The 2008 financial crisis led to severe reputational fallout for the banking sector, with bankers viewed as accountable for avoidable problems severely impacting society's most vulnerable groups. The recession saw banking institutions across the globe crumble, and so forth of Northern Rock and Lehman Brothers cease operations completely. Because the crash, public confidence towards banks hasn't truly recovered, and also the crisis has already established a long-standing effect on the sector in general.
Fast-forward 12 years and we now find inside us the midst of some other global financial trouble, this time with no credible scapegoat. The pandemic is seen as a black swan phenomenon, in that few could have predicted its happening or unprecedented consequences on our way of life. Two 100-year events happening in the space of 12 years. Who could have imagined that? Businesses have recently had to have difficult decisions, and there's no doubt more in the future. That said, those banks which could support their clients throughout the crisis could see their reputations recover as the pandemic continues to cause stress on people's lives.
Starting strong
The good news is that banks are in a significantly stronger and sounder position today compared to what they were in 2008. Regulations align better with economic reality, the capital provisions are greater, and the Bank of England intervened quickly to suspend all bonuses and dividends when COVID-19 hit the UK. Customers are better protected too. Along with the Financial Services Compensation Scheme effectively guaranteeing all retail deposits as much as lb85,000 , a bank run from the type that wrecked Northern Rock is very unlikely.
The challenges ahead
However, there are difficult times ahead. The government's furlough scheme currently buffers banks. It has helped keep businesses afloat and employees paid. But these funds won't last forever, and unless there's an immediate bounceback following the lockdown, the worst from the crisis is surely yet to come. Not so much a “V-shaped recovery” – rather a “long tick.” When the money runs out, banks will have to start making difficult decisions, especially about lending.
What can make these decisions even more complicated would be that the crisis has turned a lot of received wisdom about creditworthiness on its head. Who would have thought at the beginning of this year that airline pilots may well be a credit risk, for example? In fact, many professions will probably see significant reductions in business volumes and income within the coming months. And since many professionals are utilized to leading relatively credit-hungry lifestyles with large outgoings, the strain will soon begin to show.
Decision-making revisited
This is a concern because many banks currently have a bare-minimum approach to credit risk modelling. Most banks make day-to-day credit decisions using dated processes and data. They base them on the very broad segmentation of the customer base because when times were good, it didn't seem worthwhile to drill right down to the person level. Meanwhile, anomalies and unusually complex cases are known senior decision makers who use their experience to make the right calls manually, with expert judgment.
This approach simply won't work in times where lots of more businesses and individuals are skating on thin ice, along with a bigger proportion of decisions require sophisticated analysis. There just won't be enough expertise to go around.
Until now, this was not an issue – after all, at high tide, most ships can sail serenely. However when the tide is out, it is the boats using the deepest draught that are the first to run aground. In the same way, it's the banks with the most historical baggage which are within the greatest danger. If their legacy systems, siloed processes, organisational structures and change-resistant cultural norms make sure they are unable or hesitant to adapt, they will not possess the agility to respond to the new reality.
In short, the UK's largest banks need to take action now. They need to put the right decisioning processes and infrastructures in place to support their human experts for making more tough decisions, faster and much more accurately. And they also need that technology to steer a brand new generation of less-experienced decision makers, helping them make a good calls to assist customers get back on an even keel.
Making more intelligent decisions
The only choice is for banks to level-up and simplify financial decisioning processes by adopting a more powerful, real-time and comprehensive approach to credit decisioning – one that will satisfy regulators and comply with all internal and external audit standards. A decisioning fabric which helps banks to evaluate every individual case on its merits and take the right action to aid each customer.
This ability to make responsible decisions and act effectively in real time is essential for banks to aid vulnerable customers with the COVID-19 pandemic and to help rebuild “UK plc” in the aftermath. Moreover, within the long term, intelligent decisioning will help bind banks and their customers closer together and show banking is much more than just another utility service, like electricity, water or gas. Through getting nearer to their clients and understanding their lives, desires and needs, banks can shift the thought of the worth they offer and assume a role as trusted adviser and business partner. They'll become an integral part of the material from the networked society.
The human element
The pandemic has made it clear how today's banking landscape is really a people business, and therefore a good customer understanding is all the greater important for banks. Instead of being purely about payments, banking has become firmly engrained into our everyday lives – and will also only increase as elements like open banking demonstrate the need for modern financial technology.