Banks must prepare for recession and recovery, says Forrester
Banks are preparing for tougher economic conditions and a possible global recession in 2023, says Forrester in “Predictions 2023:Banking”. “However, the smart firms will ensure that the investments they make will put them in a strong position for the subsequent economic recovery,” the consultancy says. Banks will continue to invest in digital with good reason, the report predicts.
“Banks will redirect 60% of innovation costs to real-world concrete innovation. Two ways out of a recession: Innovate or cut costs – digital 2.0 enables both.” But some banks won’t get the chance, the consultancy warns, suggesting that 15% of banks will fail to tackle their technical debt and become uncompetitive.
“…15% of banks will fail to tackle their technical debt and become uncompetitive.”
Forrester traces technical debt—the direct and opportunity costs of maintaining outdated legacy systems—starting as far back as the Y2K scare followed by the 2009 financial crisis and major acquisitions.
The year ahead will not see much improvement. Before the war in Ukraine, over 70% of bankers said their organizations would invest in modern technology, but now direct cost cutting has become a priority for the majority of banks.
“By 2023, the dire economic situation will force many banks to shift technology spending again. Banks will further reduce the IT spend that financial services firms allocate to transforming their applications and infrastructure.”
And although banks need modern banking cores, much of the investment in the coming year will be on digital engagement rather than core transformation, according to Forrester.
Tim O’Connor, head of banking and principal at Deloitte Consulting LLP, is more optimistic. Earlier this month he told me that a number of modern, flexible new core systems had emerged over the past three years and banks were showing great interest in implementing them, which is a recent development.
Core replacement is often seen as a career threat because it is so complex and expensive. New technological developments – cloud, modular cores, consumption-based pricing of services instead of massive hardware investments and gradual transformation – have made core replacement safer and less capital-intensive.
Forrester warns that banks that do not adopt modern flexible cores will lose out to more agile competitors. Competitors like Apple, which is poised to capitalize on the waning confidence in banks that had built up during the pandemic, starting with a high-yield savings account from Goldman Sachs that it announced in October.
The honeymoon between banks and consumers is over, says Forrester, and consumer confidence will be cut even further if the economy worsens and banks reduce lending, increase borrowing costs and engage in more foreclosures.
“Banks must lead with empathy and take a data-driven approach to maintain and earn consumer trust with concrete, targeted actions that help them navigate the cost-of-living crisis.”
In the year ahead, green finance will grow to $1.2 trillion in the US, EU and Japan. But Forrester warns against investing in any green programs.
“We will also see at least 100 banks globally launch carbon tracking, which gives customers insight into their transactional carbon footprint. Banks should avoid these, as they will be wasted effort; trackers will not make a significant contribution to financial services companies’ climate-related goals.”
Look for some big changes in fintech.
“By the end of the year, about 10% of current fintech companies will either be acquired by a bank or have them take at least a 50% stake.”
The banks will take advantage of falling fintech company values to make the acquisitions. In addition to buying fintech companies, banks will find their talent as fintech firms cut staff, and presumably some prized benefits.
Buying fintech firms or hiring their employees isn’t without risk – for years, banks have struggled to hire and retain technology experts, and Forrester warns that won’t change without a lot of work from the banks. “Incumbents must ensure they offer diverse and dynamic cultures to retain new hires as the cycle turns in favor of start-ups. This is critical to tackling the 25% attrition they have seen in their technology teams – double the figure for the entire bank.”
