The Covid-19 lockdown halted the spread of the virus but also economic flow throughout many sectors, with implications running high for businesses and homeowners. Revenue loss across industries that depend heavily on direct customer service, such as those of hospitality and transport, has been the theme of 2020 and change is not likely by the end of 2021, despite plans of reviving tourism engines in many countries.
Lowered economic activity means less revenue for investment banks
The banking sector is also at a loss in revenue, but more so incidentally. While banking solutions do not have to run primarily via direct customer contact, the GDP drop across the globe means that the economic clock is winding down towards national austerity, poverty and debt increases, especially in the least developed countries (LDCs). As a result, banks are feeling the pressure to innovate and board new technological methods for assessing risk, gauging commissions, and providing more options for customers of varying economic backgrounds.
The argument that bank expansion is on the decline due to the pandemic has a lot going for it. But it is untrue. Bank expansion has been irreparably declining for at least the last ten years, with the pandemic catalyzing the decade’s downward trend according to the latest UNCTAD report, outlined in Graph 1 (UNCTADStat).
Consumer protection laws mean value & security considerations for banks
The findings, however, suggest an increase in financial services usage in Q1 2021, logically due to heightened dependency on technology’s aid in executing transactions remotely. With this comes a greater need for states around the globe to review and double down on their respective consumer protection laws to maintain the monetary safety of their citizens from predatory e-commerce practices, particularly in times of crises. Of the 63 states that were surveyed by UNCTAD, 61 reported to have active consumer protection laws, including the United States, with 62-percent stating that they presently tackle problems relating to e-commerce (“WCPM”). As more online banking becomes the new normal, concerns surrounding consumer protection laws are sure to increasingly resonate with consumers and governments.
Policy responses are sure to inform ‘value constellation’ within the bank’s strategic framework of business model reformation to be able to cope in Industry 5.0. In addition, individual banks have to catch up with the coming regulations, or they risk rendering their services obsolete.
How banks will manage risk amidst emergent global crises
Covid-19 has impacted three facets of the banking sector, consisting of short-term, long-term, and systemic effects, of which key considerations include the need to segregate financial offerings built to withstand interventions from crises, with more elaborate credit plans. A chapter dedicated to the pandemic’s impact on the banking sector in the 2020 book titled Pandemic Risk Management in Operations and Finance argues that, “Medium-to-small enterprises need to be supported through special credit lines, reduced interest rates on loans, deferred repayments, and establishment of long-term credit systems [. . .]” (“The Effect of COVID-19”), alluding that medium-to-small enterprises may be the ideal relationships small and middle-market investment firms must focus on nurturing.
The global crisis affects investment banks in four ways:
1) It lowers bank capital due to firms and governments’ sudden inability to repay loans, lowering revenues and potentially impairing long-term profits.
2) It decreases in the value of bonds, as well as unexpected fluctuations in derivative positions.
3) It increases in demand for credit since firms need to reopen and/or reinvest in a particular trade.
4) With fewer revenue streams of non-interest related services resulting from a decrease in overall service and investors, investment banks receive less service fee income from corporate activities.
5) It forces investment firms to invest in a fundamental and an overdue overhaul of their business model to survive in an Industry 5.0 setting, in which global crises such as that of Covid-19 do not have to disrupt revenue flows.
The context of these four effects force investment banks to sell bonds at drastically lower prices to compensate for losses and improve liquidation, which could also force them to downsize the credit they provide firms that depend on such safety nets, discontinuing their businesses. This reflects many instances that occurred throughout the 2008/09 global financial crisis.
Can technology save the day?
Investment banks’ only way out of this predicament is the integration of technological solutions. David L. Olson, supply chain management and analytics specialist, as well as author of the aforementioned book states, “Digital transformation needs to take place at a faster rate to improve intelligent risk control systems.”
What does digital transformation mean for banks?
Digital transformation and COVID-19 appearing alongside one another has been a common theme with the difficulties banks are facing today.
Learn more by reading this news article, A Brief Look at Digital Transformation in Banking 5.0, for a brief dive into bank’s coming formation of a new business model in the wake of the pandemic.
References
1. “INTERNATIONAL TRADE IN SERVICES Q1 2021.” UNCTADStat, United Nations Conference of Trade and Development, 23 July 2021, unctadstat.unctad.org/EN/.
2. “WCPM.” UNCTAD World Consumer Protection Map, United Nations, www.unctadwcpm.org/answers.html.
3. “The Effect of COVID-19 on the Banking Sector. In: Pandemic Risk Management in Operations and Finance.” Pandemic Risk Management in Operations and Finance: Modeling the Impact of Covid-19, by Desheng Dash Wu and David L. Olson, vol. 10, Springer Nature, 2020, pp. 89–99, link.springer.com/chapter/10.1007/978–3–030–52197–4_8.
