{{item.title}}
{{item.text}}
{{item.title}}
{{item.text}}
The COVID-19 pandemic could be the most serious challenge to financial institutions in nearly a century. As the economic fallout spreads, retail banks find themselves juggling some big priorities that require concrete steps to reposition now while also recalibrating for the future. They’re working to keep their distribution channels open, despite social distancing advice and supervisory and compliance functions that were never designed for remote work. They’re trying to manage revenue and customer expectations, despite near-zero interest rates and growing pressure on consumers. And, they need to keep an eye on strategy and brand issues that will define their future, as market forces and customer behaviors potentially change coming out of this crisis.
It’s a tall order. But there are plenty of concrete steps banks can take, right now, to support the communities and customers they serve while balancing medium to long term positioning. These steps include:
Here’s our take on the issues and options facing retail banks today and some suggested ways to replot the post-COVID strategy.
To maintain branch distribution and client service operations without interruption you’ll want to manage both branch distribution and internal operations issues.
These steps may help you prepare
These steps may help you prepare
These steps may help you prepare
You may have difficulty maintaining SLAs and controls as activity increases.
These steps may help you prepare
You could face increased operational risk when using external service providers, given the global scope of the pandemic.
These steps may help you prepare
As you adjust your work processes, there could be new blind spots for additional fraud and execution risk, especially with regard to supervisory functions and compliance operations.
These steps may help you prepare
Your current staffing level and compensation model may not be appropriate given that some fee revenue has declined sharply and some workloads may shift from branches to contact centers.
These steps may help you prepare
How you respond to your customers could be pivotal to how your brand is seen for years to come. Many banks already have mountains of customer segmentation data that can play a critical role in determining — and meeting — customer needs. For instance, you can use this data to identify which customers are better positioned to ride out the crisis and those who will need more active management and outreach. From here, you may need to develop specific, defined, customer service suggestions, such as converting credit card balances to home equity lines with fee deferrals or waivers for homeowners who need liquidity.
We recommend three core strategies that focus on near-term remedies that help preserve long-term customer relationships while balancing the needs of the community, especially for regional banks.
You may provide temporary relief with no credit bureau impact for a period of 30 to 90 days. This could apply to auto, mortgage, card, and small business loan payments through monthly service fees waivers and early CD withdrawals for retail and small business customers.
You have an opportunity to use social listening and voice-of-customer tools to identify issues related to how your brand is perceived. Work with your communications staff to create targeted messages rather than waves of mass emails. You’ll want to make sure customers are aware of the role that your bank is playing to support the community during this difficult period. Create a dedicated team to respond quickly and empathetically to social media issues.
As much as you can, tailor your efforts based on specific customer characteristics. Focus on addressing evolving needs as well as servicing and containment. For example, you might want to identify customers who:
a. are likely to face temporary financial strain and reaching out with customized solutions such as payment skips, interest deferrals, new credit lines, and fee waivers
b. have special servicing needs (such as the elderly who are accustomed to branch banking) and developing solutions to continue serving them
c. could be more financially hurt by this crisis and create thoughtful procedures to support containment plans
d. where refinancing and expansion of the product set may be appropriate given the changing market conditions.
You’ll want your overarching message to focus on preserving client relationships over near-term revenue risk. To the extent that you can offer unique solutions to individual customers, be sure that the operations team can deliver the offerings seamlessly. You may find that you’ll need to develop workarounds for operational bottlenecks, as many bank systems can’t handle payment deferrals or fee waivers, especially at scale.
In the coming weeks and months, most banks will likely see their liquidity buffers come under pressure. That could prompt some difficult balance sheet decisions about how you’ll use the liquidity you have to fund renewals of revolving credit lines and new extensions of credit. Recent guidance from the OCC on using capital and liquidity buffers to support lending has suggested that banks should stay above the minimum requirements but consider getting closer to the minimums. Each bank will need to determine its own appetite for risk, but most will likely be very hesitant to go below a minimum unless there is a coordinated bank response to a severe need.
The frenzied pace of new tools offered by the Fed is making it extremely challenging for many banks to manage changes in liquidity and recalibrate throughout the day from an operational perspective. As the slowdown continues, banks could see a huge number of small businesses arrive all at once seeking loans and financing. Banks will need to ramp up very quickly to meet demand, perhaps with reallocated employees.
As your bank’s balance sheets faces stress, you may want to take these steps:
Monitor deposit fluctuations, particularly as your clients try to remove risk from their portfolios and draw on credit lines to increase their cash positions.
Evaluate client refinancing deals against your balance sheet strategy. You’ll want to consider how government stimulus may create lending opportunities and change profitability measurements.
