5 Ways Bank Boards Can Strengthen Operational Resilience

As banks face an expanding array of threats and challenges, boards recognize the need to adapt their thinking. As a result, boards are increasingly taking a new approach to operational resilience.

The topic of operational resilience calls to mind internal planning efforts to address a list of everything that could go wrong: next-generation cyberattacks and data breaches, fraud, natural disasters and the economic shocks of inflation and interest rate changes. These critical issues all require careful board oversight of risk mitigation strategies.

But what about external, customer-driven disruptions? Customers now expect seamless digital banking services and omnichannel experiences. New fintech competitors are capable of providing these amenities and are grabbing market share from traditional banks. Many traditional banks aren’t keeping up. An eye-opening 95% of bank executives “believe their current outdated legacy systems and technological capabilities are unable to fully optimize their data for customer-centric growth strategies,” according to the World Retail Banking Report 2022.

These are existential challenges and they demand the same level of attention from the board as, say, cybersecurity. Bank boards should ask themselves: How can we remain relevant in this rapidly changing landscape?

Redefining Operational Resilience
As they wrestle with new challenges and demands, many board members are opening up to a new mindset and approach to operational resilience. Today, becoming an adaptable, resilient bank requires two intertwined, customer-focused objectives:

  • Remaining relevant to customers by offering new services and conveniences.
  • Maintaining customer trust by protecting their data and money and executing transactions securely.

This balanced approach means that operational resilience can be more broadly defined as a company’s ability to build confidence and trust in its capability to adapt to changing circumstances.

Addressing Operational Resilience
Bank boards — including their audit and risk committees — can incorporate this new approach to operational resilience into their oversight activities starting with these five steps.

1. Add value creation to the board’s mandate and mindset
Boards often focus heavily on oversight of traditional risk management and compliance: protecting value. But they also should take more responsibility for creating value and guiding bank strategies to evolve services and compete with financial services startups. Both activities contribute to increased operational resilience.

2. Embrace a customer-centric point of view
Directors should approach both value protection and value creation from a customer perspective. That means working harder to understand customer needs and consider how any decision might affect customers. During board meetings, this customer focus can shape dialogues and influence the types of questions asked, even with seemingly internally focused topics. Board members also should make every attempt to connect with customers directly — for example, inviting them to board meetings to share their perspectives.

3. Allocate more time on the agenda for operational resilience
Boards rightly prioritize risk management on their meeting agendas, but competitive risks also should be part of those conversations. And risk-focused conversations should be balanced with discussions of strategy and value creation. These topics are essential to operational resilience, which means that board agendas might need to be restructured to allocate sufficient time for each.

4. Evaluate market conditions more frequently
Boards undertaking strategic planning only once a year might not be able to adapt quickly to changing economic conditions and customer needs. A more frequent cadence of market sensing is in order. For example, one bank board performs a quarterly exercise: Directors define the five most important external events that affect the current strategy and discuss any needed adjustments at board meetings.

5. Diversify board representation
Effective, dynamic boards prioritize diversity, equity and inclusion. A more diverse board offers a better understanding of the diverse needs of its customers. Establishing more female and minority representation — as well as generational diversity to include younger demographics — boards can bring fresh, diverse perspectives to discussions on value creation and customer relevance. Board members with varied professional backgrounds, beyond finance, also can enrich strategic discussions.

Disruption Is the New Normal
Over the past several years, banks have faced wave after wave of challenges and disruptions. But imagine that every disruption is a chance to improve the organization. Organizations that can do so embrace disruption, because they know they are resilient and can improve. Moving forward, the bank leaders who adopt an evolved, customer-centric approach to operational resilience — encompassing both risk management and value creation — are most likely to thrive.

Operational Resilience: An Inside-Out and Outside-In Perspective

Operational resilience is a topic of concern for bank boards. Unfortunately, many operational resilience initiatives focus primarily on upgrading internal systems and processes to respond to potentially disruptive events. This internally focused approach can cause banks to pursue reactive, disconnected and short-term projects that are difficult to sustain and detached from overall strategy.

Recognizing this problem, a growing number of banks are refocusing their operational resilience efforts, approaching potential disruptions from an external, customer-centric perspective that seeks opportunities to create and protect value. Such an approach can enable more proactive and effective operational resilience initiatives for institutions of all sizes.

The phrase “operational resilience” typically refers to a business’s ability to overcome adverse circumstances that might cause financial loss or disrupt operations. Under this definition, topics such as disaster recovery, business continuity, cybersecurity threats, fraud and other conventional risk management issues are central to most banks’ operational resilience efforts.

Yet some of the most potentially disruptive forces banks face stem from other factors, many of which lie outside the scope of conventional risk management programs. Examples include rapidly changing technology, evolving customer expectations and unconventional competitors encroaching on banks’ traditional service models.

In this environment, an often overlooked aspect of operational resilience is relevance — a bank’s ability to remain relevant to its customers’ financial services needs and ultimately become more relevant in the future. Perhaps the conventional definition of operational resilience should be replaced with one that acknowledges the importance of resilience, such as: “The ability of a company to build confidence and trust in its capability to adapt to changing circumstances.”

This shift in understanding could have significant implications for executives. For example:

  • In addition to internal mechanisms and systems that protect the value of the organization, operational resilience must also address external factors that could affect the bank’s value.
  • Rather than focusing solely on the downside risks of changing circumstances, an effective operational resilience approach also should recognize potential upside opportunities, particularly those stemming from customers’ evolving concerns and expectations.
  • In addition to responding to identified risks, operational resilience initiatives should proactively study, anticipate and prepare for potentially disruptive events and trends.
  • To remain resilient and relevant, banks must actively seek customer input and be ready to respond quickly with new service models and products if they align with the bank’s long-term strategy.

Connecting External Forces to Broader Threads
Banks face many pressures including continued digitization, cybersecurity threats, migration from legacy information systems, nontraditional competitors, interest rate volatility and a slowing economy, to name a few. Responding to each disruptor in isolation can create a reactive, internally focused approach that produces disconnected and uncoordinated projects that have little relevance to an institution’s overall strategy.

A more proactive approach to resilience requires leadership to consider potential disruptions within the context of the broader external issues and forces that can influence a bank’s business direction. For example, rather than reacting to a slowdown in a large commercial customer’s business, it is more effective to develop a business strategy that addresses the underlying economic trends that could lead to such a disruption and provides a set of potential offerings that might better enable that customer to navigate specific challenges ahead.

Broadly speaking, most disruptive events can be considered within the context of several general trends, including:

  • Demographic shifts.
  • Regulatory trends.
  • Economic and environmental issues.
  • Competitive issues.
  • Changing technology.
  • Evolving customer needs and expectations.

By developing proactive strategies to address these broader trends, risk managers can provide a foundation for more consistent and coordinated responses to specific events. More importantly, such an approach can help management prioritize trends that are most likely to have a direct impact — either positive or negative.

Question Your Operational Resilience, Strategy Frequently
A more strategic approach to operational resilience begins with strategy itself. In today’s environment, annual strategy sessions are simply inadequate. The most successful organizations conduct quarterly or monthly strategy reviews, fine-tuning priorities to stay ahead of developments.

Risk management and operational resilience questions must figure prominently in these discussions. Management should remain customer focused, seeking to understand how their customer would experience the same risks and potential disruptions.

Management also must recognize that an effective operational resilience effort is a dynamic and iterative process that requires continuing investment in data technology to integrate information and perspectives across the organization. With a new perspective, staying resilient and relevant is possible.