The end of the world as we know it: Banking’s new reality

There are decades where it feels like nothing happens, and there are weeks where decades seem to happen. In just a few months, COVID-19 has swept around the planet, more than half the world’s population has been forced into lockdown, far too many lives have been lost and entire industries have shutdown. A crippling global recession seems inevitable and a clear exit strategy, for now, remains elusive.

Make no mistake, this truly is the end of the world as we know it. As we gradually emerge from this unprecedented crisis, societies and economies will have been irreversibly transformed at a pace and scale that would have been unimaginable only months ago.

For the payments industry, transaction volumes have collapsed as entire sectors have shut down and buying has ground to a halt. The impact is felt not only at the point-of-sale, but across supply chains and corporate, FX and trade finance transactions. In contrast, massive stimulus, relief and requisition packages have led to a huge increase in government payments directly to corporates and consumers.

Banks and financial institutions have critical, positive, immediate roles to play in supporting consumers and business, while facilitating the repurposing of entire economies and welfare systems. Longer-term, banks will need to address a range of challenges as they adapt to the new normal. One thing’s for sure, efficiency across every area of their business will be central to doing the best for customers and shareholders, and minds need to be on accelerating digital transformation.

Becoming the good guys

The reputation of the banking industry has never fully recovered from the 2008 financial crash. Public reaction to banks seen to be abandoning their customers will be severe, immediate and potentially unsalvageable. When push really has come to shove, the human race has prioritised life over money. Banks (and other businesses) that are stepping up now will be rewarded in the long-term.

Viable companies that have fallen on hard times must also be supported. Many industries such as airlines, travel and hospitality will not immediately bounce back, and finding sustainable ways to prop them up is undoubtedly a challenge. Accurate cash management to protect liquidity and reserves, for example, will be key to the survival of many businesses until better times return.

In contrast, other companies have taken off. Medical ventilator manufacturers are rapidly working to scale production, while engineering firms from other sectors are repurposing factories. Remote working means Zoom and Slack have seen share prices skyrocket since the end of January. Supporting and facilitating growth where possible will save lives and assuage ailing economies.

The unique financial circumstances and inclinations of consumers must be considered. Diligent savers are being forced to raid rainy day funds, take on debt and risk potentially defaulting on mortgage, loan and credit card payments. Spendthrifts are all-dressed-up with nowhere to go and are transformed into frustrated misers. A one-size-fits all approach will not work, and banks must think outside the box to ensure the individual needs of customers are met.

Making life easier in hard times

Banks must also consider the behavioural impact across the economy. The way we transact is likely to have changed forever as we get used to new payment methods. With billions of people stuck inside and shops shuttered, online spending has soared. And when shopping in-store, consumers are opting for cashless payment options, especially contactless cards and mobile wallets, to avoid touching cash and POS terminals. For corporates, cheque use (which accounts for 40% of B2B transactions in the U.S.) will decline as banks push real-time alternatives.

Banks also need to prepare for mass channel changes and provide support to aid this transition. Consider the many (mainly elderly) customers who were reliant on branches being forcibly converted to digital banking as a result of lockdown and quarantine measures. My suspicion is that many lockdown closed branches are unlikely to re-open, accelerating an existing trend.

Digital education is particularly crucial given another predictable, and disappointing, trend. We have seen a significant increase in fraud as criminals and chancers prey on uncertainty, confusion and inexperience.

But with banks’ own internal human resources under huge pressure and strain, supporting the transition to digital channels presents challenges. Artificial intelligence (AI) and machine learning (ML) technologies, therefore, have a key role to play in service provision. AI call centres and chat bots are already seeing increased use to help deal with enquiries, while AI-based fraud prevention tools can help protect customers. However, using them in the right way at the right time is a challenge that still needs to be met.

Speed and scale matters

Beyond support to individual consumers and companies, huge structural shifts must be addressed. The ability to respond quickly and on a massive scale is the key to protecting lives and livelihoods. Payments are an integral part of this response.

We are therefore seeing unprecedented government intervention. The U.S. has been sending $1,200 to every citizen. But welfare systems are simply not designed for this scale, and urgent support is needed to help distribute funds and relief to those who need it.

Real-time payments enable the distribution of urgent funds, such as aid, immediately rather than in a week. Value-added services built on RTP rails, such as Request to Pay, will enable data-driven action and could prove powerful.

Global supply chains have also been decimated. Protectionist instincts alongside practical necessity have taken root as governments come under increasing scrutiny. With ongoing supply constraints due to social distancing the need to source closer to home is likely to drive lower intercontinental trade.

Banks have a crucial role in supporting a rapid shift towards domestic production, whether it be food, medical supplies or PPE. For example, Singapore (which produces only 10% of its food locally) has launched a $30 million fund to incentivise innovation.

Payments transformation in a transforming world

It is a brave person that predicts what comes next. But what we do know is that bank profitability, already a significant pain point, will be placed under unprecedented strain from reduced transaction volume, historically low interest rates and increasing default rates.

Reducing costs, and quickly, is essential. With the stakes now higher than ever, we can expect to see a marked acceleration in payments transformation initiatives. Outdated, fragmented and expensive legacy systems are a burden that banks can no longer afford. As McKinsey noted, ‘banks will need to reflect on how to organise themselves for change, possibly by running some of their payments businesses in a completely different way.’

Establishing a clear strategy and target architecture, outsourcing non-strategic elements of the payments value chain and leveraging cloud-based open source technology provide opportunities to reduce costs and increase resiliency, while laying a foundation to adapt to the uncertain times that lie ahead and support consumers and businesses through them.