As the coronavirus pandemic continues to impact the global economy, the idea of negative interest rates has taken centre-stage. Nanda Kumar, founder and CEO of SunTec, shares some insights

Counterintuitive as it may seem, economies including Europe, Japan, Australia and the UK are considering the policy to help stimulate spending and investment throughout the economic downturn.

But are banks prepared to implement this policy if and when it’s rolled out? A large number of banks’ IT systems are not configured to implement negative rates.

While core legacy systems are incredibly effective and highly efficient at processing transactions at a large scale, they could run into unexpected failures when rates go negative.

In countries that have previously implemented negative rates, banks running on legacy systems have faced multiple
complications in the first few months of applying the policy. But these teething problems now have a solution, thanks to technological advancements.

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Embrace digitalisation

Digitalisation is not a nice-to-have anymore, it’s an imperative. But this doesn’t mean that banks need to topple over their legacy core systems just yet; they only need to think carefully and wisely about how they use these core systems to enable processes without hindering bank progression.

To successfully run these negative interest rates programmes, banks can add a digital layer above their core systems, which will enable them to design, implement and manage negative interest programmes at scale.

This layer will seamlessly integrate with existing systems and segment the core systems capabilities. By doing this, banks will also be able to roll-out programmes that are more customer-centric and personalised to their customers’ bespoke financial needs.

Attempt to turn the rough economic tide

Central banks use interest rates to control economic activity; they raise interest rates when their respective economies are flourishing and lower them during times of recession and deflation to avoid serious economic damage.

Negative interest is unconventional but is being given serious thought today because of the massive knock-on effect brought on by the health crisis. Yet the effective execution of the policy is more intricate than simply mandating interests on all deposits.

Keep pace

If banks are not ready to execute this policy, they are likely to erode their profitability, which would have a significant impact on their own success and growth plans.

Not implementing the negative interest rate policy on time will leave them with excess liquidity and high opportunity costs.

Many banks will want to pass these costs down to their customers but given their dependence on legacy systems—which are not built to manage and process this policy—transferring this cost to customers becomes all
the more complex.

Pandemic or not, banks face significant pressures from multiple stakeholders to remain relevant to all audiences (digital
natives as well as digital immigrants), deliver new features, fight competition, tighten margins, run loyalty programmes, promote financial wellness, and keep up with continual technological disruption.