A group of experts from the strategic consulting firm Boston Consulting Group (BCG) has prepared a report on the impact of COVID-19 on the global financial industry. An impact that these experts consider to be very profound, insofar as it will accelerate the transformation of the sector towards a scenario of best practices and priorities different from the current one. Changes that will materialise progressively, in a succession of three temporary phases in the short, medium and long term.
The forecast of a falling Return on Equity (ROE) scenario ranging between 6 p.p y 11 p.p for all institutions, caused by the effects on the coronavirus economy, is for BCG the catalyst for the acceleration of these radical changes in the new map of the financial sector that will take shape.
Because, according to BCG, the lower profitability of the banking business, together with other factors such as interest rates at minimum levels, or the increase in non-performing loans both among individuals and SMEs and corporations, will facilitate the consolidation of new business models different from the traditional ones, affected by the narrowing of margins and greater pressure on costs.
In this environment, digitalisation will be key, as an alternative to boost efficiency in the new models both in the distribution of products and services, and in customer relations. For BCG, banks must undertake a structural transformation of their business model, designing new portfolios of products that are more efficient and adapted to the economic environment and customer needs, and creating a new customer experience that relies much more on dialogue via digital channels than through physical presence in bank branches and other spaces.
Phases of transformation
According to BCG experts, this transformation process, which will affect all financial institutions, will take place in three temporary phases.
First phaseIn the short term, the focus of organisations will be on managing the immediate priorities of both employees and customers caused by the physical confinement of people.
Second phaseIn the medium term (12 to 18 months), BCG foresees a "hybrid" period, in which banks will have to face a series of pressures from different areas of their business to adapt to the new realities. Each challenge will have to be met through the implementation of an action plan by financial institutions.
- Attention to customer needs: Banks will need to increase their level of customer service through digital channels, and will need to respond to problems in the economy caused by the pandemic, such as liquidity crises in businesses, or rising levels of non-performing loans in the retail customer base. They will also need to develop effective responses to the increased need for lower-risk investment advice.
- Protecting your employees.Banks will need to preserve the health of their employees now and when they return to work. This will lead to difficult decisions regarding the downsizing of offices, business centres, trading rooms, or corporate headquarters.
- Risk management. Increased corporate defaults and bankruptcies, especially in the sectors most affected by the coronavirus, will increase counterparty insolvency risks, especially in entities highly leveraged to market volatility. Operational risks will also increase due to lower motivation of teams due to social distance, and the possible fall in sickness of key people. Other risks to be taken into account are those related to cybersecurity.
- Implementation of public aid. Banks should build on the liquidity support programmes approved by public institutions and governments, pass on the stimulus received through new credit lines, and manage their loan portfolio. At the same time protecting their solvency levels in an environment of high uncertainty.
Third phase: In the long term, the profound transformations that banks will have to undertake will shape a new map of the financial sector. The winners will be those institutions that adopt the best practices required by the changes in banking activity: new ways of working, new customer and stakeholder expectations, and new relationship models based on digitalisation.
Security
A new scenario for banking activity in which security will be a basic criterion. Both for individual customers, in terms of health issues and the impact of the evolution of the cycle on their savings, and for corporate customers, in relation to their own liquidity needs, as well as those of their suppliers and customers. Not forgetting the aspiration for investments with greater security and lower risk, as well as the growing demand for the application of sustainability criteria (ESG) in financial activities.
In conclusion, Boston Consulting Group anticipates the consolidation of a new future scenario in the financial sector, caused by the drastic changes that the coronavirus is generating in the economy and in society. An environment to which all players will have to adapt if they do not want to lose efficiency levels in their business models and their ability to meet the needs of their customers.
Javier Ferrer
Head of the Financial Communication Department of Proa Comunicación