Operational resilience, the ability of organizations to adapt to a rapidly changing environment, was an overarching concern of financial services companies before the global health crisis. Now that concern is arguably an obsession and business as usual is no more.
There is no dearth of information about what organizations must do to be ready for unexpected events, partly because of other recent crises, such as the one in 2008 that crippled global financial markets.
Among the standard advice is to know what key services an organization needs and provides, and to be prepared to continue those under any circumstances. Firms need to have plans in place to communicate with customers, vendors and employees; have a clear idea of how different types of disruptions will or would impact services; and to have contingency plans to circumvent or overcome those problems.
As part of operational resilience, firms must also be clear on who their third-party vendors are in their supply chain and work with those vendors to develop plans robust enough to deal with any circumstances.
Preparation is the key
Building operational resilience into a financial services firm may feel like a Herculean task.
Where do they begin shoring up a business on shifting sands? How do they see around corners and protect against what is unforeseen?
When moderated a panel of leading financial services experts in a recent roundtable as part of OpenOcean’s DataSeries, the answer became clear. There are really three clear priorities:
- The workforce — engaging employees, supporting them through change and mobilising them where they add value;
- The technology ecosystem — forming trusted partnerships with third-party vendors and protecting the IT infrastructure;
- The customer — taking the customer’s side in all things to ensure their loyalty and their access to services
Given these objectives, preparation is everything. Reacting once a crisis has begun is too late. It’s estimated that 90 percent of all startups fail within 10 years. And a study released in October 2020 by the University of California, Berkeley, said that without massive government intervention, the bankruptcy rate in Europe from the current pandemic would have doubled to 18 percent.
Operational resilience must be a permanent and ongoing consideration for firms.
Each panelist talked about how crucial employees and their wellbeing is to approaching operational resilience — from leaders to managers to employees, each individual has a part to play. “The lines between work and home life are now so blurred” observed one speaker, “there are strains on personal resilience that need to be dealt with carefully. No one could have imagined running a bank from their living room or kitchen, now it is simply a reality.”
The new working conditions make leadership and direction more important than ever. Managers have to be more attuned to the stresses employees face and they need new skills to communicate and carry out organizational plans with people and teams that may not even be on the same continent, let alone in the same room.
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1. The disappearance of the office
The most evident change that needs to be factored into operational resilience plans when it comes to employees is the dissolution of the office. This has changed how people communicate, and it is having a profound impact on leadership, collaboration and corporate culture.
There was consensus among our experts that even once this pandemic is over, things will not go back to the way they were. Now companies have figured out how to operate virtually, the need for large centralized offices could be a relic of the past. And there is power in the fact an organization’s talent can be gathered and deployed anywhere around the world. This could even improve resilience.
One participant commented, “We have an experienced member of the customer success team who wants to move back home to North America. As we are headquartered in the UK, this would previously have caused an issue in terms of lost knowledge and experience. That’s not the case now.”
A disparate workforce does of course pose fresh problems when it comes to the topic of resilience. Employees working in different locations creates risk, and they will, for example, have different rules and regulations to abide by.
Employees can also feel isolated or that they have lost some of their privacy. A person’s job may be their primary form of social interaction and now they are effectively working alone. Or that individual may have a family and they need to conduct a math lesson while speaking on a zoom call with a customer.
In their continuity plans, firms need to address how employees engage with the company brand, how they can continue to feel part of the culture, and how they work with colleagues and customers without losing work-life balance, particularly since work will increasingly infiltrate the home.
One participant in the roundtable summed up the situation. “It puts more weight on the leaders of the company — not only the managers, but informal leaders too. Leaders have to be active and present within the organization when you cannot meet face-to-face. It is very important to realize employees are in lockdown or semi lockdown, and they might be alone. They are living at home, by themselves. Work is their only social interaction point. How can we solve that problem?”
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2. The technology ecosystem
British regulators are in the process of making operational resilience a legal requirement, which encompasses ‘outsourcing and third-party risk management’ as part of a firm’s considerations.
It’s not enough that a financial institution thinks about itself and its operation. The consideration of business continuity has to extend to third-party vendors and supporting the technology ecosystem to ensure it doesn’t fail, fall over, or cause disruption to service.
The regulators’ objective is to ‘facilitate greater resilience and adoption of the cloud and other new technologies,’ (2) as it is recognised innovative SaaS technology is the way to compete and thrive in the future.
The ecosystem is also continuing to grow rapidly. Last year, venture capital invested $42 billion in close to 2,000 FinTech deals. That was a decline of only 2 percent from the year before, despite the economic impact of the pandemic. SMB funding activity actually increased 18 percent and M&A activity in the sector grew 25 percent (source: CBInsights).
