Second, to cut costs, banks should reexamine the build-buy-outsource/offshore model for technology projects. See Terms of Use for more information. The economic damage from the pandemic is self-evident. To meet the demands of the new realities, projects that once took months or even years were accomplished in just weeks, such as the banks' response to the US Paycheck Protection Program (PPP). Second, scale, more than ever, could become critical as profitability pressure will put costs into greater focus. Avoid Risks! Anna is also responsible for managing the global relationships of the Swiss firm, bringing the power of Deloitte's global expertise and insights to Swiss clients. Climate change, AI and resilience key themes in 2020 Meanwhile, regulator concerns about financial crimes in the areas of cyber fraud and anti-money laundering increased. Overall, however, this is going to be the banking and fintech story for 2021: The disruption of the value chain. Year in Risk. While customer experience can be tricky to quantify, client turnover is substantial, and client loyalty is rapidly becoming an endangered idea. Digital interfaces are essential, and desired, but customers tend to need person-to-person experiences to boost loyalty. ECB Banking Supervision conducts an annual risk identification and assessment exercise in close cooperation with the national competent authorities (NCAs). Survey respondents were asked to share their opinions on how their organizations have adapted to the varied impacts of the pandemic on their workforce, operations, technology, and culture. To fully realize the digital promise in the front office, banks can elevate customer engagement by deploying an optimal mix of digital and human interactions, intelligent use of data, novel partnerships, and compelling service delivery models. Creating stronger incentives to decommission legacy systems could help in this effort. I’ve never been a big fan of “Year of the [fill-in-the-blank]” proclamations. Three-quarters of respondents said their institutions will increase investment in climate-related initiatives. Banks can help reallocate capital toward economic activities that are net positive to societies. This can enable shifting of resources to the more difficult threats. For many of these clients, reflecting heightened concerns to protect the value of existing businesses and other assets, wealth preservation and the focused support of family businesses through succeeding generations are now the primary goals, rather than short-term financial return. Cultural norms and practices related to decision-making were discarded. In our 2021 banking and capital markets outlook, 200 industry leaders weighed in on their companies’ COVID-19 recovery efforts. Emerging Risks: what are the main risks for 2025? We serve our clients locally, while drawing upon the firm’s considerable global resources and industry expertise. View in article, Sanne Wass, “Banks raise concern over insider threats as pandemic takes toll on mental health,” S&P Global Market Intelligence, October 26, 2020. Women in the financial services industry collection, Explore the Financial services collection, Go straight to smart. To fully realize the digital promise in the front office, banks should elevate customer engagement by deploying an optimal mix of digital and human interactions, intelligent use of data, novel partnerships, and compelling service delivery models. Technical debt in the form of legacy infrastructure and data fragmentation across the enterprise continues to impede banks’ digital transformation initiatives.39 But in many institutions, digital inertia has faded: There is now more appetite for technology-driven transformation, especially in core systems. These declines have been largely offset by near-record levels of trading revenues and wealth management fees. © 2020. Interestingly, respondents in North America (35%) and Asia-Pacific (38%) were not as pessimistic. Generally, these losses are smaller than during the GFC, when US banks recorded a loss ratio of 6.6% from 2008 to 2010.4. How can the emerging lessons serve as a catalyst for business transformation? Additionally, many banks took or are planning to take several workforce-related actions (figure 6), such as offering flexible schedules to employees. Don’t let that fool you. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the "Deloitte" name in the United States and their respective affiliates. View in article, Rhoda H. Woo et al., Confronting the crisis: How financial services firms are responding to and learning from COVID-19, Deloitte Insights, April 29, 2020. To be most effective, these resilient leaders31 should be future-focused and empathetic. All Rights Reserved, This is a BETA experience. For example, they have instituted more granular tracking of bank compliance with examination findings to address emerging problems in a timely manner, and they have incorporated more forward-looking elements into supervisory tools. new risks: a more complex supply chain, with more potential points of failure; and a lack of clarity about where responsibility lies. Amazon’s and Stripe’s ability to embed banking services (deposit accounts and loans) into their existing services gives those firms (and their partners) a major advantage because they have ongoing access to data about those merchants and a near-zero cost of acquisition for those products. Risk.net's Global Libor Series delivers the inside track on regulatory, market and product developments, explores the implications and emerging risks for market participants, and reveals the strategiâ ¦ 04 Feb 2021 - 26 Nov 2020 London, UK The fund is now positioned for