This is an AArete Financial Services Insight
You Cannot Have Great Customer and Employee Experiences Without Great Financial Risk Management
Less than a week after a series of events shocked the banking industry, the term “financial risk management” is back into mainstream discussions. It’s not that financial risk management had gone away. Quite the contrary. After the 2008 Global Financial Crisis and nearly a decade to follow, the Financial Services industry was immersed with implementing financial controls and compliance programs to address supervisory rule makings and new regulatory requirements. During this time, financial risk management became very much “business-as-usual” (BAU) for financial institutions and less trendy.
“Now, with the collapse of Silicon Valley Bank (SVB), Signature Bank, and Silvergate Bank, it may be time to acknowledge a new principle – you cannot have great banking Customer Experience (CX) or Employee Experience (EX) without great financial risk management.”
As regulatory activities scaled back, the industry in parallel had ushered in a new era of digital financial services transformations, financial services innovations, banking and capital markets modernizations, cloud migrations, advanced analytics, and related strategies all focused on cross-channel banking business line growth, operational optimization, and technology innovation. At the center of these strategies is a core focus on how to improve experiences in ways that deliver greater value to clients and customers. In recent years, ample research has also shown that a major contributing factor to improving your CX is to improve the experiences of your employees. Essentially, happier employees will make happier customers.
At the moment, banking clients and customers are experiencing tremendous stress and uncertainty around their bank accounts, deposits, and cashflows stemming from weaknesses in financial risk management practices. Banking employees are growing concerned in the ability of their financial institutions to endure more financial stress. More broadly, market anxiety is growing about how far these issues will cut across the industry. It’s hard to imagine these are the types of experiences that any financial institution would want to have with any of its clients, customers, or employees.
There Are Notable Risks That Must Be Monitored Closely in the Market Environment
There has been no shortage of risks already impacting the industry and the market environment. Volatility has been pervasive across global markets, inflation remains high with interest rates continuing to rise, outflow of deposits is an increasing worry, loan to deposit ratios and loan-loss reserves continue to increase, operating costs continue to go up, pressure is building in the commercial real estate market, uncertainty continues to grow across cryptocurrencies and following the collapse of FTX, cross-industry layoffs have been ongoing for months, the war between Russia and Ukraine continues, and the list goes on and on.
- Pressure in the commercial real estate market
- Interest rates
- Loan to deposit ratios
- Loan-loss reserves
- Operating costs
- Deposit outflows
- Cryptocurrencies following the collapse of FTX
- Cross-industry layoffs
- War between Russia and Ukraine
News around SVB, Signature, and Silvergate emphasizes the need for heightened risk management and intensified levels of monitoring to assess the uncertainties ahead and to strengthen confidence across clients, customers, employees, and the broader market.
When you observe how these industry trends have evolved so quickly, it demonstrates the importance of effective financial risk management including credit, market, liquidity, and interest rate risk management practices. In the case of SVB, we now know that a combination of factors contributed to its collapse, including a mismatch in assets and liabilities and investment losses due to the declining value of bonds that had been purchased to fund higher rates on deposits. With a regional footprint and a concentrated client base of technology startup firms, SVB’s profile has driven a fresh look at regional banks and banks with similar profiles to assess the potential of wider spread contagion. It’s important to consider other banks that have similar structures and may have balance sheet and liquidity issues of their own. However, it’s also important to remember that risks take different forms and the causes of one panic are unlikely to cause the next, so looking at the obvious may not always be the most pragmatic approach.
For example, in the cases of Signature and Silvergate, both were also overwhelmed by a surge of withdrawals, yet had also been struggling due to ongoing troubles in the cryptocurrency sector. This will continue to heighten the focus on regulatory and supervisory trends impacting digital assets. Broader financial institutions will need to further adapt their risk management practices, internal controls, and capital infrastructure to support new digital assets and product sets while adhering to multijurisdictional guidance. Withdrawals forced management at both banks to liquidate securities held as reserves causing significant write-downs due to the decline in the value of those portfolios. While this was happening, two stablecoins, USD Coin and Dai, dropped below 87 and 90 cents, respectively breaking their pegs with the dollar, which has caused further questions around the potential for a future rush by investors to exchange or sell those coins if conditions were to continue to worsen and especially given the collapse of TerraUSD in 2022.
