June 1, 2020

Financial Resilience: Long-Term Success for Customers and Banks

In the first of this series, we will introduce and define the concept of financial resilience, the bank’s KPIs around financial resilience and what it means for end customers to be financially resilient. In future posts we will explore banking strategies that develop financially resilient customers, how personalization enables customers to achieve financial resilience, how banks can use automation to drive customer financial resilience and how open banking can strengthen customers’ financial resilience.   

Customers Trust Banks to Help Them Prepare for a Rainy Day

The COVID-19 pandemic is catalyzing financial uncertainty unparalleled since the Great Depression. Many people find themselves ill-equipped to survive this crisis, and with growing awareness and fear of future economic downturns. An April 2020 Forrester report found that many consumers struggle to manage debt, understand how to manage money and invest, afford credit, plan for retirement, and build savings. People are facing increasing financial burden, and they lack the knowledge and skills to ease it alone. 

And yet, a new social contract has re-emerged, with 87% of consumers trusting their banks to do the right thing during the crisis, and two-thirds trusting their banks more than before the pandemic, according to a McKinsey Consumer Survey. These figures indicate that consumers not only expect but trust their banks to act on their behalf, to alleviate the financial pressures they face. To live up to their end of the contract, banks have both an obligation and an opportunity to build products and services that foster their customers’ financial resilience. Resilient-driven offerings ensure that customers have the support and tools to save, reduce debt, and better manage their money – all of which will prepare both customers and banks to weather storms in the long term. 

What is Financial Resilience, and Why Does it Matter?

Financial resilience is the ability to withstand and recover from temporary financial hardship and disruptions. Rather than a reactionary response to an acute need, resilience is a long-term, ongoing, and sustainable process that can be nurtured and planned for. The goal of a financial resilience-led strategy is to strengthen customers for the long. By cultivating habits of savings, debt reduction, and smart money management, financially resilient customers will be able to withstand what McKinsey calls the “next normal”, the uncertain future of major world events that may impact the global financial system.  

Resilience matters right now because it allows customers and banks alike to plan for downturns, and to use that planning to better financially manage themselves during turbulent times. Until now banks have focused on increasing customer share of wallet, loyalty, and engagement. These goals have informed products and services that promote customers’ financial wellbeing, their ability to pay debts, have ample emergency, college, and retirement funds, and feel positive about their financial health. All these speak to customers’ current financial situation, but not necessarily to their long-term standing. A customer might have an abundant checking account, but what do their emergency savings look like, and how often do they contribute to them? 

In the uncertain “next normal”, customers feel an urgency to build long-term preparedness. And by helping customers build financial resilience, the banks also prepare themselves to survive downturns. The goal of building financial resilience is therefore imperative for banks. Customers will be well-positioned for the next downturn, with increased savings, less debt, and better money management. Banks will enjoy fewer delinquencies, greater customer loyalty and increased share of wallet, engagement – and even increased revenue. 

How Banks Can Build Financially Resilient Customers

Products and services designed with financial resilience in mind should reduce the customer’s burden when it comes to making decisions about savings and money management: How much to save? Where? How should saving plans change when income fluctuates? Many customers lack the financial knowledge, skills, time and tools to make those decisions on their own. 

Banks should step in to reclaim their social contract role as protectors of customers’ financial health, relying on the latest AI and data analytics tools to offer automated and personalized solutions that eliminate the customer’s burden and increase trust. A May 2020 McKinsey report suggests specific areas banks should focus on when designing for financial resilience, such as problem resolution, loan modification, budgeting advice, and personalized data-based offerings that take into account each customer’s unique financial situation. 

For example, to assist customers in continuously building emergency savings, banks can use data and artificial intelligence to understand cash flow patterns and automatically divert pockets of customers’ funds to savings or investment. Royal Bank of Canada’s NOMI Find & Save program has saved for over 210,000 clients over $225 per month each in this way. To support customers in setting up budgets and guiding them to abide by them, automated budgeting programs can identify spend categories, set targets, and track spending on customers’ behalf. Customers have used Find & Save’s budget tool to create over 1 million budgets since April 2019.  

The impact of these solutions is not abstract. Resilience can be clearly defined and measured. A resilient consumer has: 

• Three to six months of expenses in emergency savings 
• A high savings rate in relation to their income 
• The ability to borrow and pay down debt 
• The ability to manage spending

As banks design solutions targeting financial resilience, they can ask themselves, on one hand, what percentage of their customers have emergency savings, the power to borrow and pay down debt, and the ability to manage their spending? And on the other hand, how can they use AI and data to take the burden off customers and lead them to make smarter financial decisions that build resilience? 

Both Banks and Customers Stand to Gain From Financial Resilience

Automated and personalized programs that aim to increase savings, reduce debt, and improve spending habits will help customers feel more prepared to survive future economic downturns. When customers feel that their bank delivers on its end of the new social contract, they will increasingly view the bank as a trusted advisor that genuinely has their best interest in mind, becoming more loyal to the bank over time, and more interested in new products and services.  

Beyond engendering loyalty, solutions that promote financial resilience can reduce delinquency and defaults because of the concrete improvements to customers’ financial behaviors. Seeing that the bank’s offerings solve a need customers would struggle to solve alone will increase engagement and wallet share. Combined, these factors impact the bank’s revenue. A 2020 retail banking study by Accenture shows that propositions based on trust and resilience can generate a 9% revenue uplift for traditional banks. 

As unpredictable events increasingly become the norm, customers and banks alike will benefit from the opportunity in financial resilience. Innovations to foster resilience will not only help customers and banks to withstand hardship, but to transform for the better, and now is the time to pursue them. 

Be sure to read the next in the series “What natural disaster preparedness can teach financial institutions about moving from crisis management to long-term strategic planning for resilience.”