Today’s financial services industry is at a crossroads. Despite uncertainty about COVID-19’s aftereffects, the sector is making bold investment decisions that can largely shape the growth of banks, asset management firms and other financial services for years to come. Unlike most sectors, finance leaders are in a unique position to support the nation’s economic recovery through lending and other means. How companies choose to help can significantly shape the public’s perception of the industry.
The public already has compared the pandemic to the 2008 financial crisis. There are, however, few parallels between the two. Unlike the crisis that shocked financial markets more than a decade ago, this crisis has severely hit virtually all aspects of the economy and put nearly all stakeholders under stress.
Navigate record-low interest rates and other challenges likely ahead
It will be imperative for financial services — including insurers, private equity houses and sovereign wealth funds — to be part of the solution. At the same time, leaders will likely need to cope with the uncertainties ahead, as the industry’s outlook and availability of funding sources will depend on how the pandemic plays out. The longer and more severe the crisis, the more likely it will limit the sector from providing financing to investors, businesses and consumers.
Already, consumer banks find it challenging to make returns, given that interest rates have stayed historically low and financial institutions face growing competition from alternative and emerging platforms. This means banks should rethink long-term growth strategies. Sector leaders should also anticipate and manage customers’ deteriorating credit quality, which will likely cause consumers to be more cautious about borrowing for major purchases, including homes and cars.
Governments will continue playing a critical role in the recovery
Given the challenges ahead, financial services can’t help businesses and households recover on its own. Governments around the world already have stepped in to provide financing assistance. The US Federal Reserve, for example, launched a $700 billion stimulus package to help revive growth and has promised to keep interest rates at nearly zero through 2023, and the US has relaxed some capital and liquidity requirements to help accelerate lending by banks.
All this means money to support the recovery has never been cheaper. While finance leaders anticipate more help to come, consider how regulations could change as the Biden administration settles into its first term.
Here’s where finance leaders can help
The COVID-19 crisis has magnified inequalities across income, race and gender. Because of this, I believe we’ll likely see increased expectations for financial services leaders to add value beyond strong shareholder returns. Already, the industry is positioned to do more to accelerate the recovery since it has direct access and established relationships with corporations and households. Under the CARES Act, for instance, the federal government has collaborated with banks to distribute capital and ease debt burdens on borrowers.
Looking ahead, I also expect that financial services firms will welcome a wave of socially conscious investors who measure performance through environmental, social and governance (ESG) criteria. This means firms should reevaluate certain aspects of their business, including their impact on the environment; how they manage relationships with employees, customers and their communities; and how they define leadership and manage executive pay, audits, internal controls and shareholder rights. This is where private equity can play a particularly important role. The industry has long been known to reshape troubled companies, and PE has an opportunity to create value for investors as well a broader set of stakeholders, including the communities where they do business.
Create a more innovative and resilient organization
Beyond an increased focus on ESG, we expect financial services companies to increase innovation and investments across their organizations. Before the outbreak, companies were already digitally transforming their people and operating models and considering deals to expand their growth.
The crisis will likely continue to accelerate investment in technology, especially as borrowing costs continue to stay low. We can also expect companies with ample capital to consider acquisitions, partnerships or joint ventures to generate new revenue and expand their business. While the key focus remains economic recovery and recapitalization, there’s also an unprecedented opportunity for financial services to structurally transform their businesses — whether it be through product innovation, new digital platforms or other efforts.
By thinking ahead and being strategic, finance leaders can create a less uncertain future for their organizations and the communities they serve.
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