Banks have an opportunity to leverage their role in economic support programs to improve their reputation and accelerate digitization.
Much of the work to implement huge government stimulus packages has fallen to commercial banks. Under pressure to distribute funding quickly – but with vigilance – banks have so far done relatively well to get money where it’s needed fast, and even made inroads in repairing some previous reputational damage. Still, the process has highlighted some weaknesses in the system while also presenting an opportunity to accelerate the digitization of banking. I recently joined a OMFIF/EY COVID-19 podcast to discuss key issues facing commercial banks during the pandemic.
Key questions covered included:
How are commercial banks implementing government support schemes? What’s worked well?
As well as implementing their own measures to support customers and the economy, including waiving fees and postponing payments, banks have often been the conduit for government stimulus, with much of it transmitted to small and medium enterprises (SMEs).
Banks have done well to get this money out quickly, with the most successful schemes those that have been developed in close consultation between the financial sector and governments. For example, Switzerland’s stimulus transmission program, which was co-designed with the banks, distributed funding to small and medium enterprises (SMEs) within just a few hours.
Of course, achieving speed while avoiding fraud is always challenging, requiring banks to stay vigilant to these risks. The sheer size of the funding on offer makes this a complex task and we see more banks realizing the value of having the right technology solutions in place to help.
How has this accelerated the digitization of banking?
The stimulus program has delivered a wake-up call for many banks that have realized just how many of their operations are still slowed down by paper-based processes. The impact of COVID-19 has aggressively accelerated digitization programs – we’ve seen technology solutions that may once have taken a year to put in place, implemented in just days.
We expect this digitization trend to continue, but not necessarily at the expense of physical branches. Our EY Future Consumer Index survey found that just 24% of people said that they would bank more online, even after the crisis.
How are banks preparing for non-performing loans?
Uncertainty around the economic impact and overall duration of this crisis – and how much of the subsequent risk will be supported by government – has bank leaders worried about a “day of reckoning”. If government stimulus tapers off before SMEs are back on their feet, we may see a surge in non-performing loans.
Banks are more prepared for this prospect than they were a decade ago, with regular stress-testing in place and a clear view of where key risks lie. Still, with a prolonged economic recovery period ahead, banks must ensure they have the right skills and expertise in place to navigate the capital restructuring of corporates and businesses that will become critically important.
How are banks balancing their social and fiduciary duty to protect profitability?
Banks are keen to demonstrate responsible banking during this crisis, showing support for customers and making commitments to hold off on redundancies. The challenge will be balancing these efforts with ensuring medium and longer-term profitability.
Is this crisis putting the bank business model under strain?
Banks may miss equity targets because of credit provisions and low interest rates but are generally well-capitalized. How bank profitability evolves over the next 12 months will depend on the trajectory of the virus and its economic impacts.
What will be some of the long-term lessons – and benefits – of this crisis for the banking sector?
The digital acceleration of the banking sector during this crisis should be maintained. Banks that move faster to leverage technologies, such as artificial intelligence, to improve how they serve customers will be better prepared for the next decade.
I also believe this is an opportunity for banks to improve their reputation by showing their value as a facilitator for the economy and customers. Those that keep purpose front of mind and focus on environmental, social and governance (ESG) targets can emerge stronger from the crisis, and even find new growth prospects.
Read the complete transcript of this recently concluded EY/OMFIF podcast.