Leveraging technology to thrive
Another area in which the current crisis has impacted operational resilience is in digital transformation of risk-management and compliance processes. Companies that did not have digital compliance in place for KYC, AML or ongoing risk management were wrong-footed when normal routines were disrupted. The days of people being able to pop into a branch to open a bank account were swept away. More than a quarter (27 percent) of British adults, or about 14 million people, have opened an account with a digital-only bank. (1). This number is only going to rise. When looking at 2020’s Q3, Starling Bank and Monzo made net gains of 12,652 and 9,157 customers respectively, while Barclays, HSBC, NatWest and Santander all made net losses (source: Finder)
One panelist indicated that they have digitally transformed their compliance and risk management procedures around one guiding principle:“The idea is to make it easy to do the right thing and make it hard to do the wrong thing.”
Organizations with robust digital risk-management plans that leverage partnerships with trusted third-party vendors have a distinct competitive advantage. They can keep onboarding customers and continue preventing fraud.
None of the financial institutions on the panel “go it alone.” Each uses third-party vendors to deliver key aspects of their service to customers, so their operational resilience depends on the resilience of their partners. Protecting the ecosystem is therefore vital.
Before entering partnerships, vendors need to prove they have their own business continuity plans and capacity for resilience. “We have to be able to say that we can still cope and still deliver service if a data center somewhere falls over” said one participant.
Trusted vendors, selected carefully to support operations, digitally execute key processes and enhance customer experience, are invaluable. They make it possible for firms to pivot operations more quickly and thrive going forward.
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3. The customer
Ultimately, the one thing all businesses need to be resilient is a strong customer-base — one that is growing, loyal, and cared for. This means adapting to what customers want and what they need from their financial solutions.
Starting with the customer’s perspective and engineering solutions backwards delivers value and operational security. All financial institutions have now had to make various moves to provide access to products online, to deliver virtual customer service, and to digitally transform processes such as customer due diligence.
An indicator of a maturing market is clearly visible on the horizon however. Venture Capital remains the primary source of funding for FinTech startups by far, trends suggest an increasing level of PE and debt financing. Data by a Deloitte report shows a lot more activity has been coming from later funding rounds with IPOs and acquisitions also on the rise.
These moves towards digital transformation help ensure operational resilience as customers aren’t disrupted and they can continue to interact with their bank, wealth management firm, card payment provider, and so on. Creating resilience through customer loyalty is key.
Responding to customer demand
Donald Gillies, chief executive and cofounder of PassFort, who led the roundtable discussion, said, “A good example of responding to customer demand has played out through challenger banks, even before COVID. They were providing the sort of customer journeys consumers wanted: applications online, virtual due diligence and low-touch support.”
Each financial services firm has its own customer base and each financial product has its own audience. Wealth management customers, for example, want a different experience than a customer applying for a new online credit card. Some customers have a lighter digital footprint and they want to meet relationship managers to know they can trust them with their capital, others are happy to share their data and documents online. It’s the ability to adapt to customer needs, specific to the product being offered, that will ensure customer loyalty and a financial institution’s resilience.
“A startup online payment provider will engineer a very different customer onboarding journey to the wealth management firms we support. But whoever the customer is, it’s important to remember to put them first in the journey if you want to achieve loyalty, to compete and to thrive,” added Gillies.
The journey ahead
Strategic planning and a strong corporate vision, while always essential, have become paramount. Being able to see around corners and anticipate the next development, not to say the next revolution in demand for services, is the key to survival.
“You have to have big ambitions,” one participant said. “The challenge is: How do you make sure that every day, when anyone comes to work, they know what the top three priorities are for that day, that week, that quarter?”
And, while operational resilience may feel like a weighty task for financial services institutions, the core of the matter is focussing on supporting employees, strengthening the IT infrastructure and protecting customers. Companies that prioritize these areas can adapt more quickly and are more likely to achieve resilience.
Gillies concluded, “My vision of the future is that operational resilience will no longer be a compliance or risk afterthought and will instead become a normal requirement for firms, for software and infrastructure. If you can’t reliably evolve processes, systems and people by exercising an operational resilience muscle within your business, then you are ill-equipped to succeed in increasingly uncertain and volatile markets.”
The experience of the last 12 months, the accelerated rate of economic digitisation, and move to remote working, has shown that firms who can successfully adapt to change will be the winners in the long run. Therefore, it is not operational resilience policies or processes in themselves that drive value, but instead how rapidly those processes can be adapted in response to unknowable external forces.