By Brian Holden, Global Director of Financial Services at SAS UK & Ireland
The 2008 financial crisis led to severe reputational fallout for the banking sector, with bankers seen as responsible for avoidable problems severely impacting society’s most vulnerable groups. The recession saw financial institutions across the globe crumble, and the likes of Northern Rock and Lehman Brothers cease operations completely. Since the crash, public confidence towards banks has never truly recovered, and the crisis has had a long-standing impact on the sector as a whole.
Fast-forward 12 years and we now find ourselves in the midst of another global financial crisis, 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 lives. Two 100-year events happening in the space of 12 years. Who could have imagined that? Businesses have recently had to make some difficult decisions, and there’s no doubt more to come. That said, those banks which can support their customers throughout the crisis may see their reputations recover as the pandemic continues to cause strain on people’s daily lives.
The good news is that banks are in a much stronger and sounder position today than 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 as soon as COVID-19 hit the UK. Customers are better protected too. And with the Financial Services Compensation Scheme (FSCS) effectively guaranteeing all retail deposits up to £85,000 (£170,000 for joint accounts), a bank run of 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. This has helped keep businesses afloat and employees paid. But these funds won’t last forever, and unless there’s an immediate bounceback after the lockdown, the worst of 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 will make these decisions even more difficult is that the crisis has turned a lot of received wisdom about creditworthiness on its head. Who would have thought at the start of this year that airline pilots might be a credit risk, for example? In fact, many professions are likely to see significant reductions in business volumes and income over the coming months. And since many professionals are used to leading relatively credit-hungry lifestyles with large outgoings, the strain will soon start to show.
This is a problem because many banks currently take 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 a very broad segmentation of the customer base because when times were good, it didn’t seem worth the trouble to drill down to the individual level. Meanwhile, anomalies and unusually complex cases are referred to senior decision makers who use their experience to make the right calls manually, with expert judgment.
This approach simply won’t work in a situation where many more businesses and individuals are skating on thin ice, and a much larger proportion of decisions require sophisticated analysis. There just won’t be enough expertise to go around.
Until now, this hasn’t been an issue – after all, at high tide, most ships can sail serenely. But when the tide goes out, it’s the boats with the deepest draught that are the first to run aground. In the same way, it’s the banks with the most historical baggage that are in the greatest danger. If their legacy systems, siloed processes, organisational structures and change-resistant cultural norms make them unable or unwilling to adapt, they won’t have the agility to respond to the new reality.
In short, the UK’s largest banks need to act now. They need to put the right decisioning processes and infrastructures in place to support their human experts in making more tough decisions, faster and more accurately. And they also need that technology to guide a new generation of less-experienced decision makers, helping them make the right calls to help customers get back on an even keel.
Making more intelligent decisions
The only option 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 enables banks to assess each individual case on its merits and take the right action to support each customer.
This ability to make responsible decisions and act effectively in real time is vital for banks to support vulnerable customers through the COVID-19 pandemic and to help rebuild “UK plc” in its aftermath. Moreover, in the longer term, intelligent decisioning will help bind banks and their customers closer together and demonstrate that banking is more than just another utility service, like electricity, water or gas. By getting closer to their customers and understanding their lives, needs and desires, banks can shift the perception of the value they offer and assume a role as trusted adviser and business partner. They will become an integral part of the fabric of the networked society.
The human element
The pandemic has made it clear how today’s banking landscape is a people business, meaning that a solid customer understanding is all the more important for banks. Rather than being purely about payments, banking is now firmly engrained into our everyday lives – and this will only increase as elements like open banking demonstrate the value of modern financial technology.
Under current circumstances, financial decision-making is having more of an impact on our personal and professional lives than ever before. Getting it right therefore becomes mission critical, and any mistakes could lead to irreparable reputational damage. By providing decision-makers with visibility around each customer’s individual situation and financial health, banks have a chance to save cash-strapped businesses and guide customers through this crisis. This will ultimately accentuate their role in the UK’s financial recovery and help them regain what was lost in the last financial crisis – their reputation.