The impact of COVID-19 on the financial services industry

Over the past five months, banks have been restructuring operations to address the emerging challenges from COVID-19. Across all markets, operational adaptation will take one to two years to fully implement. To date, operational impacts have manifested across customer and employee access, writes Andy Efstathiou.

Banks have taken action to mitigate these impacts, including increasing remote access options, scaling processing capacity with robotics and cloud delivery and operational hygiene reviews, including reviews of SOPs, BC/DR plans, and liquidity plans.

We expect that, over time, COVID19 will cause banks to shift their product mix, employee skillsets and channel delivery. The scale and scope of the transformation in sourcing arrangements will be driven by the length of the COVID lockdown.

When the lockdown abates, banks will redouble their efforts in digital transformation to prepare for any future pandemics.

The costs of changing products, workforces, and delivery will be very large. To understand how banks are planning for this change I have interviewed industry executives both at banks and at operations services vendors. Banks are prioritising those activities which maintain continuity and support adaptation in an operating environment with larger volume swings.

Key transformation initiatives where banks are accelerating investments include:

  • Remote delivery focused on workforce engagement and a relatively reduced effort in remote customer engagement 
  • Migration to cloud delivery, with its ability to manage large volume swings
  • Data management initiatives, with a focus now on default management applications
  • Consolidation of operation solutions and methodologies. These are longer-term initiatives, but much higher ranking for global institutions than before COVID. At the same time, banks are increasing their search for multiple supply sources.

In contrast, banks have reduced their activities focused on support for marketing and sales campaigns. Business growth which requires capital has been sidelined, while banks are now focused on vendors with the strongest financial positions. 

Impact on bank operations to date

The primary impact on retail banks and capital markets firms has been to move workforces to a work-from-home (WFH) environment.

The success of moving to WFH has varied as government policies have changed. Over time, bank operations have been able to obtain permission for critical processes to be delivered from centres, with dormitory and hotel housing provided for workers.

Non-essential processes have continued to be delivered from home. This has led to worker utilization rates at the largest delivery centres moving from an initial capacity utilisation rate of 20% in late March to 60% utilisation in early April, to 90% utilisation rate now with essential work done in centres and large numbers of WFH workers.     

While operations delivery has rebounded, bank executives we have interviewed expect their businesses to aggressively deteriorate in Q2 2020.

Specifically, they expect sales to decline ~25%, costs to increase ~7%, and profits to decline ~45% in Q2 2020. Fortunately, their operations supplier contracts are adequate to support a 20% decline in volumes (and a 25% increase in volumes).

No one is sure how long the impact on business will continue. Based on recent announcements by governments, we expect the COVID-19 lockdowns to continue, at some level, for at least six months. The saving grace may be that the continuing shutdowns will be at progressively lower levels of restriction.

Banks have been asked by regulators to provide BCDR plans for themselves and their suppliers. These have been supplied. Of note is that private conversations indicate banks and suppliers are setting triage plans for who and what to focus resources on if the impact of COVID-19 worsens.

If that happens, expect to see suppliers retaining service to their most important clients and banks cutting back on product lines (i.e. low margin and risk products) and reducing suppliers to financially stronger vendors.

Transformation projects in production have continued as planned. However, new projects have been stopped in anticipation of restarting the process when lockdowns are lifted.

Banks will have to prioritise which projects to restart as they face reduced capital to invest in transformation. Because scalability has become so important, banks are looking to restart initiatives that enable scaling, such as RPA and cloud migration.     

Finally, bank product lines have been aggressively impacted. Lending, except for government support loan programs, has all but stopped in all countries. Payment volumes, especially cross-border payments, have plummeted by over 20%. Physical branches have been shut down for business.

The fall in activities has reduced operational requirements, but at the cost of profits for banks and revenues for their services providers. The largely anticipated drop-off in revenues and profits will drive a reassessment of banks’ services contracts to drive lower pricing and sale of operations. There will be a consolidation of services vendors and pricing pressure.

Andy Efstathiou is Director at NelsonHall.

The views and opinions expressed in this Viewpoint article are solely those of the author(s) and does not reflect the views and opinions of Fintech Bulletin.