Banks are working as if it’s a sprint at the moment, but it’s going to be a marathon.
A local global workforce
Essential to this support is employees’ access to the right hardware – as well as reliable internet access – to enable sustainable work practices. Banks with global operations are experiencing a surge in latency and bandwidth issues with staff in various regions struggling to work from home when everyone is online at the same time. Our Capital Confidence Barometer report indicates that the vast majority of senior financial services executives see COVID-19 affecting how they manage their workforce with 31% stating the need to reevaluate their operations and 42% taking steps to change.
How do banks take a high volume of loan requests – ten times what the annual loan volume has been – and work through these quickly?
The challenges of working remotely are made more difficult with the sudden pressure on lending facilities, adding additional compliance, training and conduct burdens on banks.
Crucial to seamless business continuity is secure remote access for both banks’ employees and third parties. To avoid any increase in fraud or of cyber risk, banks should look to scale up their risk management capabilities to contend with surging credit requests, in a secure remote environment.
More than ever, the need to work from home has exposed the challenges of carrying out non-standard and non-digitized tasks. On top of this, banks must also review existing policies pertaining to where employees can and cannot work – after all, prior to COVID-19, few banks had imagined their entire trading operations working from home. However, banks are proving that it is possible to work remotely effectively, which raises the question of office location. The potential for a large number of employees to work remotely on a continuous basis is one that will influence whether or not banks will see the need for expensive real estate in the future.
Overall, the current environment calls for fresh thinking on the resilience of critical business services, whether or not it is practical to have third-party suppliers located in one area or whether their services should be distributed more widely, and if current operating policies are right for the weeks to come. This can be a useful eye-opener for banks’ resilience planning.
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Remotely embracing the digital age
With banks’ reduced physical presence, one of the biggest opportunities to come out of the COVID-19 crisis is customers’ rapid uptake of digital banking. Government orders to stay at home have resulted in a huge increase in digital adoption across all client segments, driving banks’ digital transformation programs. Where some banks had previously struggled with encouraging customers to switch to digital channels, customers are now investing time to learn these technologies.
The recent EY Future Consumer Index has revealed that 43% of consumers now say that the way they bank has changed, with 17% revealing it has changed significantly. Up to 47% of respondents say they are using contactless payments more, and almost a third have increased the use of cards and online payments.
In Hong Kong, the use of digital tools in retail banking has increased from 40% to 80% in recent weeks. In corporate banking, the rise in video conferencing is proof that, if carried out effectively, banks could seize this opportunity as a way to save travel costs and reduce their carbon footprints.
Market volumes suggest that banks that have been able to get technology to their customers quickly have been winning a larger market share, indicating that speed to market is essential. With bank branches still shut for now, it is critical that banks keep customers engaged on their digital channels to ensure new digital habits simply become old routine, opening up post-crisis opportunities for improved customer engagement and sustained cost savings.
Financial resilience, take two
Banks today are strong enough to mitigate the immediate financial impact of COVID-19. With companies tapping out credit lines, but putting that money straight back into deposit accounts, banks’ balance sheets are in good shape for now.
However, depending on how long these organizations hold onto their cash – and if the number of defaults start to rise – banks could start to feel acute strain on their stress test models and substantial loan losses.
In Europe, the crisis may trigger the consolidation of some overbanked segments of the market. In Asia-Pacific, there are some positive signs that banks have withstood the immediate impact, but it is still early days and the reality of credit losses will become more apparent in Q2 and Q3 this year. So far, credit provisions for four of the biggest banks in the US has reached approximately US$20b. Now is the time for robust stress testing to help with better financial planning for the months ahead.
Banks are engaged in a complicated balancing act of protecting the customer and protecting themselves from extensive credit losses during this difficult period.
An exceptionally low interest rate environment, coupled with continued labor force disruption, means that banks will need to consider a number of scenarios to understand what their capital base may look like later this year. However, given the bleak global economic outlook, forecasting has become tremendously difficult.
The ultimate cost of COVID-19 is yet unknown. However, it is clear that banks have an opportunity to help lead the global response, ensuring that customers are successfully guided through this crisis, enabling the rapid adaption to the “new normal” that lies ahead.
Summary
Banks are in a unique position to guide customers and businesses through this crisis, but will be put to the test as economic conditions worsen.