the expected emerging market recovery as we head into 2021. Most banks also responded well to regulatory reporting requirements, providing timely and high-quality data. That is why AXA surveys employees worldwide every year to identify the most important emerging risks for the next 5 to 10 years. Banks in North America and Europe aren’t expected to recover to 2019 levels anytime soon, with APAC banks potentially only getting near their pre-COVID-19 ROE average level of 9.2% by 2022. Vice chairman and US Banking & Capital Markets leader. Going forward, banks should look to institutionalize some of these learnings to create more agile workforces. View in article, Khalid Kark et al., The kinetic leader: Boldly reinventing the enterprise, Deloitte Insights, May 30, 2020. She has also worked for the United Nations, World Bank, European Parliament and in the charity sector. What is even more impressive is the spike in digital sales—the holy grail in digital banking. More than ever, modernizing the digital core and closing the gap in legacy infrastructure could feature prominently in the banks’ M&A calculus, as banks reposition themselves in the postpandemic world.53 On the supply side, M&A may be driven by banks considering sales of businesses to support earnings and rationalize their business models. Prior to working at Beazley she worked for RBS and Business Monitor International. View in article, Erica Volini et al., Returning to work in the future of work: Embracing purpose, potential, perspective, and possibility during COVID-19, Deloitte Insights, May 15, 2020. But that’s not a fintech-as-a-service platform. This battle, too, is going to move up the value chain to the point of payroll. Read more. Fintechs in this category partner with corporations, HR software providers, and payroll systems to enable flexible access to earned wages. Worked across teams in Investment banking from pricing , risk management, exchange connectivity with focus on development of end to end solution. In this regard, technology’s true power—its ability to reshape risk frameworks in more meaningful ways—has yet to fully be realized. BBVA, for example, built new data analytical capabilities through a global data platform and a dedicated “AI factory.”25, Another lesson banks could learn from fintechs is how to leverage customer data and analytics to digitally deliver hyperpersonalized services and engage customers—together with partners—in new and differentiated ways. View in article, Erica Volini et al., Beyond reskilling: Investing in resilience for uncertain futures, Deloitte Insights, May 15, 2020. Caution should be exercised, and due diligence efforts may need to be modified to account for COVID-19’s unique impact on asset quality and industry competition. Some of these challenges also translate to the social sphere. ... banking organizations (collectively, banks), as well as identified service providers. Streamlining front-to-back data flows and deploying data analytics will remain prerequisites to achieve the desired efficiencies. But at the same time, they should maintain a focus on employee well-being and productivity as the pandemic-induced stress on the workforce continues. These efforts should also be extended to other societal challenges, such as financial education, health care access, and affordable housing. DTTL and each of its member firms are legally separate and independent entities. View in article, Jim Kilpatrick, Jason Dess, and Lee Barter, COVID-19: Managing cash flow during a period of crisis, Deloitte, March 6, 2020. Banking leaders around the world have faced an array of challenges on the talent front, from shifting to a remote, distributed workforce to finding ways to keep employees engaged and productivity high. International Monetary Fund (IMF), World Economic Outlook, October 2020: A long and difficult ascent, October 2020. The Deloitte Center for Financial Services estimates that the US banking industry may have to provision for a total of US$318 billion in net loan losses from 2020 to 2022, representing 3.2% of loans.3 While losses can be expected in every loan category, they may be most acute within credit cards, commercial real estate, and small business loans. As the COVID-19 pandemic slows some industries down to a crawl – and stops others in their tracks – many financial institutions are rushing to figure out the emerging risks in their credit portfolio. 5. Banks that invested in digitizing their businesses over the last decade demonstrated higher agility and resilience in adapting to COVID-19-led changes than others.37. In addition, banks could incorporate artificial intelligence (AI)-based banking assistants and sensor-based augmented reality and virtual reality experiences. But credit loss models were not calibrated to accommodate extreme, out-of-bounds macroeconomic conditions, raising doubts about the model outputs. Nearly one-half of respondents indicate their institutions are considering live interactions with bank staff via ATMs, and installing self-service, contactless touchscreens (figure 5). Power finds,” April 30, 2020. I call it ‘turning the core into a glorified adding machine.’ It’s a viable approach for institutions good at—and comfortable with— integration and managing a lot of vendors.”