6 imperatives for financial institutions to return to profitable growth

COVID-19 has resulted in an economic contraction that will likely be the deepest since World War II. It has also put tremendous stress on the banking industry. At the same time, this stress has helped show financial institutions what is actually possible in terms of change. And it is time to make sure that the speed and ambition that we see now from financial institutions becomes the new normal and not just a pandemic-fueled exception. With that in mind, here are 6 imperatives to help financial institutions return to profitable growth as the crisis abates:

  • Innovate new products and propositions – COVID-19 has triggered a range of new financial needs that are waiting to be addressed. Financial institutions need to strengthen their advanced analytics skills to identify which consumers they can feasibly serve and then create a personalized offer for them. Small businesses might also be interested in liquidity advice offered as a subscription service.
  • Lock in the shift to digital sales and service, and reshape physical distribution – in only a few months, consumers’ adoption of digital banking has leapt forward by years. Such a jump in adoption opens the door for financial institutions to turn digital channels into real sales channels and not just convenient self-service tools. At the same time, financial institutions need to redesign their physical footprint to match new post-COVID-19 realities.
  • Create a structurally leaner and scalable cost base – in order to offset the effect of spiking risk costs and sluggish income (as well as to free up resources for building digital capabilities), financial institutions need to aim for a cost improvement of 25-35% over the next 2-3 years.
  • Reset the organization and technology for speed – as a result of COVID-19-related measures, many working in the banking industry have become agile overnight, deploying digitally in record time and numbers. Financial institutions need to lock in this speed and empower their employees by resetting their organization from a siloed setup to one oriented around what consumers value.
  • Double down on risk and capital management – credit losses will be the defining differentiator of performance over the next year. Early detection and proactive intervention are critical to manage non-performing loans. Once this is under control, the next challenge will be steering through the coming recapitalization wave.
  • Rebalance the business mix and seek targeted merger and acquisition deals – industry landscapes are often redrawn by crises. As the pressure on return on equity increases, financial institutions need to respond by cutting out non-core assets that drive complexity or cost (or that simply add no value). Mergers and acquisitions might feel far off today, but they remain a path to rapid cost savings or the acquiring of new capabilities.