April 2020 | Point of View

How banks can pivot from defense to offense to endure the COVID-19 economy

The COVID-19 outbreak and its upending of American life has left financial institutions grappling with the dual challenge of preserving the financial health of their clients and preserving their own for what will surely be a prolonged period of economic uncertainty.

For banks of all sizes, stepping up to provide necessary relief to small business via the SBA Payroll Protection Program emerged as the unplanned and most urgent priority. Yet, when the dust eventually settles on the SBA PPP and funds begin to flow back to small business, banks must also plan for the economic conditions looming on the other side of COVID-19. 

The economic impacts of the pandemic have upset financial projections with record-low interest rates, dramatically reshaping the outlook for 2020 and beyond. Banks are left to not only simultaneously figure out how to weather the public health crisis and serve their clients in almost entirely remote environments, but also to look ahead and preserve their financial health for months of economic uncertainty.  

The looming depth and unknown longevity of this crisis unequivocally requires banks to strategically assess the immediate negative impacts, project probabilities of further disruption, and plan to re-engineer the delivery model to protect the bank while still leaving the front door open for new business.

It is our belief that banks that take bold and decisive action in the near term around these key issues will emerge from this period of uncertainty with more durable relationships and greater agility and resilience, providing a competitive advantage and steeper market growth and profitability compared to their peers.   Banks should take a near-term view and prioritize a defined set of five actions that will help provide stability throughout the immediate health crisis while setting the stage for resilience in a potential downturn in the months after the outbreak subsides.  

1. Help your customers confront the health crisis—now

Moments of adversity contain an implicit opportunity for customer outreach. Customers are yearning to hear from bankers and personally learn how their bank is dealing with the pandemic. Banks should be contacting every customer to deliver peace of mind that their bank is open for business and available for support. Periods of turmoil forge the deepest, most loyal relationships, and banks should devise a strategic customer outreach program to solidify customer confidence and further build relationships that lead to long-term retention.

Banks should then immediately focus on helping their customers find ways to ease cashflow constraints caused from the sudden economic stop and related revenue impact. Many bank customers have been paralyzed by this unexpected economic shift and are unable to survive based on the shortfalls in their working capital and liquidity reserves. Banks should consider various relief programs designed to address these negative changes in borrowers cash flow through creative, beneficial adjustments to loan structures. Consider options such as permitting deferred payments, interest-only payments, re-amortizing payments, or even waiving select fees. Additionally, aligning new client needs resulting from the slowdown with bank solutions and products will shore up relationships and establish a foundation for post-crisis revenue growth from these new services.  Helping customers succeed and weather this economic storm not only leads to short-term success but also a portfolio of lifelong customers.

2. Be surgical with expense reductions 

Why is it that the immediate reaction during economic turmoil is to cut staff, often without strategic approach? Staff reductions are typically a knee-jerk reaction driven solely by an assessment of financial conditions (e.g., eliminate 10% by month-end). Where did the 10% come from, and why by month-end? While effective at lowering costs by the next financial period, this approach fails to strategically position the bank for post-downturn recovery. For example, organizations often find themselves understaffed or staffed with a labor force whose skill sets misalign to post-recession requirements. Rest assured, there will be an economic recovery, and the myopic, nearsighted approach of cutting 10% this month will leave an institution starving for the right skills and talents in the months to come.

Instead, we recommend banks understand those levers that can be strategically pulled to quickly reduce costs. Levers take shape in different forms and while some are apparent, others are less visible yet offer more return. These levers range from identifying and evaluating paper-based processes that must be digitized in remote settings, automating using RPA, and better aligning front-line operations and sales personnel to much revised sales volume estimates. In fact, even in the sacred area of credit risk management, an area often left untouched during a downturn, there are significant cost savings available simply by optimizing your credit processes and better leveraging internal and external data.

3. Ensure your credit risk management strategy responds to the current crisis

The coupling of a public health crisis and looming economic downturn is unprecedented. Banks had no visibility into the recession and therefore must assess not only the immediate impact on borrower financial and implied repayment performances but also the delayed impact on various segments of the economy. For example, restaurants, hotels, and consumer retail will feel the impact immediately. Second-tier automotive suppliers, higher educational institutions, and new real estate construction should expect impacts to follow.  

Knowing there will be a long-lasting impact to the economy and bank borrowers, ensure your risk management strategy reflects the new credit reality:

  • Consider proactively managing the portfolio renewal cycle by implementing mass short-term extensions on lines of credit, re-evaluating credit policy exception limits, particularly for renewals, and increasing credit monitoring through frequently recurring conversations with borrowers. 
  • Leverage internal and external data to scale the identification of emerging portfolio risk and related triggers without the need to double staff.
  • Consider creating a COVID-19 financial health assessment to facilitate providing financial relief for all commercial customers and to identify potential upcoming credit downgrades. 
  • Assess industry-based impacts on your portfolio to better predict deteriorating credits and charge-offs in order to right-size loan loss reserves.  
  • Adjust credit monitoring procedures by increasing review frequency and detail of analysis for sectors more immediately impacted (hospitality and transportation) and those that will be impacted in the near term like retail and higher education. 

4. Realign Your RMs to match new market conditions

The change in economic spending will impact the creditworthiness of many loan applicants. As such, banks must take a hard look at realistic expectations for new business goals in 2020 and even 2021. Greater inspection of new business expectations will warrant realignment of banker-relationship manager priorities and shift from new business development with prospective customers to selling deeper into the existing portfolio where possible. Steady and meaningful client engagement will both enable banks to manage risk while providing the client with much-needed attention, solutions, and assistance during this challenging time.  Providing this engagement with clients will pay dividends in the form or greater retention and increased depth of relationship.

Alignment of Resources with Client Need

Given the sudden impact to the client base and resulting changes in transactional and service request patterns and volumes, it will be critical to scale up certain operational functions quickly to meet client demand. Realignment of branch staff to handle call center volume and line resources to assist with spiking credit action volumes with allow you to realign, redeploy, and scale your workforce to the new reality.

5. Leverage digital methods to create a balanced remote workplace strategy

If you’re reading this, there’s a good chance you’re working remote, and so are bank customers. Being mindful of the downturn’s impact to bank customers, including being off premise, is paramount. But that’s not enough. Banks must become innovative and creative to leverage all available tools not just to maintain but to further customer relationships and generate new business activity where possible.

  • Surprisingly, there are many customers who still travel daily to the bank to complete deposits. Help your bank by helping your customer. Empower them to make deposits digitally by providing Remote Deposit Capture (RDC) hardware and services. Banks should also consider the long-term loyalty gain during critical moments by simple gestures of waiving a portion of RDC equipment or service fees for a trial period. 
  • Proactively run and distribute through digitally secure methods the myriad bank statement reports used by bank customers rather having the bank’s customers create and distribute these reports while they are also remote.
  • Collaborate with bank customers and have the customer send check payable files to the bank for check printing and distribution.

We believe a bank’s actions in the next 90 days are vital to survival, sustainability, and long-term positioning for regrowth. Begin with the bank’s underlying values, adhere to them, and respond to customers by providing needed outreach and set the stage for new levels of customer loyalty. Shifting focus inward toward bank operations with a keen focus on streamlining processes, proactively changing procedures, and aligning the right people to the right tasks in the 2020 reality will ultimately lead to both a sustained and improved ecosystem comprised of bank, customer, and community.

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