In the US, as of April 15, over 22 million people have filed for unemployment since the beginning of the Covid-19-related shutdowns. That is one out of every 10 workers. At the same time, 50% of small businesses have forecast that they will run out of cash. Worldwide, the number of businesses closing doors and the people without jobs is rising exponentially. The coronavirus pandemic is edging the world toward an abrupt economic crisis.
The historic antagonist in these stories is the financial services industry – Black Monday (1987), the internet bubble (2001 dot-com crash), Lehman Brothers (2008 recession). They take the blame for those events. In this crisis, however, the financial services industry has shown itself to be the saviour, both taking the hits and fighting at the front-lines of economic correction. They must continue to assure the continuity of business. They must facilitate the flow of money. They must help the world avoid an economic collapse.
In Europe, several countries have already agreed to pass strict regulations that limit service fees for consumers and enterprise. They have also provided extensions of debt payments for an undefined period of time to alleviate the weight on those affected by the Covid-19 crisis.
Financial services are using the tools they developed during the last few financial crises to add security and fundamentals back into the market. From consumer loans, credit card business, home loans, point-of-sale (POS) services to ATMs, the banking system and payments specifically, are rapidly adjusting to a new reality.
- Higher consumer defaults (personal loans, credit cards and mortgages), leading to overall credit loss. Several banks have already issued notices to extend the maturity of these loans until the end of the year in an effort to smooth the impact.
- Transaction-based fees, account management fees, overdraft – any fee banks charge their customers – will take a hit as consumers and businesses cancel services and request refunds. In Portugal, banks are no longer charging businesses fixed fees for POS solutions or increasing any commissions during this period.
- Lower consumer spending and a volatile equity market in decline will impact some of the bank’s most consistent revenue streams such as card-based transactions fees (interchange fees, processing fees, authorisation fees). This is particularly true for payments where interchange fees (what a merchant’s bank must pay whenever a customer uses a credit or debit card to make a purchase) are a major source of revenue.
- Cross-border transactions will likely drop as a result of travel restrictions and supply-chain disruptions across industries. McKinsey predicts a decline of 25% to 30% in cross-border consumer-to-business transactions alone.
- Banks are also expected to maintain branch operations despite the fall in demand. While there is a significant push towards digital banking, there are still critical services that remain in-person only for many banks across the globe. The high cost of operating branches will not be compensated by the usual foot traffic business.
These changes will have a lasting impact well beyond the Covid-19 crisis. Across the world, banks are acting quickly to support customers and ensure smooth operations amid the crisis:
- Chase has created a website with resources for small businesses and consumers to take advantage of programs offered from the government as well as the bank. For its co-branded cards it has relied on the partners to ensure loyalty programs continue to support its customers.
- Bank of America announced it will work on a case-by-case basis to provide support by refunding overdraft, insufficient fund and monthly maintenance fees and allowing payment deferment on small business loans, auto loans and other personal/home loans.
- The US government has also announced several programs, including a small and medium business Paycheck Protection Program to $349bn in forgivable loans to small businesses and nonprofits to pay their employees during the Covid-19 crisis. Chase, Wells Fargo, Bank of America and others have been leveraging the program widely.
- Several European banks, as a result of internal policies and regulatory guidelines, are refunding late payment and overdraft fees, enabling payment suspension/ deferment, waiving online transfer fees and offering credit card limit increases.
- Covid-19 has been a reminder of how critical the banking system is for our economy and how important even the smallest, incremental advancements have been, such as contactless payments and mobile banking. The need for digital solutions is driving adoption of mobile payments and better payments infrastructure, ultimately improving the flow of money and forcing digital transformation across the industry.
Financial services are stepping outside their core business to help manage the crisis, minimise damage to their customers and add much needed stability to the economy. They are adjusting their business in real time to support customers and facilitate a more comfortable reality post-Covid-19. This is a very different role than in previous economic downturns where the banks are part of the problem, if not the problem.
In this crisis, they are doing the critical job of steering us out of economic peril. They might just be the hero of this story.