Covid-19 and the rush to Digital banks

Umberto Eco once wrote “Everything is repeated, in a circle. History is a master because it teaches us that it doesn't exist. It's the permutations that matter.”

 In addition to the effects on the supply and demand side, COVID-19 has jolted financial markets across the globe as oil, bond yields, and equity prices fall, and trillions of dollars, across all asset classes seek safety. As we career towards another global financial crisis, which banks have learnt the hard lessons of 2008? And are the safeguards they introduced sufficient to allow them to endure this dramatic downturn? 

 The good news is that over the last 12 years Central Banks, Regulators and policy makers have worked in unparalleled unity to enhance banking regulations and increase the amount and quantity of bank capital and liquidity in order to establish a more robust banking ecosystem. Regulators around the world insisted that banks meet new and more stringent stress tests to safeguard against losses during global crisis, such as a decline in global GDP of up to 7%.

But are the stress tests fit for purchase in the days of Covid-19? According to data published by Fitch Ratings, world economic activity could decline by 1.9% in 2020 with US GDP down by 3.3%, the EU down by 4.2% and the UK down by 3.9%. GDP across the EU and US could drop by 7% to 8%, or 28% to 30% annualized, in 2Q20. If this proves to be correct, it would be the gravest economic crisis since the 1930s.

 Despite best efforts and policy foresight, these numbers exceed the stress test ratios used by banks, creating an all too familiar sense of uncertainty as businesses and private clients seek options to protect their money if buffers prove to be insufficient. In these “unprecedented” times are digital banks the answer?

 Developments in banking and fintech have enabled businesses around the world to work closely with their digital banks and keep the wheels of global trade spinning, while still maintaining social distancing and helping to fight COVID-19. There are many similarities between the leading digital banks - EQIBank, Monzo, Revolut, N26, Starling, Moven, Simple and Chime have all created compelling brands, interesting apps, innovative UI/UX and streamlined services. But there are differences, Monzo, Revolut, N26, Simple and Chime are focused on banking retail clients and SMEs in the onshore markets. On the other hand, EQIBank focuses on the needs of corporate and private clients and provides services to over 180 countries across the globe. EQIBank also avoids balance sheet lending.

Jason Blick, CEO of EQIBank. Commented “EQIBank has seen a dramatic increase in accounts during the quarantine period as people reassess their relationship with their banks. A key part of our risk averse approach is that the Bank does not offer any balance sheet lending and only invests in US Treasuries. This approach provides the Bank with a best of breed Capital Adequacy Ratio”

Transactional banking is becoming the norm, where banks offer simple and transparent fees for sending and receiving customer funds, as opposed to traditional banking options provided by legacy institutions. In the post Covid world, the race is on to offer businesses and HNWIs robust and cost effective banking. Banking that is safe, tax efficient and truly global.

 COVID-19 has become the ‘reality check’ for traditional banks, many of whom are falling far short of expectations at a time when the businesses have few options. If Umberto Eco is right and it’s the permutations that matter, perhaps it’s this new breed of digital banks that will drive transformational security and benefit businesses and private clients alike.  

 Data: https://www.fitchratings.com/research/sovereigns/deep-global-recession-in-2020-as-coronavirus-crisis-escalates-02-04-2020