Can technology help banks navigate a recession?

The global banking industry is bracing for a potential recession in 2023 thanks to a perfect storm of geopolitical and macroeconomic conditions. 

In the UK alone, NIESR has predicted a 60% chance of recession due to the contemporaneous effects of Brexit, COVID-19 and Russia’s war with Ukraine on the economy. 

However, while a potential recession in the UK seems just as likely in other global markets, SVP and Industry Head of Finance Service & Public Sector for Infosys, Jay Nair, believes technology may hold the answers to help banks navigate a recession. 

He says: “With many disruptive innovations blossoming across the sector, there are several technologies that can help banks navigate a recession and meet their new priorities. 

“First, however, banks must adopt a strategic approach towards digital transformation whereby the chosen programmes are focused and targeted at these dynamic priorities. This is vital for banks in order to avoid spreading their efforts and budgets too thin with reduced chances of achieving a successful transformation.”

We speak to Nair about ways banks can navigate a recession by leveraging tech. 

How is digital transformation at banks being affected amid a potential recession? 

“A mix of macroeconomic and geopolitical factors is causing concern in the banking industry. For example, rising interest rates, steep energy prices, inflation, negative GDP, and Russia’s war with Ukraine have created enormous uncertainty. 

“As a result, customers are reluctant to borrow money, leading to shrinking loan volumes and, consequently, reduced interest income for lenders.

“Interestingly, rather than squeeze spending on digital transformation, many banks are eager to leverage digital innovation to handle a recessionary scenario more effectively. 

“Some of the main focus areas are optimising costs, making operations more efficient, improving the customer experience, and rolling out targeted and affordable services and products. 

“Recent research supports this finding. According to a Forrester report, banks are redirecting 60% of their innovation spending to tangible, real-world innovation in response to these challenging times. Similarly, Infosys research conducted in early 2023 reflects this trend, with retail banks seeing digital transformation as a means to navigate uncertainty.”

What are some of the spending trends in banks’ digital transformation exploits? 

Nair offers four trending areas where banks plan to direct spending on technology initiatives. These are:

• Innovative services – Infosys research shows that 42% of banks want to offer new services to help customers better manage their finances over the next 12 months. The use of cloud and platform technologies will be critical for such offerings.
• Business targets – Some banks are focusing on integrating central bank digital currencies (CBDCs) as well as digital currencies and tokens. As per the Infosys research, many respondents hold the conviction that open banking, real-time payments, and banking-as-a-service initiatives will help them achieve their business goals.
• Modern core banking systems – The replacement of core banking systems was traditionally viewed as extremely complex and expensive. However, new technology developments in cloud and consumption-based services offset the risk and steep costs of end-to-end investments. This makes core replacement a cost-effective and viable option.
• Attracting talent – Following the Great Resignation post-pandemic, banks are looking at digital transformation as a way to attract new talent trained in the latest technologies. This can help them not merely grow their brand to gain the mindshare of the new generation, but also keep pace with, if not race ahead of,  competition such as consumer-tech enterprises, neo-banks, and FinTech companies. 

Are these trends now new priorities for banks? 

“It is clear that the main task for leaders in the banking sector is to define their priorities and identify critical areas in order to strategically dedicate investments to technology advancement. 

“Without such an approach, banks run the risk of losing out to agile competitors that deliver precisely what customers want. One such example is of Apple, which recently announced its offer of high-yield savings accounts from Goldman Sachs for Apple Card holders.

“Some senior banking professionals are cognizant of this fact. They view IT modernisation and, specifically, the shift to distributed platforms and cloud technologies as a key priority. 

“As per the Infosys study, 76% of respondents say modernisation is an essential step if their organizations are to achieve their strategic and business objectives. This includes leveraging technologies such as low-code and no-code platforms, blockchain, and Edge computing. 

“Further, the thrust on technology investments shows no sign of slowing down either. Nearly 66% of the sample surveyed state that they are keen to direct budgets to open banking and embedded finance in the future while others aim to focus on disruptive technologies such as applied AI, analytics, and metaverse with the conviction that these form the new frontier of banking.

“On another note, some business leaders are already preparing for how they must respond to the impending challenges. For instance, some banks are prioritising cost reduction across operations, staff, and suppliers. 

“In such cases, they may find it important to focus more on streamlining customer services, reducing the number of branches in operation, and rationalising overheads. 

“Finally, while setting priorities in order, another key factor to consider is ROI. Several retail banks expect positive ROI on their investments in super apps, digital identity and trust, and decentralised finance (DeFi). 

“But the most optimistic ROI predictions remain with IT modernisation programmes and cloud technologies, according to 37% of senior banking professionals surveyed. 

“Other areas of potentially high ROI include tokenisation, digital currencies, banking-as-a-service, sustainable banking, open banking, and embedded finance.

“Technology has become an integral part of the banking industry and is now seen as a key enabler in navigating uncertain times, especially during a possible recession in the near future. 

“With the majority of senior banking professionals expecting an increase in IT budgets, investment in digital transformation will continue to gain momentum in 2023. 

“Banks are prioritising cost reduction, streamlining operations, enhancing customer experience, and trying to keep pace with new competition as well as disruption in the market. 

“To succeed, they must adopt new, modern, flexible cores and prioritise IT modernisation and cloud technologies. This will ensure that they remain agile, innovative, and resilient in a rapidly changing and uncertain environment.”

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