Today, La Macchia Group released a whitepaper analyzing the outcomes of investment activity during economic contractions and the implications for future success.
“Throughout history, times of economic uncertainty and contraction have spurred mass lay-offs, cancelation of capital expenditures, and organizational ‘tightening of the belt,’” said Tim Klatt, Director of Retail Strategies at La Macchia Group and author of the whitepaper. “Though this has been the common response, we sought to use data from the Great Recession to help us evaluate whether it is the correct response for financial institutions.”
La Macchia Group’s analysis found that organizations that invest in times of economic uncertainty emerge stronger in the long-term
“Organizations that only reduced costs during economic downturns came out worse for it in the long run,” said Klatt. “The organizations that saw long-term success were those that wisely balanced cost reduction efforts with investments in the future.”
How organizations cut costs also matters. Research found that companies that cut costs by maximizing operational efficiency, as opposed to cutting employees, weathered the recession better than those that significantly cut their workforce. Additionally, these companies seized opportunities to invest in business growth through research and development, plant, property, and equipment stock and other capital expenditures.
“Investments during recessions build a foundation for the future,” said Klatt. “When economies rebound and consumers return, you have to be ready.”
Insights for Financial Institutions
While these business practices are relevant across industries – they are also true within the financial services industry, an industry uniquely served by La Macchia Group. La Macchia Group found that credit unions that invested in fixed assets during a recession drove substantial gains in assets and members, when compared to credit unions that did not invest. In fact, credit unions that did not invest lost assets and members.
As expected, the larger the credit union, the greater its chance of survival; however, research also found that investments in fixed assets (land, buildings, etc.) positively impacted survival rates for organizations of all sizes. More than just surviving, credit unions that invested in fixed assets thrived, seeing increases in assets and new memberships both during and after the recession.
Unlike credit unions, bank survival rates during and following the recession did not have a linear relationship with size, with mid-size banks faring better in survival than both their smaller and larger counterparts.
“The bottom line is that financial institutions, at least in small to mid-size asset ranges, followed the same patterns as other businesses in times of recession,” said Klatt. “Organizations that focused on operational efficiency and also invested in customer-centered enhancements succeed at a greater rate than those that focused solely on defensive cost-cutting measures or only on investments.”
Smart Investments in the Midst of COVID-19
In financial services, few ways exist to dramatically increase efficiencies to reduce cost and invest in the future simultaneously; however, the areas of opportunity lie in both the physical footprint and digital platforms. And, making these investments in the midst of COVID-19 could actually reduce overall costs.
While data shows that updating, repositioning, or adding new branches can provide an opportunity to reduce costs and more deeply engage consumers, there is added benefit to making these investments during a time of economic contraction because it may cost less to do so.
“During time of recession, construction and commercial real estate costs decrease,” said Klatt. “This can present a unique window of opportunity for savvy financial service providers.”
Wise brick-and-mortar investment will be done with a digital strategy in mind. Gone are the days when investing in digital meant not investing in “other” channels or only supporting online and mobile banking. As a platform that supports self-service and remote-service, investments in digital scale to customer experience enhancements across the board.
“COVID-19 has further illustrated the need for a cohesive user experience inclusive of both in-person and digital / virtual banking options,” said Klatt. “Financial institutions that have already made investments in technology have not only better weathered the current pandemic but will be better positioned to welcome consumers back to their physical branches.”
When carefully executed, based on a critical understanding of target demographics, socioeconomic, and behavioral profiles for the institution, investments in physical branches and technology in the midst of a recession can ensure a financial institution not only survives an economic downtown, but thrives.
To download La Macchia Group’s whitepaper, visit https://www.lamacchiagroup.com/opportunitywp.