Downturn and digital transformation: A call for banks

The COVID pandemic has been one of the most severe global crises in a generation, leaving the economy in a state of fragility. The Organisation for Economic Co-operation and Development (OECD) released its Interim Report in March 2023, suggesting that global economic growth is likely to stay below trend rates in both 2023 and 2024, at 2.6% and 2.9% respectively.

Moreover, ongoing inflation, financial market instability, and supply chain disruptions contribute to an environment of uncertainty. This situation poses a challenge for banks when deciding on digital investments. However, it has been observed that banks and fintechs equipped with the right technologies and strategies have not only weathered the economic storm but have also emerged victorious.

As banks traverse this period of economic uncertainty, it becomes necessary to consider how digital technologies and new working methods can drive change and continuous improvement, even during difficult times.

Global trends, regional differences 

While global banking is a hyperconnected industry, banks in various regions face distinct challenges and have unique priorities. For instance, banks and financial institutions in markets across Asia-Pacific face fewer headwinds compared to other regions, due to strong macroeconomic conditions prevailing in most markets. Against this backdrop, there is an increasing demand for risk identification, mitigation, and management services throughout the region, particularly in Australia.

Banks in the Philippines, Thailand, and Hong Kong show a keen interest in the opening of the payments market and regulatory integration. These steps aim to facilitate interoperability and real-time cross-border payments, significantly aiding the expansion of regional economic integration and benefiting all participants in the region.

Bank regulators are becoming more cognisant of the integrated nature of global banking and the inherent risk of importing adverse economic conditions. Moreover, all banks must monitor and manage a variety of currencies, interest rates, and other macroeconomic variables, influenced by a mix of internal and external factors. Technology offers an effective solution to these challenges as part of regular business operations.

Globally, there is also a rising interest in technological advancements such as artificial intelligence (AI) and machine learning (ML), both of which will shape the future of banking, irrespective of the economic climate.

Digital optimisation vs digital transformation 

Navigating through a downturn is not for the faint-hearted, but it is essential and a true test of business leadership. Businesses require modern digital tools to reduce costs, manage with greater precision, and meet customer needs more comprehensively than ever. Now is the time for banks to optimise and transform their operations.

Digital optimisation involves enhancing existing business functions to drive improvement, increase efficiency, and achieve better outcomes. This process includes digitising and refining existing processes or products by leveraging data to make decisions based on customer insight. 

In a climate of uncertainty, digital optimisation needs to become part of business as usual, enabling banks to accommodate change and seize new opportunities. Banks that pursue digital optimisation will become more lean, agile and customer centric. They will be better able to handle changing market conditions that compress business margins or call for products or services to be adapted.

In a climate of uncertainty, digital optimisation needs to become part of regular business operations, enabling banks to accommodate change and seize new opportunities. Banks that pursue digital optimisation will become leaner, more agile, and more customer-centric. They will be better equipped to handle changing market conditions that compress business margins or call for products or services to be adapted.

Digital transformation involves reimagining the bank’s digital capabilities. The most successful digital transformations focus on the total experience, where the bank’s customers and employees share the same data and view of the business. Digital transformation is essential in order to turbocharge innovation and become a data-driven bank. A bank that invests in digital transformation will use data to inform roadmaps and strategies and identify new growth opportunities.

Digital optimisation and transformation are highly complementary – they can and should be pursued in parallel to develop a continuous cycle of improvement and growth.

The bottom line

In an economic downturn, margins are likely to be compressed. Now more than ever, banks need to transform, as a digitally enabled bank can operate more cost-effectively. Digital products can be developed, launched, and managed with significantly more cost savings than previously possible. This approach ensures that marginal business lines remain viable, and innovation can persist even during challenging times.

At the same time, global banking is transforming from a closed and vertically integrated industry to an open and horizontal ecosystem powered by collaboration. To participate successfully, banks need technology that is open and collaborative, with a well-designed application programming interface strategy to facilitate innovation.

Cloud computing is also crucial. As a fundamental component of digitalisation, it allows processing costs to be managed with precision. The unique elasticity of the cloud ensures that costs are always in line with usage. However, the cloud is about more than just costs – it’s the gateway to modern methods and new technologies, including AI and ML, and the harnessing of data as a production factor.

Today’s strategic investments in modern technologies will enable incumbent banks to deliver market-changing solutions and innovations, and compete more effectively when the upturn arrives.

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