With great volatility, there are plenty of opportunities to improve the experience for banking clients, customers, and employees. Strategies can be deployed to assess these opportunities leveraging advanced analytics to derive meaningful data insights and immediately improve these experiences.
Acquisition Readiness: Periods of volatility open themselves up to potential growth opportunities. If M&A functions and strategy teams have not started already, they should be keenly focused on market trends and evaluating opportunities for acquisitions. Setting up a cross-functional M&A Strategy Integration Office is one way to actively monitor the market environment for targets and incorporate insights quickly into risk models to determine the viability of potential acquisitions. Growth may include acquiring new clients and customers, targeting specific business units and banking portfolios, or even considering complete firm takeovers. In a matter of days, there has been a tremendous flow of deposits moving into larger banks, digital banks, and fintechs who have offered product alternatives and instant access to capital to struggling start-ups.
Targeted Communication: CX strategies focused on post-acquisition are always critical to retaining new customers. However, pre-acquisition CX initiatives both via branch and digital channels can be leveraged to attract new customers feeling uncertainty, attract new deposits quickly, and improve future acquisition readiness. Ultimately, targeted communication becomes essential and leveraging data to segment clients and customers and communicate messaging to those segments will build trust through personalization. From reassuring the reliability of financial institutions to providing competitive products or pricing strategies to retain customers especially those most likely to act first if market issues continue to worsen, targeted marketing and social media strategies combined with detailed communications plans can further drive resiliency across the client and customer base. For example, some banks have quickly extended branch office hours to serve customers during these market developments and have been actively communicating these changes to their communities via direct messaging and social media.
Employee Reassurance: Beyond clients and customers, there needs to be a focus on reassuring employees of banking stability during this time. Again, a contributing factor to improving your CX is to improve your EX, and periods of heightened uncertainty require extra attention to alleviate the concerns of distracted and anxious employees. Also, give your team, particularly frontline teams in branches and call centers, the key messages and communications tools they need to confidently assure customers their money is safe. A core “playbook” is a structured and direct way to implement this strategy along with brief training to reinforce messaging and confidence in the approach. While 90% of consumers now bank online, in-person visits often pick up following a major event.
By considering the experiences of banking clients, customers, and employees, financial institutions can lead with a competitive edge during uncertain market conditions. A balanced approach between experience and risk strategies will provide greater stability and targeted growth.
Effective Utilization of Risk Management Data Determines Its Worth
These events also serve as a reminder that there is an abundance of financial and risk management data available, yet the real challenge continues to be how to derive valuable insights from data sets and convert those insights into actionable next steps. By using more advanced and innovative risk management techniques including data analytics tools such as social media analysis, transaction monitoring, AI and ML, unstructured data analysis, and IoT data analysis, banks can identify potential risks quicker and take proactive and preventative steps to address them. For example, if a customer suddenly stops using their smart home device, that user behavior may be a sign of financial distress. The ability to have available, real-time data helps in analyzing daily cash positions to assess sufficient liquidity to meet obligations, maturity profiles of funding sources to identify potential liquidity gaps, and collateral valuations to determine sufficient collateral needs. Further, the use of real-time liquidity metrics monitoring such as tracking cash flows, funding sources, and collateral requirements helps to identify liquidity gaps quickly. ML algorithms can analyze large data sets to identify patterns and anomalies and better understand liquidity trends.
Many banks are moving towards integrated risk management approaches that bring together data from multiple sources to provide a comprehensive view of risk. By combining liquidity risk data with other types of risk data, such as credit, interest rate, market, cybersecurity, and operational risk data, banks can better understand the interconnected nature of risks and take more proactive steps to managing them. Data risk models enable banks to manage their risks more effectively and banks should ensure that risk practices and models are adjusted to address the current and future market scenarios that may arise with a specific focus on the continued impact of rising rates and declining deposits. These models can then be used for more timely alerts of potential problems with the ability to adjust strategies including funding and investments in real time.
