This article is written on March 18 2020, considering publicly available information. It provides a short summary of the unfolding situation and implications for financial services institutions.
Where we stand right now
The World Health Organization (WHO) declared Covid-19 a global pandemic last week. Currently, the centre of the outbreak moved from China to Europe, with 31 506 reported cases in Italy, followed by Spain (11 178), France (7 730) and Germany (7 156). As a result, the EU is closing its borders for non-EU nationals, many countries have closed schools and non-essential stores and urge citizens to stay at home and practice social distancing. The most affected regions now focus on flattening the curve, as brilliantly illustrated by The Washington Post.
Immediate action to keep operations going
Needless to say, the health of employees and customers is a key priority. That is why most banks have quickly
- updated office and branch hygiene measures
- restricted travel
- filtered down immediate crisis response procedures across hierarchies
- organised flexible work plans for employees who now mostly work from home where possible
For financial services providers, it was a revealing experience that showed if the organisation is ready to work remotely and on a more general level to keep serving customers through digital channels. Most fintech companies already use cloud-based SaaS (Google Suite for documents, Confluence and Jira for project work, Slack for communications, chat for customer support, etc.) and VPN tools to provide maximum flexibility for employees. However, some traditional providers were not as well prepared and experienced heavily impacted back-office operations, as their established tools and processes were never designed for work-from-home or asynchronous workflows.
Many collaborative software providers have released helpful resources on how to manage a rapid switch to remote work. If you are looking for information on how to optimise your remote operations, have a look at Notion’s hub for the best resources on remote work. Next to that, we wrote a blog post on staying sane when working from home.
Consequences for financial services providers
The crisis obviously has a rising impact on the global economy and consequently on financial services providers. The Dow is now down 13 % and European markets have fallen sharply, with shares in France off the most. The ongoing quarantines, sealed borders, shut non-essential businesses as well as social distancing measures are vastly decreasing consumer and business spending. Many businesses loose revenue now and are forced to take drastic measures, such as carmakers pausing production across Europe.
When consumers isolate at home and businesses lay off workers, decrease investments, some even approaching bankruptcy, the pressure on the financial system will become immense. Immediate impacts will likely both affect the revenue and cost side of banks: decreased branch utilisation, escalating loan default rates, less transactions, lower liquidity levels and reduced spending, to name a few.
That is why it is key to immediately kickstart measures to absorb the unfolding economic shock. Banks are now important intermediaries for the crisis loans made available by most states. For example, the British government has made a guarantee of £330 billion to businesses, similarly to the German government who facilitates unlimited short-term supply of liquidity to all businesses affected. Beyond that, many businesses now rely on additional liquidity injections and support of their banking providers. For instance, Deutsche Bank released a dedicated website today that provides an overview of all available support measures now available for their business customers.
Banks should also prepare for several second-order effects, such as
- a coronavirus-driven recession and downturn in Europe
- long-term interest rates hitting the zero percent interest rate floor, combined with large amounts of debt outstanding
- increasing wealth gaps and political tension
- decreasing asset classes across the board
Especially the universal banks who mostly rely on corporate banking clients as well as banks that aggressively expanded their loan books now need to mitigate immediately.
For a more detailed outlook on global second-order effects, have a look at the recent post by Bridgewater’s founder Ray Dalio.
Rebounding in stronger shape
Banks now have the opportunity to manifest their roles as trusted corporate citizens and to turn their brand purpose statements into reality. The chance to fortify a brand’s purpose in people’s minds and to catapult brand equity to new heights is most obtainable in times of crisis, when customers and employees experience the true values of a firm, exposed by its actions. That is why the actions that banks now to take to help their clients out will have a long-lasting effect.