Everyday insights fall short in exceptional times
COVID-19 has banks facing the prospect of dealing not only declining revenues and rising loan losses, but also a consumer base that is saving more, using less debt and radically changing how and where they bank.
As financial services providers respond to these market changes, data and benchmarking is more important than ever. Detailed credit risk analysis, metrics around operational efficiency and greater insight into customer behavior can help banks thrive in the new normal of smaller capital buffers and greater uncertainty.
Many banks are now trying to use data and benchmarking to measure this risk to anticipate delinquencies or defaults, says Joe Fielding, a partner in the financial services practice at Bain & Company. They are relying less on blanket assumptions and using more granular data to look for strategic and cash flow disruption within individual businesses. For instance, while the restaurant industry overall is experiencing tremendous losses, many takeout restaurants are doing quite well relative to sit-down establishments, he says.
Being able to see cash flows through cash management accounts can give banks a quick window into the financial health of these companies, he says. Many are also looking to timeliness of payments and deferments, along with government aid packages, to gauge a company’s future viability.
“If all you’ve got is credit, you don’t have much,” Fielding says. “Having a combination of credit and deposits gives you a more real-time lens on the [company’s] health. Using the full set of information that you have to assess risk at that level is critically important.”
Anticipating customer trends and preferences
Banks can also use data and benchmarking to keep pace with how consumers bank and interact with channels and branches. Even before the pandemic, many banks weren’t fully using data to follow consumer migration to digital, Fielding says. A Bain survey of more than 131,000 customers across 22 countries found banks were steadily leaking customer business for years because of poor digital transformation efforts.
The pandemic has only increased the pace of digitization as customers are now working from home, going out less, and relying more on digital interactions. Gaining detailed data and analytics around short-term and long-term branch performance can help banks identify which ones to keep.
While some branches undergo a temporary loss in traffic because of the pandemic, others may be falling into a downward spiral that will only increase their obsolescence. “Using that data will help them better define which branches are worth keeping open and which ones are candidates for closure,” says Vincent Hui, managing director of Cornerstone Advisors.
As they analyze customer and channel data, banks should also ensure they’re increasing their security standards to protect their customers and themselves. “You have more reported incidents of fraud,” Fielding says. “Most banks already track this, but it needs to be tracked in a diligent way so you can close any kind of back doors.”
Operational and forward-looking data
Banks can also leverage data around operational efficiency and effectiveness, such as new accounts opened per branch, average number of accounts services per branch, number of loans per loan processor, average time to close, assets under management (AUM) per employee and sales per branch. “These are pretty important things. People are really looking at a lot of expenses [and metrics] to find ways to be more efficient or reduce costs,” Hui says.
Fielding notes the expectation of a sustained low-rate environment through 2022 will lead to further margin compression. Consumers are also saving more, relying less on debt, and even using stimulus money to pay down credit card balances. While many benchmarks indicate “business is fine” for most banks, models must take a more strategic approach to prepare for the “deferred distress and business interruption,” Fielding says.
Whatever internal or external data banks use to make decisions, they must be cognizant that backward-looking historical models can only provide so much context in these unprecedented times, Fielding says. He notes the past 10 years of benchmarking data was derived in an abnormal time of cheap and abundant liquidity, and a protected credit environment.
“The stress test for credit crisis really never anticipated a pandemic,” Fielding says. “What worries me would be that banks are using these internal models that are not overly reliant on this relatively benign 10-year window of data.”
Craig Guillot is a business writer who specializes in retail and finance. His work has appeared in such publications as the Wall Street Journal, CNBC, Bankrate and Better Investing.