockdown, they did not have the right IT infrastructure in place to continue working so banks had to scramble for alternatives. This makes a compelling case to bring these types of services closer to home so they can respond to local variances.
Security, data, and compliance – All of my banking clients have done a fantastic job of rapidly working from home (WFH) with minimal loss on productivity. The proof of productivity allows banks to extend current WFH policies and significantly reduce their real estate costs and HQ office space. However, there are associated risks involved including data leaks and security concerns. Typically, banks can sustain 10% of their workforce working from home, but any sudden multiple can increase the risk of a cyber-attack in the same proportion. Compliance will also be a challenge with reduced home monitoring capabilities – for example how do you ensure all trading related calls are recorded while working from home or any fraudulent activity is not taking place? Security, data, and compliance operating models will need to extend past the physical office barrier and into the home with a renewed focus on data strategy as we become increasingly distributed.
The virtual office –Working virtually can cause a sense of isolation, lack of control, and blurred lines between work and home. How do banks create a virtual environment that considers engagement and well-being? How do we turn the virtual world into a more personable space in line with the banks culture? One client has for example created a ‘coffee channel’ – an open video conferencing channel so people can come in and out as they please mimicking the real life office coffee area. How do we capture those informal conversations and body language that allows you to shape conversations in different directions? Innovative technologies such as augmented reality combined with further analysis on employee interaction/movement in the workplace can help guide, define and create a truly interactive and personable virtual office.
Machine learning (ML) / artificial intelligence (AI) – AI/ML funds and models is a growth area within most tier one investment banks but have experienced mixed results during the COVID-19 crisis – some AI machines were able to identify risks earlier than conventional quants, while some machines stopped operating altogether as the pandemic spread and events began to diverge from historical data. AI machines can also be disconnected from the real functioning market for example one AI fund tried to short sell Italian stocks, but the market had restricted short selling causing a disconnect. The crisis demonstrates how much more work is required to build more reliable, robust, and resilient AI models / funds before they are more commonly used. Note – AI/ML techniques can be used for less market critical activities such as chat bots to provide important information in times of crisis where resources are less available. Chatbots are currently used sporadically in the wealth management sector but I expect their use to start expanding into other core business areas as they become more sophisticated.
New products and services – Banks were the genesis of the 2008 crisis and the government bailed them out to avoid global markets collapsing and accelerate the rate of recovery. This time around it is other industries and institutions that will require help not just from the government but also the banks. Banks have a chance to play a positive role in the global economic recovery and demonstrate their social utility. In doing so, banks will introduce new products and offerings not only guided by the government stimulus programmes but also through innovation and client demand. This also means ensuring they have the right business model / technology architecture to rapidly deploy and service these new offerings.
Had the COVID-19 virus pandemic struck in 2007, most of the investment banks would have struggled to survive. The post 2008 structural changes and regulation has enabled our banking system to sustain the current economic attack. Investment Banks will continue to evolve their business models and IT architecture to not only safeguard themselves but to play a huge role in saving the global economy. Will banks be able to step up and look more like the solution than the problem? Could this be banking’s coronation? Watch this space.
Stay home, stay safe, stay healthy.