The Resilient Bank: Harnessing the Power of Data to Navigate Economic Uncertainty

Economic issues remain a top concern. what does the looming recession mean for your institution? it means data should be your best friend.

Weathering economic uncertainty is a major concern across nearly every industry but it is especially urgent for financial services companies, which play a vital role in helping the economy operate efficiently. It’s unclear just yet whether the economy is heading for a recession or is already in one, or whether the Federal Reserve can engineer a soft landing.

But one thing that is plainly true is that financial institutions can’t afford to close their eyes until the economic storm blows over. And at moments like this, data is an institution’s best friend when it is easily accessible across the entire enterprise. Banks can better identify early warning indicators on both the lending and deposit sides, provided they have timely and insightful data at their fingertips.

We’ll dive deeper, but first, let’s take a step back and take stock of the turmoil that has roiled the financial services industry recently.

The big economic story of the past year has been rising prices. The rate of inflation reached a 40-year high in 2022, unleashing pressures on banks and their customers. In an effort to tame inflation, the Federal Reserve began raising interest rates in March 2022, and has notched nine rate hikes so far. (Most economists expect a tenth hike, totaling 25 basis points, on May 3.) Although the Fed has made some progress in reducing the inflation rate, consumers are feeling the pinch as inflation and higher interest rates eat away at their spending power. Increasingly, they are dipping into savings to pay for basics like gas and groceries.

As if inflation wasn’t pressure enough, the economic turmoil was compounded in March 2023 by a short-lived financial panic. A spate of deposit runs and bank failures had ripple effects that will be playing out for months to come. One immediate outcome is that competition for deposits has intensified, driving up banks’ funding costs and compressing their margins.

Amid these crosscurrents, financial services companies need to be acutely in tune not only with the state of the economy, but the particular struggles that a downturn may impose upon their customers.

Already, we’re seeing that consumers are having more trouble paying for basic necessities. According to a recent report from LendingTree, one-third of Americans have paid a bill late in the past six months and 61 percent of them said it’s because they didn’t have the money. And delinquencies on car loans were up 17.9 percent from just a year ago, according to Cox Automotive.

Such trends can potentially signal long-term unfavorable impacts on a bank’s bottom line. But timely and situationally appropriate intervention can help customers — and ultimately, the bank — weather the storm.

Data can help identify potential problems.

Banks that leverage data effectively have a better understanding of their customers, allowing them to be proactive in addressing issues and help customers before problems escalate. This ability and growing customer expectation is crucial particularly for community banks whose differentiator hinges on their ability to know their customers on a much more intimate level compared to their larger, national competitors.

For instance, by using their own data to identify trends, banks can uncover anomalies like spikes in business credit usage. They can then pair the spikes in credit usage with activities such as an increase in past dues on loans or a decline in deposit balances to identify customers that could benefit from a phone call from their commercial relationship manager. That type of proactive outreach not only could have a positive impact on both the client’s and the bank’s bottom line, but it also goes a long way in terms of goodwill and true relationship building with customers.

Adding another layer to this picture is the customer’s specific industry. Perhaps their business has been impacted more so than others, similar to the way the hospitality industry was severely affected during COVID.

Geographic location could also be important. For instance, a specific area may have recently been hit by layoffs at a local factory or large employer, which has created challenges for other local businesses or industries. The financial institution’s data should and will reflect that.

By building a complete view of the customer and uncovering trends, banks can quickly and proactively act rather than wait until that customer is severely delinquent.

We live in a world of uncertainty, which is further amplified by social media. A constant question for banks is, where is an issue going to arise next? An early warning system has to take a full scope look at the business, not just be limited to one or two things, monitored by one or two people in the bank.

But data and insights must be timely.

Banks must be able to glean insights in near real-time to address problems early. They need to be able to see trends quickly, anticipate their potential impacts, and take action immediately —
rather than waiting 15 days after the month ends to see what happened in the previous month. By then, it’s too late to offer customers true support.

Identifying behaviors, like an unusual increase in overdrafts, for example, allows banks to proactively reach out to customers to provide support as soon as they need it, rather than waiting until statements are out the following month.

Why is it hard for banks to harness data and put it to work in a way that produces insights? A primary reason is that banks use legacy systems that are built for processing large amounts of transactions, not providing data intelligence. Banks either attempt to fit the square in a round peg by using the core processor’s solutions or they are left to their own devices to solve for complex matters like identifying the data that is truly impactful, communicating those insights across the enterprise, having consistency in reporting, and doing so in a timely way where proactive decisions can be made.

Timely insights also allow banks to understand their exposure to risk.

While proactively helping customers is crucial for providing an exceptional customer experience and maintaining a sound reputation, it could also help financial institutions mitigate risk. If a bank is seeing a decline in deposit balances while also seeing an increase in credit line usage, this can reveal problem areas that should be quickly addressed.

Even if banks are reviewing portfolios quarterly, they’ll quickly be behind. With insights delivered daily, teams can instead monitor their bank’s health more frequently. They can then make changes quickly as the economy shifts.

Speed is really driving the need for more data, and to build it yourself can take years. In March, KlariVis’ most used page was focused on monitoring banks’ funding and balance changes, reflecting the questions raised by deposit runs at a handful of large banks and how turn-key data solutions can be used to proactively manage sudden, unforeseen situations.”

As talk of a recession grows, financial institutions must be asking if they have the right data strategy in place to make critical decisions, manage risk and proactively help customers weather potentially tough times.

To learn how KlariVis can support your financial institution, visit our features page or schedule a demo today with our team of former bankers.