The Importance of Financial Planning Agility for Banks in Gaining Competitive Advantage


In the current post-pandemic era, there is a competition to provide the optimal combination of digital banking products, despite the cost of developing new projects. Banks that fail to meet customer expectations may lose market share to agile newcomers who are not burdened by the expenses associated with modernizing outdated systems.

To effectively address current operational requirements and establish a foundation for future objectives, banks must possess a comprehensive understanding of their financial data and be able to swiftly adapt strategies in response to profitability, capital requirements, and market dynamics. However, to enhance agility and attain a competitive edge, banks must address four primary challenges:


Challenge 1: Ensuring Accurate Tracking of Financial Performance and Profitability

Banks have raised interest rates due to shifting economic conditions, reducing profit margins. In 2020, there was a significant decline of 36.5% in U.S. bank profits compared to the previous year.

Regional banks with smaller loan portfolios face significant challenges in maintaining industry-standard profitability due to the fact that around two-thirds of their revenue is derived from interest income.

For a comprehensive understanding of profitability, it is essential to ensure data consistency across various departments, branches, and lines of business. Product-level data is commonly distributed across systems such as core banking, enterprise resource planning (ERP), and asset liability management (ALM). This poses a challenge when conducting product profitability analysis.

Managing data from ERP, ALM, GL, and HRIS systems can pose challenges in obtaining the necessary information for effective oversight. In situations where margins are narrow, the margin for error is significantly reduced.

Challenge 2: Meeting Customer Expectations

Fluctuating interest rates reduce innovation budgets, yet customers increasingly demand new digital banking products and experiences. A 2020 survey conducted by the Boston Consulting Group found that 24% of consumers intended to reduce their usage of bank branches or cease visiting them entirely following the pandemic.

Banks must develop advanced online banking products and services to avoid market share loss. Research indicates that many customers are open to changing their banking institutions in favor of improved digital offerings. Specifically, 31.4% of customers currently using local and regional banks express a certain likelihood of switching to a different bank that provides a superior mobile card application.

Finance teams must prioritize meeting customer expectations and should refrain from allocating time to operational tasks such as manual data consolidation and reconciliation. Instead, it is advisable to give their time to strategic planning and forecasting to ensure the coverage of operating costs and the funding of digital transformation initiatives.

Banks often need help with innovation due to the presence of siloed legacy systems and ad-hoc integrations. In the current highly competitive landscape, the integration of data is essential for enhancing both the customer-facing and operational aspects of digital banking services.

Challenge 3: Enhancing Stakeholder Cooperation

Fluctuating interest rates and increasing technology costs associated with digital product development are contributing to the need for banks to consolidate through mergers and acquisitions. Regional consolidation can promptly enhance a bank’s deposit rate, while cross-country consolidation can mitigate risks associated with specific regional economic markets. Consolidated banks can improve profitability through the utilization of scale and cost savings.

However, consolidation presents its complexities. Branches located in different geographical regions face the challenge of analyzing data centrally while complying with diverse regional regulatory requirements.

Banks must establish a unified source of accurate information across various systems. Additionally, they should develop collaborative procedures to efficiently deliver relevant data to the appropriate stakeholders within the required timeframe.

Challenge 4: Market Adaptation in Response to Dynamic Conditions

What are the potential outcomes in the event of a future crisis? A significant lesson from recent turbulent times is that banks must be prepared and capable of effectively managing change. Conditions can rapidly change, encompassing interest rates, regulatory requirements, and even entire business models.

Banks must be prepared to respond in order to maintain normal business operations and ensure continuity. Accenture research indicates that agile firms are more likely to achieve top-quartile financial performance than the average organization. Specifically, agile firms are more than twice as likely to achieve this level of financial performance, with a percentage of 55% compared to 25%.

Scenario planning is crucial for preparing for change. Financial teams should be able to swiftly and flexibly modify essential factors, such as projected prime rates, to observe the effects on margins and profitability promptly.

Banks can enhance their resilience and reduce the risk of costly business interruptions by exploring future scenarios.