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Covid-19 – The Challenges and Opportunities facing the Banking Industry

Is Covid-19 the biggest catalyst for digital transformation in the banking industry since the internet revolution?

Over the last few months we have all been affected by one of the most far reaching pandemics and global crises that we can remember.

Covid-19 is a tremendous tragedy from both a health and economic perspective, affecting all in its path.

The pandemic may not only change our perspective on life, our priorities and the way we work and interact…, it may also change the way we bank in the future.

Financial institutions were heavily affected by the 2008 credit crisis and today, after investing a decade in digital transformation, they can play a key role during this challenging period by curtailing the economic recession and supporting their customers, especially SMEs.

Since early this year, the banking industry has been faced with unprecedented challenges. The way banks address these challenges will determine their role in, and contribution to, mitigating the effects of the current crisis.

Challenges for the Banking Industry

Credit Risk

There has been a noticeable surge in loan and debt restructuring requests during this period, particularly from SMEs. Banks will need to rethink their approach to credit risk and credit scoring in order to adapt to the context of the current situation and provide unprecedented levels of liquidity to the market. In parallel, regulators will also need to relax some of the credit risk directives, at least in the short/mid-term.

Digital Banking

Many customers who were reluctant to engage digitally with their banks, have been “forced” to do it during quarantine. As a result, banks have tripled their digital interactions with customers during this period. The main challenge now is to ensure that they can provide customers with all of the basic services digitally, end-to-end (Onboarding, lending etc.), which was not the case for many financial institutions pre-covid 19.

Cyber Threats

Financial institutions are facing a potential increase in cyber-attacks and fraud attempts due to the growth of digital banking interactions which is compounded due to employees working remotely from home/less secure environments. Cyber and Fraud, albeit a key focus for the banking industry, will no doubt take centre stage.

Business Continuity

Banks have been compelled to adapt quickly during this pandemic, both internally and vis-à-vis their customers. Banks that heavily invested in digital transformation over recent years are now reaping the benefits and seeing the results of their investment. Despite cyber threats and a significant increase in digital interactions, keeping their systems stable and reliable is a key focus of banks.

Crisis Management

Uncertainty and constant evolution require banks to make fast decisions and adapt quickly.

The way of working and interacting with customers and colleagues is changing…and banks need to be particularly agile in order to keep up and adapt to the “new normal”.

In addition to adapting, in a record time, to the current situation, banks will undoubtedly face further challenges; they will need to prepare for and minimise effects of the upcoming post-covid-19 economic recession.

Innovation: From “nice to have” to “must have”

Before the crisis some stakeholders within the banking industry still thought that innovation was a nice thing to have, but not a necessity. Covid-19 may be one of, if not, the strongest of catalysts for digital transformation in the banking industry since the internet revolution. I am convinced that from now on, innovation will be perceived as a “must have” across all financial services organizations and the previous skepticism surrounding innovation and digital transformation investments will diminish. The focus will, at least in the short and mid-term, be on delivering end to end digital services rather than exploring cutting edge technologies for future use.

As is the case with most crises, while the current situation brings multiple challenges to the forefront, as described above, it also brings with it many opportunities for banks.

Opportunities for the Banking Industry

Post Covid-19 Digital Customers

During the current crisis, many customers have been engaging digitally with their banks… for some of them, for the first time. There is a huge opportunity for banks to retain these digital customers beyond the crisis, especially SMEs and Retail. The level of the services provided by banks today will determine the percentage of customers that will not revert back to the traditional physical channels when things eventually get back to normal.

Rethinking Cost Reduction Strategy

Many organizations realize that working from home can, in some cases, be more productive and therefore financial institutions are considering the possibility of keeping a significant chunk of their workforce working from home permanently, even after the crisis has subsided. This will create a win-win situation; increasing employee engagement, satisfaction and work-life balance on the one hand while bringing significant cost savings to banks on the other hand.

Only time will tell to what extent the financial industry’s actions have contributed to overcoming current and future challenges associated with covid-19. For now, banks are demonstrating their ability to respond by providing unprecedented levels of liquidity, adapting their organizations to support customers and employees in record time and taking an active role from a socially responsible perspective.

Stay safe and well.

By Moises Cohen

Head of Banking