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 of the global coronavirus pandemic will likely take some time to overcome.
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.
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 No Going Back: New Imperatives for European Banking.
Facing a new normal
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’.
The industry is likely to face prolonged economics pressure, McKinsey says, meaning that the decisions taken now will “set their performance trajectory for the years ahead”.
The shift to remote working and serving customers through an online or mobile banking model has demonstrated the potential of innovative digital technology.
From these foundations, it notes, financial services leaders should “reimagine how their institutions operate” around a set of key imperatives.
More broadly, McKinsey provides context around the possible economic environment that banks may operate in.
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.
Similarly, McKinsey suggests a potential drop in gap of 11% across the Eurozone in 2020 and a recovery in late 2023.
For banks, it explains, this would “lead to sharp drops in revenue, a squeeze on capital and a hit on return on equity”.
There is hope for a new kind of banking, however. For example, says McKinsey, its own European customer survey shows an evolution of customer behaviour.
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.
Based on these findings, McKinsey offers six key imperatives that banking leaders must focus on:
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.
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.
Build a leaner and more scalable cost base - banks must aim for a cost improvement of 25-35% to mitigate any wider economic downturn.
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.
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.
M&A deals will play a role - while any M&A may feel far away in the current climate, McKinsey says that “it remains a path to rapid cost savings or acquiring new abilities.
Read the full No Going Back: New Imperatives for European Banking here.
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