Most banks have addressed the immediate challenges presented by the COVID-19 crisis – protecting staff, moving to remote working, and providing much-needed services to customers. Unlike 2008-2009 when banks were portrayed as the villains, the current crisis provides an opportunity for banks to be active and positive participants, helping both consumers and businesses weather the economic storm we are experiencing. Doing it well with empathy, personalization, but also appropriate risk management, could create stronger, enduring relationships that will be a foundation for future success. This is how banks will be able to survive the short-term and thrive long-term.
Beyond business continuity there are four key areas that demand banks’ attention during this crisis.
* Credit Management
As business and personal cashflows tighten, banks can expect an increase in loan defaults as borrowers struggle to make payments. Lenders that focus on the following priorities can help keep customers afloat in this time of financial uncertainty:
· Support government actions. As governments try to mitigate the financial impact of the pandemic, many banks are being asked to provide a grace period for mortgage and other loan payments to prevent defaults. For example, U.K. banks have been asked to provide three-month mortgage payment holidays and to suspend most repossessions and court actions. Quickly implementing these programs may be challenging as many systems aren’t set up with the required flexibility. Governments are also injecting capital into the economy with small- and medium enterprise (SME) loan guarantee programs, like those from the Small Business Administration in the U.S. and Germany’s development bank, KfW. Many banks aren’t structured to offer these types of loans, and early challenges with the SBA program in the U.S. clearly show these efforts will be work in progress for some time. Despite the challenges, banks need to lean in and be active as standing on the sidelines will send the wrong message to customers. Governments are leading and funding these efforts, but the banking industry has an opportunity to work together to make the financial stimulus process quick and easy to deploy.
· Be proactive in modifying loans for consumers in need, rather than wait for governments to ask. Many lenders can use a data-driven approach to understand which customers need help and then rapidly reach out with tailored, relevant solutions. Many people will be overwhelmed by the crisis, so cutting through the noise and getting their attention with an offer of help is crucial. This will require a pivot in credit analysis to provide resolution and recovery options and prevent delinquencies. We also expect an uptick in mortgage refinancing – preliminary U.S. data from Accenture shows before March was over, refinancings were up 100% from February. This demand may last for some time, since not everyone who could benefit from a lower rate applies right away. This could be a good time to advance pure digital lending products from those borrowers in a position to benefit from historically low interest rates.
· Prepare for losses. While forbearance programs will help some customers with a three to six-month grace period, many will still not be able to make their next payment. Banks should use this time to build the capacity to manage delinquent and defaulting loans. Train staff on handling customers with empathy and constructively use technology to free up people to manage inquiries personally and provide staff with the best possible solutions for each customer. Providing helpful, meaningful advice and guidance during this time is essential. Consumers won’t forget how they were treated by their bank over the next year.
* Falling Revenue
In nearly every case, bank revenue is declining sharply. Emergency rate cuts have the downside of compressing banks’ net interest margins. As consumers shift money from the securities markets to insured deposit accounts, banks need to manage their deposit pricing to quickly lower the rate they give consumers. Payments revenue will also take a drastic dive. With a collapse in market demand in sectors like retail, entertainment and travel, some demand will move to online, e-commerce channels, while tourism revenues will evaporate – at normal interchange rates, this can mean a drop in revenue of more than $10B from tourism alone and we expect an overall drop in payments revenue of up to 10%, which could be $150B globally removed from the top line of the industry. While there’s not much to do to stop the overall drop in revenue, banks can focus on making payments safer by increasing limits on contactless cards and educating consumers on digital wallets. Banks can also target cashback and loyalty rewards to encourage spend in areas that most need it, like restaurants.
* Customer Service and Advice
While some banks are closing branches to walk-ins, there needs to be an allowance for the elderly and others who don’t use apps or online banking. Consider implementing elderly hours at branches and providing over-the-phone digital banking training to customers who aren’t comfortable with digital technology. Don’t let the perfect be the enemy of the good here: scale up and train branch and call center staff to identify customers who don’t use online services and help them with simple tasks, like logging on and checking balances. It’s also a chance to connect with people who are among the most vulnerable in our communities, providing an added sense of purpose to your employees too. Also, consider that in every crisis, people stockpile cash, so make sure ATMs are well-stocked but also well disinfected. Retail customers are going to need help and advice on short-term cash management and re-planning their future – banks should prioritize live interactions (enabled by video collaboration tools) with their customers to help them with their financial future. As banks try to enable more flexible customer interactions, they’ll need to also ramp up cybersecurity and anti-fraud tools.
* Managing the Business
Even the best-positioned banks are going to have a short-term hit to their finances. Accenture modelling suggests banks may see half to all of their profit margin disappear this year. Regions where banks have been stronger, like the U.S. and Canada, will fare better than Europe, where banks were seeing an average 6.2% return on equity, half as much as their North American counterparts. Banks will need to review and prioritize current projects to determine what can be slowed/stopped or redirected to the most pressing needs. In addition to helping their customers, banks will also need to be flexible with vendors and suppliers to limit economic contagion.
In addition to preparing for the short-term impact, banks should be mindful not to waste money on disposable responses. It’s important to act quickly, but to solve issues with one eye towards the future. This crisis will likely accelerate many existing trends, like the shift to digital sales, but customers will see long-term value in some of these short-term solutions, as we will never go back to a pre-COVID-19 world. This is also an opportunity for banks to test out new advice propositions to understand what works and what doesn’t – in an environment where customers are likely to be forgiving of experimentation. We all should realize our actions today will lay the basis for the banking industry’s future for years to come.
