City scape banking
Jun 1, 2020
Matt High

After COVID-19: a new normal for banking

European banking leaders must focus on reimagining strategies and operations if they are to thrive in a post-COVID-19 world, says McKinsey

The impact o...

<h3 dir="ltr">European banking leaders must focus on reimagining strategies and operations if they are to thrive in a post-COVID-19 world, says McKinsey</h3>

<p dir="ltr">The impact of the global coronavirus pandemic will likely take some time to overcome.</p>

<p>Not only has there been irreversible change to societies worldwide and tragic loss of life, businesses and economies worldwide have been faced with significant challenges.&nbsp;</p>

<p>Banking leaders have already shown resilience in their moving to protect customers, ensure the continuity of banking services and focus on strengthening their institutions, says McKinsey in <a href="https://www.mckinsey.com/industries/financial-services/our-insights/no-… Going Back: New Imperatives for European Banking</em></a>.&nbsp;</p>

<h4>Facing a new normal</h4>

<p>In the article, the global consulting firm examines the next steps for the European banking sector, as leaders are faced with a slow return to the ‘new normal’.&nbsp;</p>

<p>The industry is likely to face prolonged economics pressure, <a href="//www.mckinsey.com">McKinsey</a&gt; says, meaning that the decisions taken now will “set their performance trajectory for the years ahead”.&nbsp;</p>

<p>The shift to remote working and serving customers through an online or mobile banking model has demonstrated the potential of innovative digital technology.&nbsp;</p>

<p>From these foundations, it notes, financial services leaders should “reimagine how their institutions operate” around a set of key imperatives.&nbsp;</p>

<p>More broadly, McKinsey provides context around the possible economic environment that banks may operate in.&nbsp;</p>

<p>While too early to predict the full impact of COVID-19, it reports that its own research found more than a third of European executives expecting a muted recovery.&nbsp;</p>

<p>Similarly, McKinsey suggests a potential drop in gap of 11% across the Eurozone in 2020 and a recovery in late 2023.</p>

<p>For banks, it explains, this would “lead to sharp drops in revenue, a squeeze on capital and a hit on return on equity”.</p>

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<h4>Six imperatives</h4>

<p>There is hope for a new kind of banking, however.&nbsp; For example, says McKinsey, its own European customer survey shows an evolution of customer behaviour.&nbsp;</p>

<p>This includes a 20% increase in digital engagement levels and a halving of the use of cash. It also explains that between 20-40% of customers have expressed the need for products to help them through the current crisis.&nbsp;</p>

<p>Based on these findings, McKinsey offers six key imperatives that banking leaders must focus on:</p>

<ol>
<li dir="ltr">
<p dir="ltr">Innovate new products and propositions - pressure on interest margins, for example, means that alternative and new products could provide new sources of income. However, McKinsey warns that innovation cannot be incremental.</p>
</li>
<li dir="ltr">
<p dir="ltr">Reshape physical distribution and shift to digital services and sales - digital banking has soared under COVID-19, making a shift to a digital-first model essential.&nbsp;</p>
</li>
<li dir="ltr">
<p dir="ltr">Build a leaner and more scalable cost base - banks must aim for a cost improvement of 25-35% to mitigate any wider economic downturn.&nbsp;</p>
</li>
<li dir="ltr">
<p dir="ltr">Focus on speed, both for the organisation and technology - operating under COVID-19 conditions has proven the importance of being agile and flexible; banks should lock in this approach to operations in the longer term.</p>
</li>
<li dir="ltr">
<p dir="ltr">Recognise the importance of risk and capital management - credit loss will be a key differentiator in performance post-coronavirus, McKinsey says. Accordingly, banks should understand the importance of early detection and proactive intervention when managing non-performing loans.</p>
</li>
<li dir="ltr">
<p dir="ltr">M&amp;A deals will play a role - while any M&amp;A may feel far away in the current climate, McKinsey says that “it remains a path to rapid cost savings or acquiring new abilities.&nbsp;</p>
</li>
</ol>

<p>Read the full No Going Back: New Imperatives for European Banking <a href="https://www.mckinsey.com/industries/financial-services/our-insights/no-…;

<p><em>For more information on all topics for FinTech, please take a look at the latest edition of&nbsp;<a href="https://www.fintechmagazine.com/magazine/fintech-magazine/may-2020">Fin… magazine</a>.</em></p>

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