How should retail banks navigate COVID-19?
The global coronavirus pandemic has irreversibly changed society and the global economy.
Companies in every industry sector face dealing with significant and lasting change, and retail banks - along with the broader financial services sector - are no different.
For those banks in particular, says McKinsey, key challenges include COVID-19 accelerating already shifting consumer behaviour patterns, economic impacts worldwide and the ongoing risk of financial distress for businesses and customers.
In Reshaping retail banking for the next normal, published 11 June, McKinsey argues that retail banks will play a prominent role in guiding the world towards economic recovery, while preserving the health of their organisations.
McKinsey reports that its modelling for overall revenue declines as a result of COVID-19 found a potential drop of 16% to 44% for Western Europe.
A significant challenge that retail banks must consider is changing consumer behaviour. For example, says McKinsey, in Italy, Spain and the US between 15% and 20% of customers surveyed said that they expected to increase their digital channel use after COVID-19.
In addition, it found that the preference for handling everyday transactions digitally is as high 60% to 85% across the Western European markets.
It should be recognized that the results above represent a mindset shift. For many, says McKinsey, this has yet to translate into actual user behaviour.
If this does occur, McKinsey says that “retail banking distribution will experience up to three years of digital preference acceleration in 2020”.
This could result in 25% fewer bricks-and-mortar branches in some markets, and lead to a broader shift in product, service and customer experience models.
According to McKinsey: “As revenue growth and customer relationships come under pressure, banks may want to rethink their revenue drivers.”
This, it explains, could include new product channels or a shift in direction of existing service offerings to take on more of an advisory or consultative role.
Similarly, retail banks should consider the greater use of data and analytics in order to hone these opportunities further and to digitally transform in a relevant and meaningful way.
In a post-COVID world, it is also highly likely that customer support will take a greater importance than previously.
Accordingly, McKinsey says that retail banks should look to reinvent their approach to risk and customer assistance solutions, so that they fulfil their ‘societal purpose’.
Importantly, it notes, retail banks must act quickly to position themselves for success in the ‘next normal’ world that will follow COVID-19.
In doing so, they should focus on four core questions:
- Is the bank’s distribution strategy configured for up to three years of digital preference acceleration?
- Is it possible to rethink revenue drivers?
- Is the bank’s approach to credit risk and customer assistance adequate for the new environment?
- Is it possible to keep the rapid decision making mindset that has typified working in a COVID-19 environment?
Basel Committee urges recognition and management of crypto
Experts have welcomed the news that the Basel Committee on Banking Supervision has proposed splitting cryptocurrency assets into two categories and managing them according to their current stability.
The regulatory body has recommended that crypto should be assessed on its operational risks to the bank, its credit, and its market liquidity. Well-established currencies, such as Bitcoin, will be managed in line with a “new conservative prudential treatment” the committee said.
Currently, the leading global standard-setter for the prudential regulation of banks, the Basel Committee on Banking Supervision (BCBS) is based in Switzerland and comprises 45 members from bank supervisors and central banks in 28 jurisdictions.
The recommendations have come as a welcomed move by banking leaders and crypto cynics alike, and experts say the move now needs to be followed by a global policy that makes crypto assets safer for both banks and customers. This is despite the potential pitfalls due to crypto being associated with criminal activities and terrorism.
Cryptocurrency regulations welcomed
Although currently, banks have limited exposure to cryptocurrency, the popularity of Bitcoin, Etherium, and others is increasing rapidly among consumer and business transactions.
Recently, El Salvador became the first country in the world to adopt Bitcoin as legal tender.
According to reports, 62 out of 84 congressional votes saw the move approved following President Nayib Bukele's proposal to embrace the cryptocurrency. This occurred despite concern about the potential impact on El Salvador's programme with the International Monetary Fund.
Fintech giants such as PayPal are also loosening their grip on cryptocurrency. The California-based online payments leader recently announced at the Coindesk Consensus 2021 conference, that it would allow customers to move cryptocurrency holdings off its platform via third-party wallets.
PayPal has also enabled users to buy and sell digital currencies through its platform since October 2020.
In an official statement released by the BCSC, the committee’s members said, “Continued growth and innovation in crypto-assets and related services, coupled with the heightened interest of some banks, could increase global financial stability concerns and risks to the banking system in the absence of a specified prudential treatment.”
An opinion report in the Financial Times also backed the move, saying that the popularity of cryptocurrencies shows no signs of slowing down and therefore, its volatility, which puts retailers and lenders at risk, must be made a safer asset.
Data shows that the value of Bitcoin makes up 50% of the cryptocurrency market, which is currently worth an estimated US$2trn. The BCBS announcement also boosted the value of the market because regulation classes cryptocurrency officially as an asset and is a significant recognition of maturation.
However, volatility remains an issue following Bitcoin’s turbulent year, which has seen it rise from $30,00 to more than $60,00 and then back down to $37,000 in under 12 months.
Crypto cynics not happy
But not everyone is pleased about the move. The director of the CPB Netherlands Bureau for Economic Policy Analysis, Pieter Hasekamp, published an article entitled ‘The Netherlands must ban Bitcoin” in response to the news for daily newspaper Het Financieele Dagblad
Hasekamp has predicted that cryptocurrency is a bubble that will ultimately collapse. He also urged the Netherlands government to ban bitcoin and other cryptocurrencies with immediate effect.
He said, “Cryptocurrencies are unsuitable as a unit of account and means of payment outside the criminal circuit; its use as a store of value is based on the hope that cryptocurrencies will one day replace real money. But that’s not going to happen.”
He continued, “Cryptocurrencies are essentially neither money nor a financial product, but an example of what Nobel laureate Robert Shiller calls a contagious narrative: a contagious story in which people believe because other people believe in it. Gresham’s law is replaced by Newton’s law: what goes up, must come down.”
Image credit: Getty