The good news is the banks are continuing to invest in areas such as technology, process automation, digitisation and process simplification, with the COVID-19 pandemic accelerating the pace of digital transformation programs.
The pandemic has changed consumer behaviour, increasing the use of digital banking products and services. The EY Future Consumer Index found 62 per cent of respondents intended to use less cash in the future and 59 per cent expected to use more contactless payments.
The Australian banks have an opportunity to reduce costs by accelerating product simplification and digitisation. Using their increased interaction with customers, they can move customers off legacy products to simpler, more cost-effective digital offerings. With bank margins under pressure, digital tools can help unlock cost savings in both front and back office operations and, if well executed, it will be these investments that should help them reduce their cost base.
The expected increase in customers entering financial difficulty as temporary pandemic support measures come to an end will create a significant challenge for the Australian banking sector in the near term.
Large numbers of customers are likely to need customised payment strategies and solutions, and this is forcing banks to rethink their collections model and scale their capabilities.
Banks will need to replace their traditional transactions-based approach to collections with a more customer-focused model to create a better and more personalised experience for vulnerable consumers. This will require a much more nuanced approach to measuring and monitoring credit risk.
Predictive and high-frequency analytics will be essential to understanding an individual customer’s probability of default. In this way, banks can incentivise at-risk customers to proactively reach out for a more tailored and effective service – at the same time building loyalty and improving recovery return rates.
The way forward
The Australian banking sector remains resilient but risks are clearly elevated in the challenging operating environment brought about by the pandemic. The economic downturn, dampened credit demand and significant asset quality risks are all weighing on the banks’ future revenues, profits and returns.
However, as a transition takes place into the recovery phase, banks can still position themselves for future growth. To help rebuild profitability in the wake of the COVID-19 crisis, EY expects to see banks focused on improving efficiencies and developing the customer experience. Strategies are likely to include:
- Reshaping the cost base through cost transformation and fast-tracking digital transformation strategies
- Optimising branch footprints
- Implementing a more flexible operating model with a dispersed workforce
- Introducing new digital products and services to address changing customer behaviours and needs, underpinned by an enhanced data analytics capability.
With improved digital capabilities and more agile operating models, Australian banks will be able to deliver an even better customer experience and create capacity to invest in further transformation for the future.
Tim Dring is the EY Oceania Banking and Capital Markets Leader
The views expressed in this article are the views of the author, not Ernst & Young. The article provides general information, does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Liability limited by a scheme approved under Professional Standards Legislation.