The economic recession induced by the coronavirus pandemic is challenging corporations like never before, yet as the demand for liquidity rises, banks are struggling to identify risk. James Buckley, VP and director Europe at Infosys Finacle argues that new approaches can solve the conundrum.
Looking back, one of the single most significant lessons from the 2020 coronavirus pandemic might be: “The unforeseen will happen.” For example, who in 2019 would have predicted that the booming aviation industry would shrink by 60% in 2020?
The extent and speed of the economic downturn has caught everyone by surprise, with a double-digit contraction within just three months. By comparison, the 2008 financial crisis knocked around four percent off global GDP over two years.
The pandemic has mercilessly exposed financial fragility and corporate casualties are mounting. Companies are ruthlessly cutting costs in order to survive, while at the same time crying out for funds during lean times.
As bellwethers of the economy, banks are not immune to these impacts. In the context of a recession of unknown depth, revenues from traditional banking transaction services will be in rapid decline and making validated risk assessments to enable expanded lending and liquidity services may be too difficult.
How can banks manage corporate lending to increase or revive higher-margin revenues, while mitigating the risk?
For many years, corporations have been driving down their banking costs, typically through constant review of service contracts in a steady drizzle of requests for information (RFIs) and request for proposals (RFPs). To add to the downward pressure on fees, many challenger banks and FinTechs are chipping away at specific segments and lines of business.
Yet with the clamour from industry for funds, there are clear lending opportunities for full-service banks, including additional high-value liquidity management services for corporations struggling with lean reserves.
However the history of finance shows that a rush to lend, lend, lend – in the hope of reaping a greater share of high-margin business – can lead to disaster. If too many loans go bad, banks will become increasingly risk-averse, potentially pushing more companies to the brink as funds dry up.
If banks are under financial (and potentially political) pressure to lend more and sell more value-added services to corporations even as they seek to avoid risk, can the circle be squared – or at least smoothed at the edges?
Assessing risk accurately requires good data, in as much detail as possible, in a way that can be analysed and scored effectively. If bank executives can act on comprehensive, validated understanding, they will be better-placed to ensure profitable loans and other services are extended to corporations that fit the right risk profile.
Naturally, banks possess a vast store of transaction data that can act as the foundation for risk analysis. But as the banking industry knows all too well, there is a gulf between possession of data and the ability to create actionable information, and in these straitened times it will be an uphill struggle to justify IT investments to create new capabilities.
The long lead times of core system extension, with its complexities of governance, security and more, could easily lead to an opportunity lost.
Lessons from the fintech world show that serving a single issue successfully delivers extraordinary agility. A single-service fintech can turn on a dime when compared with a full-service bank.
The economic shocks provoked by the pandemic have shown that agility is essential. Some industries are demonstrating that radical change can happen in weeks, not months. In many cases, entire business models have been re-thought or pivoted: dine-in restaurants are home-delivery experts; manufacturers sell direct to consumers; exhibition organisers stage virtual-reality conferences. These changes are driven by innovation, at the business, commercial and technology levels.
Similarly, banks are already exploiting overlay solutions that offer the tooling and analytics that enable comprehensive risk models to help capture new lending opportunities. Critically, the technology element can be adopted without impacting core systems. Armed with data, both internal and recruited from external sources, banks can become specialist lenders to each sector, with analysis that allows them to compete effectively and at reduced risk of incurring bad loans.
Overlay solutions have the advantage of meeting the nimble, agile, rapid criteria deployed by challenger banks and fintechss. Using the latest technologies, and in some cases living in the cloud, overlay solutions enable banks to create risk profiles at very detailed segment and sector level. With reduced or even zero capital outlay, the solutions provide aggregation, analytics, tooling, and calculation models that allow banks to pinpoint risk for both current customers and new prospects.
Additionally, new overlay elements can be added in an incremental fashion to extend capabilities, from loans to treasury to trade finance and more.
As recession bites, the corporate funding gap is even more acute than before, right at the moment when lenders are themselves becoming more risk-averse. New overlay technologies offer banks the opportunity to try new approaches very quickly, free of the trappings of legacy systems.
To avoid capital outlays and side-step the need for complex IT implementation projects, cloud and subscription models offer a rapid route to market. Sign-up is quick, with capabilities that would be too difficult or costly for the company to self-develop. The result is agility and flexibility that encourages executives and teams to experiment and innovate.
Modern overlay banking software offers fast adoption that delivers new functionality without the disruption and delay of large IT projects. In the post-pandemic world, the impossible is becoming routine, and banks can be at the forefront of change.