The COVID-19 lockdown took people indoors and took them online. Everything from grocery shopping to paying bills was online as social distancing norms were enforced. This was the time when fintech and tech-fin firms came to their own as more and more people and organizations depended on their services to make and receive online payments securely. Several shadow banking firms who had been early adopters of fintech found themselves in a strong position to weather the storm of the pandemic and recover from the slump in business quickly. However, when it came to the main banking sector, a sense of disarray prevailed.
One of the most crucial institutes of human civilization found itself in troubled waters as it got hit from multiple angles. Both personal and institutional banking activities came to a near standstill as everyone experienced a financial crunch. The term used by S&P to describe the effect was ‘Screeching Halt’, which spoke volumes for the state of things. However, it was not the pandemic alone that affected banks. The pre-COVID banking sector was already under pressure in two main areas: competition from large and small fintech and tech fin firms, and low-interest rates.
The situation was only exasperated by the crisis, providing a stark reminder that it was time for banks to up their game.
Issues that plagued the banking sector due to COVID-19 pandemic
Banks saw a drastic reduction in investment levels while also experiencing market volatility. Activities like M&A/SPAC also saw a drop, further affecting income streams. And finally, the underutilization of brick-and-mortar bank facilities added to costs without substantial revenue to justify the spending. The aim of the banking sector in the post-COVID world was not so much about surviving – that was well within its capability, but more about how quickly it would get back on its feet.
Fortifying for the post-COVID era
There are a few areas that the sector can focus on to be better equipped for the post-COVID era. The first is digitalization. This is where fintech got it right, right from the start. If banks can digitalize and automate as many processes as possible, it could be a leap forward in getting back on track. Digitalization does not only streamline operations and makes them faster, but it also helps to lower the error rate to even zero. Automating processes helps free up resources that would otherwise be tied up doing mundane tasks. Reallocating these resources can have a considerable positive impact on the everyday running of the banking sector.
Personalized experience for customers
While going digital and moving processes online, it is also important to maintain a personalized experience for customers. Improved telephonic and video communications for customer interactions could be exactly what both banks and customers need to retain good relationships and provide reassurances in the sector’s ability to build momentum in the ‘new normal’.
In a world where many non-banking financial companies (NBFCs) already have a head start in online payments and processing of financial transactions, banks do not have to start from scratch. Collaborative ventures or even mergers and acquisitions of small yet well-equipped NBFCs could speed the process along.
Interests on loans have been the major source of revenue for banks over the decades. However, the COVID-19 crisis rocked this model to the core. Loss of jobs, and businesses collapsing made it impossible for a vast number of borrowers to pay back their loan amounts. As the number of non-performing loans (NPLs) increased, banks found themselves incurring greater losses with a diminishing capacity to absorb these losses over time. This situation is unlikely to change at a rate that would help banks recover quickly.
Focusing on alternate sources of income
One way that the banking sector could start recovering from this outcome is to focus on other sources of income. A fee-based model for revenues should be the next step to protect and stabilize the business. Developing new products and improving existing products would help to enhance fee-based revenue-generating streams. Whether we are looking at digital products like e-wallets and e-credit cards or more traditional products like lockers, Guarantees, and pay orders, increasing their attractiveness and accessibility for the customers is a move in the right direction.
COVID-19 was a shock to the system of transactional banking, which has led to a change in the business model. This new model combines and integrates technology into the survival strategy. There has no doubt been progress, and things have been looking up to an extent. However, while it is now behind us, COVID has left us with a rocky road ahead, fraught with significant recessionary and geopolitical factors that continue to influence the banking industry.
In this light, the future needs to be navigated with caution, but also with imagination and innovation playing a significant role. An attitude of openness to collaboration with various players is necessary in order to thrive and should be looked at with a fresh perspective. Typical low activities like consolidation and joint ventures are essential if banks are to emerge stronger in a post-COVID world.