Engage your credit risk and accounting teams to determine how increases in expected losses will affect earnings.
Look for opportunities to refinance existing debt or raise new funding at attractive rates.
Revise any planned capital actions, given changes to buyback strategies, dividends, and new balance sheet forecasts.
For a more detailed look at the bank treasurer’s response, see Managing through uncertainty: recommendations for bank treasurers.
It’s always a good idea to minimize spending on activity that doesn’t build your core capabilities. But the current situation makes triage more important than ever. In many industries, companies are already freezing hiring for non-essential employees, among other “quick hits.” Some of these will be particularly useful in retail banking operations:
Functional area |
Steps you might take |
Time to achieve |
---|---|---|
Corporate |
Review all inflight projects and recent proposal selections. Set up a control tower process to evaluate which costs can be trimmed or eliminated. Use a similar process to review all new costs to separate the “must haves” from the “nice to haves.” |
2 weeks to set up |
Look at everything in the physical locations. You may be able to shut down climate control on floors that aren’t being used, and some buildings or campuses may be shut down completely while workers are remote. |
1 month |
|
Consider using intelligent automation tools, if you haven’t done so already. They are improving rapidly in sophistication and ease-of-use, and returns can often be achieved in a matter of months. |
1-3 months |
|
Corporate/LOB |
Triage the product/investment portfolio. If you still have active development programs and projects that are low or slow impact, stop them. |
1 month |
Procurement |
Streamline procurement with a rapid-sourcing process to support your control tower decisions. Once you’ve decided that a given expense is appropriate, use this process to reduce costs quickly through competitive bids or direct negotiations. |
3-6 months |
Back office functions |
Run a one-week assessment to identify quick wins for process automation. Procurement is one often overlooked area. |
1-3 months |
IT |
Don’t forget to establish a regular process to wind down unused software licenses. Monitor usage strictly so you’ll know if new or renewed license purchases are appropriate. |
3-12 months |
Marketing |
Where possible, bring media and media analytics spend in-house and benchmark its use. This will help you scale responsibly as the business recovers. You may be able to move creative development spending in-house as well. Take a closer look at how you spend resources to build brand and acquire customers. If you see ways to pull back from lower priority or lower margin efforts, do so. |
1 to 6 months |
Customer service |
To handle the surge in call volume from offset branch traffic, develop a digital process to address as many requests as possible without live intervention. This can start with a refined interface and better FAQs, but bots and process automation will also be key tools in serving call volume more cost-effectively. |
3 months |
We see three areas that warrant special attention from the immediate financial stress: forecasting lost interest income, preparing for the potential of negative rates, and managing the deposit portfolio.
Banks will almost certainly need to manage the earnings impact from recent emergency interest rate cuts, and that need is urgent. US commercial banks were already dealing with a $1 billion reduction in net interest income from the first to second half in 2019—a 10 bps decline in net interest margins—and the current rate cuts are even more severe. Further, 18% of deposit portfolios for regional banks are currently made up of time deposits, and those will reprice over time. For comparison, this was about 8% heading into the rate cuts of the 2008 financial crisis.
Today’s near-zero rate environment, and the fact that some bond yields have turned negative, has also revived discussion of a negative policy rate scenario. As you update your budget and scenario planning, you’ll want to consider options for both low and negative rates. It’s not necessarily the rate change that’s an issue, but the inflection of rates falling below zero that may conflict with how your systems were designed to work. Your risk management processes may also be exposed as many standard option pricing models haven’t been designed to accurately capture the risk dynamics of a negative rate. You could also see legal and operational complications for floating rate contracts, such as swaps that don’t anticipate the application of a negative rate. While most financial institutions don’t expect negative rates, it’s no longer unthinkable. You’ll want to make this scenario a normal input into your standard risk management practices.
You may need to stratify your deposit portfolio to accept attrition, if you can’t find a way to enhance customer profitability. In parallel, as your bank sheds higher cost deposits such as CDs, consider how you might retain or increase your share of your existing customers’ wallet. Take steps now to prepare individual customer offers for checking, savings, money market products and wealth products as necessary. In every recession for at least seven decades, deposits have seen positive growth, so it’s a safe bet that you’ll need to manage an expanding deposit portfolio. You’ll face tradeoffs between deposit margin contributions, growth, and the costs of managing deposit products. Particularly if loan growth slows, the new deposit funding could feed growth of low-duration, low-return cash.
It may seem early to be imagining a post COVID-19 world, but it’s important to take the long view. We believe that the following factors will be especially important for retail banking success after the emergency passes. These may not seem like priorities today, but understanding how consumers are acting may help shape future product and distribution preferences.