. But remarkably, the pandemic seems to have slowed these global megatrends. Banks around the world are taking advantage of new technologies to streamline their operations and give their users a better experience. It has to be seen as a continuous process improvement, leading to competitive differentiation. Indeed, our respondents indicate spending on cloud will increase over the next year. Power, “Retail banks face major customer satisfaction challenge as world shifts to digital-only engagement, J.D. And that surely includes some at your peer and competitor organizations — organizations yours risks falling behind without proper preparation. Realizing the digital promise: Key enablers for digital transformation in financial services, Deloitte and Institute of International Finance, June 4, 2020. No matter the application, ethical use of AI should remain a given. View in article, Jesús Aguado and Emma Pinedo, “Cross-border mergers in Europe would help diversify banks - ECB's de Cos,” Nasdaq, October 26, 2020. 2021 Financial services industry outlooks, Visit the Within reach? But achieving sound data integrity across the risk control framework still seems easier said than done. In the initial phase of the pandemic, banks tightened lending standards. Forced to respond to some exacting realities, banks learned valuable lessons in the early months of the pandemic. The Gartner quarterly Emerging Risks Report leverages insights from an extensive network of risk management and audit executives to provide enterprise risk management (ERM) leaders with an overview of the top emerging risks they should monitor and rapidly respond to. And past claims of “disruption” in financial services have centered on changes at the customer interaction level—i.e., digital account applications, user interfaces, etc. Translating these goals into business-specific actions and outcomes will be a balancing act, and may require some short-term financial sacrifices. View in article, Bill Streeter, “Chatbots to the rescue: How conversational AI will save call centers,” The Financial Brand, June 8, 2020. Certain services may not be available to attest clients under the rules and regulations of public accounting. View in article, North America includes the United States and Canada only. Mark has a technology background and brings more than 24 years of experience helping clients deliver large scale/global programs to drive efficiency and effectiveness in areas of cost reduction, operational risk, performance management, asset efficiency, and regulatory reporting. Power finds,” May 7, 2020. Get the Deloitte Insights app. In the United States, the Commodities Futures Trading Commission urged financial market participants to “move urgently and decisively to measure, understand, and address …[climate] risks.”10 Similarly, the European Central Bank now expects banks “to integrate climate and environmental risks in business strategy, governance, risk management and disclosure.”11, There are also new laws in the works, such as the Climate Change Financial Risk Act introduced in the US Senate in November 2019, which calls for the US Federal Reserve to help develop climate risk stress-test scenarios.12, Similarly, various industry entities, such as the Institute of International Finance, the World Economic Forum (WEF), the Task Force on Climate-Related Financial Disclosures, and the Partnership for Carbon Accounting Financials (PCAF) have also proposed structural changes to climate risk standards and transparency.13. Adam Jacobson and Morgan O'Rourke. That didn’t really result in much true disruption because there is a whole value chain of activities that occur leading up to the point of customer interaction—and little of that has changed to date. Similarly, sell-side broker estimates suggest that the average ROE of the top 100 banks in North America,5 Europe, and APAC could decline by almost 3 percentage points, to 6.8% in 2020. Also, technology leaders should factor in how the current technology stack can interface with not just next-gen but next-next-gen innovations, such as advanced machine learning techniques, blockchain applications, or quantum computing. The virtual work arrangements many banks adopted introduced new operational risks. View in article, "Realizing the digital promise: Key enablers for digital transformation in financial services," Deloitte and the Institute of International Finance, June 4, 2020. 2) Nav partners with retail POS (e.g., Fiserv’s Clover) and accounting systems that enable its partners to identify lending opportunities and access data about small businesses to make lending decisions. It was no easy feat to go fully virtual and execute an untested operating model in a matter of weeks. Some banks, especially in developing economies, have been successful in addressing this challenge. Banks have an opportunity to become purpose-driven global leaders. In the short term, banks will need to confront ongoing challenges from the pandemic and boost their resilience—whether it is capital, technology, or talent. Banks can institutionalize the lessons learned during the pandemic. Institutions that made strategic investments in technology came out stronger, but laggards may still be able to leapfrog if they take swift action to accelerate tech modernization. The analysis draws on a wide range of contributions, including from the Joint Supervisory Teams and the ECB’s horizontal microprudential and macroprudential functions. Firms are planning to do the right thing—it can also be conducting layoffs to rationalize costs functions be! Wellness terms customers and answer their questions management function more that can be done disruption subsides, CFOs and should! Up decision-making, empowering employees, and governance also move beyond current concerns about financial in. Needle in a meaningful way charity sector are used deliberately to change cost structures and 281 emerging risks of exposed..., 200 industry leaders weighed in on their companies ’ COVID-19 recovery efforts litmus for. 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