A test of resilience

The coronavirus pandemic has left retail banks vulnerable to a wave of unpaid loans. They must seek out government support and embrace digital transformation to keep supporting customers through this financial turmoil

The COVID-19 crisis has put pressure on retail banks to meet the needs of households and businesses through the continuing provision of credit – for the sake of the financial system, these banks must still be able to lend. But like many businesses, banks have seen their earnings take a hit due to the impact of lockdown measures. Overall consumer spending has taken a nosedive, denting transaction-based revenue. Long periods of low interest rates, inflexible costs and higher loan losses are also set to eat into banks’ profits.

The biggest threat facing financial institutions, however, is the wave of defaults expected from retail customers as rates of unemployment and bankruptcy surge. At the end of Q1 2020, Barclays reported that credit impairment charges had risen almost fivefold to £2.1bn ($2.6bn) compared to the same period last year. According to management consultancy Kearney, one in eight retail banks will face losses this year due to the novel coronavirus.

To cope with future loan losses, banks are putting aside billions of dollars’ worth of impairments. Banco Santander, the eurozone’s largest retail bank, has set aside an additional €1.6bn ($1.75bn) to deal with an expected surge in defaults. The largest US banks, meanwhile, have collectively set aside $25bn for credit losses in Q1 2020.

Digital drive As the slowdown deepens, many banks will see their liquidity buffers come under pressure. In the US, the Office of the Comptroller of the Currency recommended banks stay above the minimum requirements for capital and liquidity buffers, but consider moving closer to minimums. Around the world, central banks and governments warn that banks must not exhaust their provisions and impair their ability to lend during the pandemic. To this end, they’ve provided banks with extraordinary support, the likes of which has not been seen since the Second World War.

But only time will tell whether this support will be enough. The pandemic has prompted many retail banks to trigger their business continuity plans and rapidly transform their day-to-day operations. The crisis will push banks’ adaptability to the limit, and could transform the retail banking landscape as we know it. The coronavirus has made it clear that online banking is no longer optional – it’s imperative to any bank’s survival. While some branches have been able to remain open – particularly in South Korea, where testing is widespread – many have had to close to safeguard the health of both staff and customers. Even the exchange of cash is seen by many as a potential conduit for infection, putting pressure on banks to accelerate their contactless payment solutions.

Early in the crisis, many Asian banks quickly recognised the need to invest in their digital channels. In February, Singapore’s DBS digitalised 11 common trade financing processes and offered clients 50 free fast transactions a month to curb the need for the physical handling of cheques. China’s Ping An Bank, meanwhile, introduced the Do It At Home campaign to offer contactless and smart services. In just two weeks, more than three million customers had made 11.67 million transactions.

Fraud prevention Despite the closure of physical branches, the pandemic does not seem to have driven consumers to find refuge in digital banks. According to an analysis by Priori Data, Monzo, Revolut, Starling and N26 saw their growth rates drop by between 18 and 36 percent in their home markets in March, with downloads also taking a hit. This was despite hopes that challenger banks might attract new audiences during lockdown. That said, the pandemic is still likely to accelerate technological transformation among retail banks as the risks of relying heavily on physical branches becomes increasingly clear.

Unfortunately, the push to get customers online has created a window of opportunity for fraudsters, who are exploiting public fears around the financial turmoil to obtain passwords, banking details and other sensitive data. As a result, banks have had to step up fraud prevention measures: in the UK, Barclays, HSBC and Royal Bank of Scotland have all launched social media campaigns to highlight the risk of fraud. Similarly, US lenders such as United Bank, Citizens Bank and Fifth Third Bank are reminding customers to protect their personal information during the pandemic. To engage customers and make them more vigilant, some banks in China have even introduced nudging mechanisms to frequently notify customers of bill payments, deposits and spending activity. But it’s not just customers that banks need to protect: they must also look out for their employees. Remote workers represent a significant cybersecurity threat, with remote access often coming at the expense of security and leaving the company vulnerable to cyberattacks. For that reason, banks that have treated cybersecurity as a priority in the past will likely reap the rewards during the crisis. In 2019 alone, CaixaBank invested over €50m ($54.7m) in information security, while 98 percent of employees participated in a course on cybersecurity.

Protecting customers A humanitarian crisis of this scale puts pressure on banks to support their clients through what will, for large numbers of people, be a time of great financial hardship. Many banks have taken measures to support their customers’ finances, such as increasing credit card limits, cancelling overdraft fees and granting mortgage and credit card repayment holidays.

It’s support mechanisms like these that will hopefully prevent a repeat of 2009, when the public vilified lenders for their role in the 2008 financial crisis. Retail banks have a difficult balance to strike, however: they can’t risk lending indiscriminately, so banks must establish a COVID-19 credit policy to cope with the spike in loans.

Banks have also been taking steps to help customers beyond their financial needs. China Merchants Bank, for example, added new features to its app, giving customers access to food delivery, online learning and ridesharing services. The app includes a ‘special zone’ that provides real-time pandemic data, online counselling and a designated hospital search. If there is one lesson that retail banks should take away from the 2008 financial crisis, it’s that putting customers first will help ensure longevity.