“It’s important to consider other banks that have similar structures and may have balance sheet and liquidity issues of their own. However, it’s also important to remember that risks take different forms and the causes of one panic are unlikely to cause the next, so looking at the obvious may not always be the most pragmatic approach.”
Venture Capital Firms, Start-ups, and SMBs Need Foundational Risk Management Strategies Too
Almost instantly, start-up entrepreneurs and founders, as well as their investors including venture capital firms, have begun adopting foundational risk management principles in the aftermath of SVB, Signature, and Silvergate. For venture capital firms, it is an awakening to reassess, improve, and enhance cash management, spend control management, and risk management practices including internal controls and real-time reporting to understand risks around financial institutions and cashflows. These expectations have almost immediately started to flow from investors to start-up founders, portfolio companies, and small and midsize businesses (SMBs), who are now being urged to take a more prudent approach to their banking activities including diversification of banking accounts and holdings. It also has further supported the need for these firms to revisit spend control management to gain full visibility over decentralized areas of spending. This includes spend control governance, processes, reporting, policies and procedures, and infrastructure for large scale decentralized spend areas to have greater visibility into cash outflows.
More to Come
The collapse of SVB, Signature, and Silvergate, in addition to the recent collapse of FTX and an array of heightened risks in the market environment, has sent shockwaves through public confidence. Regulators are looking to stem fear, uncertainty, and doubt, and emergency measures have been taken to stabilize the banking system and protect deposits. It’s too early to say if these measures will be enough to curtail the panic and prevent the collapse of other banks. The critical question is whether these measures will reassure investors and customers, or whether they will continue to withdraw their deposits that may trigger further bank failures. However, the events provide ample examples of opportunities to improve experiences for clients, customers, and employees through stronger financial risk management discipline. Ultimately, there are opportunities for stable firms to consider a variety of targeted growth strategies and acquisitions, in addition to driving further digital and technology innovations, including advanced analytics strategies, to improve banking reliability and resiliency.
Meet the Authors
Chris McGee leads AArete’s Global Financial Services (FS) Consulting Practice. AArete partners with FS firms to drive growth and boost competitiveness by optimizing digital and technology capabilities, risk management and cybersecurity solutions, strategic profitability initiatives, regulatory compliance, and M&A strategies.
Chris brings nearly 20 years of experience across the FS sector (e.g., retail, commercial, corporate, and investment banking, capital markets, securities, investment and wealth management, insurance, fintech). He is passionate about helping organizations and their people realize their potential, achieve their business goals, and deliver operational excellence. He has a strong track record of partnering with executive leaders driving strategic change across global businesses to solve complex operating model challenges and enable sustainable results.
Prior to AArete, Chris was a Global Director and Team Leader at Gartner, partnering with FS firms on client-centric innovations. He served as a trusted advisor to guide the planning and execution of FS business strategies through digital products and platforms and new technology-based solutions to enhance customer and client experiences across channels and geographies while also improving employee experiences.
Previously, Chris was a Director in PwC’s US Advisory FS Practice where he led management consulting engagements with multi-disciplined teams primarily supporting global FS firms to shape enterprise solutions. He managed global initiatives for clients including strategic business transformations, as well as risk management, compliance, and regulatory remediation programs.
Chris also advises start-up organizations on their product innovations. Most recently, he has served as an external strategic advisor to KeeperAI, which is a SaaS platform that enables the formation of deeper relationships to empower people to connect authentically and companies to retain employees via healthy work cultures. Chris earned a Master of Business Administration (MBA) from Columbia University completing the Executive Program at Columbia Business School in New York, NY and holds a Bachelor of Science (BS) in Finance and Marketing from Fairfield University’s Dolan School of Business in Fairfield, CT. Outside of the office, he values family, volunteerism, mentorship, and giving back to one’s community.
Priya joins AArete with 16 years of experience working in data and technology. She’s a data analytics master with deep history in the financial sector designing and delivering analytics solutions. Before joining AArete, Priya served as director of big data technologies for American Express. Priya is used to being the go-to person for an organization’s analytics needs. She has a demonstrated track record of helping companies make better, faster, more informed decisions by thoroughly analyzing their data and constructing custom, insightful, easy-to-understand, and highly visual analytics.