Simon says the party is over for us bankers. Well, Simon, there has never been one actually. We have been dealing with one challenge after another while having to adjust our sails quite often in order to stay afloat. Banking is certainly one of the most highly regulated industries in the world and is perhaps the most vulnerable and susceptible to a multiplicity of factors, be it political, economic, social, technological, ecological or legal.
I joke with industry colleagues and make a pronouncement that perhaps Luke Chapter 8 Verse 48 was written for us bankers. “For unto whomsoever much is given, of him shall be much required,” it says. But we are not complaining. Afterall, we are entrusted with a very vital commodity that belongs to other parties. There is certainly no room for complacency in the need to keep assets safe.
In a recent book authored by Carletti et.al, “The Future of Banking 2: The Bank Business Model in the Post COVID-19 World,” it is well documented that banks will come under stress with large scale insolvencies among firms expected to rise. A wave of bankruptcies among households may also arise. Banks may eventually get caught up, with stresses to exceed those envisioned in many tests. Furthermore, the COVID-19 crisis comes on top of the combination over the past decade of persistently low interest rates, regulations, and competition from shadow banks and new digital entrants that have really challenged the traditional business model in banking.
The million pula question to pose is, in the midst of all these forces at play, how will the banks’ operating models be affected going into the future? Kevin Martin, The Chief Operating Officer, Wealth and Personal Banking, at HSBC, famously wrote on the International Banker blog: “Life for many of us has changed beyond recognition compared with just a few months ago, and one of the biggest changes has been doing electronically what we had historically done more in person … for the banking industry the answer is probably towards permanent change. There has been a lot been of news coverage highlighting how COVID-19 has driven established banks to accelerate their digital programmes.”
COVID-19 did not only impose challenges on the service delivery models largely due to social distancing protocols to be observed. There are other serious aftershocks that banks will grapple with going forward and it will take having to review overall business models by banks to hold on. The fact is that for most bank CEOs (local or international), top of the agenda is what has been impacted or will soon be impacted and how we respond. The crucial action item is how business will be done going forward, given that a lot the banking we know has to take a different form.
We are now in an era of low interest rates. Although a positive development for our clients, low interest rates affect banks negatively as profit margins get narrowed. Banks do not print cash; we need to find funds from somewhere at a price. Banks are largely financial intermediaries that connect investors and borrowers. Inherently, banks will now need to be more tactically selective in terms who they give out loans to. The screening, the scoring, credit appetites and client behavioural aspects will be used as a determination. While all this is at play, the frequency of loan defaults is also skyrocketing due to loss of income, be it by businesses or individuals.
There is an inverse relationship between loan defaults and credit appetite. When the rate of defaults increases, less credit appetite occupies the arena. As already alluded to, the fact that banks are intermediaries, low interest rates will force banks to adjust pricing on savings and investment products, and this never excites either. In response, clients usually consider other investment vehicles in line with their risk appetite offered by direct or non-traditional competitors, thus putting banks on a knife’s edge. A change in the savings and investment strategy becomes apparent as a countermeasure, thus affecting the current business model and dependencies around it.
The response to COVID-19 has been largely about going digital for most banks. It is a good move as it keeps clients in contact with their banks and their finances. My argument is that it is not enough because there is a lot more that needs to be looked at and reviewed. Furthermore, with all these heavy investments on the technological side, one wonders what then happens to the state of the art branch networks. Do they become white elephants and closed once and for all or they are downscaled?
Another factor to remember is that most banks do not own these buildings but are tenants and have to pay rent to guarantee their occupancy and surely a business case will have to prevail. The branches are complemented by sights and sounds of human capital to service customers. What happens to all the talent when a decision is made to scale down operations? for staff members to get deployed elsewhere, do their job descriptions change or a handshake is enough? This is what COVID-19 is confronting us with – so many realities to deal with, so many questions to ask, a long list of things to do, and adjusting or ceasing to do. Banks have to interrogate an array of factors and find ways to confront the new reality. It is a given that the business models will have to take a different form. This is a state of forced change but it is necessary for survival to meet customer needs. But this article barely scratches the surface. There is a long list to grapple with.
Let’s say Rest in Peace to all the amazing souls whom we have lost to COVID-19 and other causes. For us in life, this is the time to unite in prayer for ourselves, our country and our leaders. Let us marshal the resources we have to support the government of the day. We are all we have. Amen.
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