COVID-19 knows no boundaries and the financial world is not immune with the virus infecting the balance sheets of many companies in the industry. The shock is as severe as in the days of the Great Depression, warns the EU Commission, and predicts a decline of almost eight percent in the European national product. BNP Paribas has already been hit hard, losing almost half of its market value and it’s forecast that the pandemic could end up costing UK banks £25bn ($31bn) in 2020.

Just when we were thinking we were back to a more stable position in Europe, following the 2008 financial crisis, now the economy is being hit again harder than ever. Above all, it is the threats of loan defaults and low consumer sentiment that are so dangerous for the banks. The longer the corona-induced restrictions in the major industrial nations drag on, the more companies stumble, the greater the uncertainty and the rise in unemployment will continue. Even the billions in aid from the European Central Bank (ECB) are of little help here. The economy is losing its balance and even the larger stalwart companies are on the brink of collapse.

The Challenges Facing the Established Banks

It’s no wonder the banks are raising risk provisions as a precautionary measure, even so some institutions themselves can become a systemic risk. The Federal Ministry of Finance has already given credit guarantees of up to 460 billion euros but it’s clear that many banks may not be prepared for the after-effects of the crisis – the European banking and financial system as a whole certainly is not.

However, it is not only the virus that is currently afflicting banks but also two ongoing challenges:

The business models of many banks have been under pressure for years.

The ECB’s monetary policy is hampering the core business of commercial banks. A negative deposit rate reduces the banks’ profits and it’s difficult for them to pass on this cost burden to their customers. In a world of negative interest rates, banks cannot earn on interest margin as they once did in days gone by. The banks are therefore forced to improve their risk management, tighten their own compliance to avoid high fines, scale down branch networks, reduce staff and increase the equity ratio. Open banking should secure new revenue streams by creating interfaces to fintechs’ customer-centric and data-based services, thus enabling their customers to enjoy a more positive financial experience.

Digital transformation has been slow.

The digital transformation of the established banking world is notoriously laborious. Banks are still burdened by the high costs of their branches and outdated technical processes and its strict regulations such as these that are hindering the transition to a more digital financial world. The established institutions are slowed down by this organisational ballast, which has accumulated over decades. In addition, most institutions still have a product-centric rather than a customer-centric culture. The big banks need to transform their organisations, make decisions faster and easier, reduce hierarchies, create real-time, data-based customer touch points and create true added value for their clients.

Four Actions for Established Financial Service Providers to Take Now:

  1. Transform your marketing by putting digital at its core. A satisfying customer experience can only be achieved if every touch point with the customer is meticulously optimised. Only the analysis and strategic use of customer data enables that with personalised real-time offers.
  2. Elevate your brand communication to a new level. “Hygiene factors” such as products and services have long since ceased to provide decisive competitive advantages. The brand needs to put the customer first and find ways to connect with them on a deeper and more emotional level. Look for new types of products and services, be agile and reactive, and drive brand relevance by being responsive to the changing market environment.
  3. Give employees more autonomy and influence. Remote working, digital collaboration and simplified decision-making processes are part of the new reality. Pay particular attention to listening to those who deal with customers on a daily basis.
  4. Make the technology your own. The crisis is an opportunity to establish new technologies and behaviours among customers, partners and employees. Make products and services intuitive to use and easy to access, learn from those leading in this field.

The Impact of COVID-19 on Fintechs

Even the long-praised fintechs are feeling the bite of the pandemic and the situation is unlikely to improve quickly. Investors are reluctant to invest right now, which means new rounds of financing will become more difficult and the high valuations of start-ups will come under pressure. Even high performing UK-based digital bank Revolut, which was recently valued at $5.5 billion, has reportedly laid off around 60 workers, as the COVID-19 outbreak negatively impacts the firm.

While PayPal and TransferWise, which offer cross-border payment systems, are already feeling the hit due to the lack of revenue coming from the travel and events industries. Companies like Zopa and Auxmoney are also finding it difficult to offer online unsecured loans. They could all suffer from the default of many customers. Technology providers that hone in on blockchain and digital identity security, on the other hand, are more likely to profit from the instability of the crisis because their services identify and mitigate risks and will be in much greater demand in the new normal.

Two Actions for Fintechs to Take Now:

  1. Follow the laws of economics again. Turnover, EBIT, earnings, EPS have become relevant KPIs again. The “winner takes it all” leveraged growth and rapid market share gains remain important, but are longer the sole focus’.
  2. Get out of your niche. Some fintechs have been very unsuccessful in certain customer segments that have come under massive pressure during the crisis. The card terminal providers SumUp and iZettel, for example, are suffering from the collapsing restaurant and retail sectors. They are now under pressure to expand their product portfolio as quickly as possible and offer their target group (small businesses) loans or free terminals – similar to the breweries, which supply their customers not only with beer but also with counters or furniture. Sweden’s fintech darling Klarna responded quickly and now offers “contactless invoice purchase” in all H&M stores. H&M customers transfer money via the app and can pay within 30 days thanks to online invoicing.

Bottom Line

Suddenly everything is different. The global economy has never before experienced such a rapid and unpredictable paradigm shift. However, as said by Winston Churchill: “Never waste a good crisis.” The urgently needed investments in technology, the lack of focus on the customer and the cultural vulnerabilities in organisations have been exposed on the public stage. Companies must now accelerate their digital transformation efforts to combat these challenges and do so with agility. At least the virus triggered something positive, it’s forcing financial services companies to finally drive the industry forward and take a big belated step into the digital future.

Learn how your business needs to adapt to the ongoing market changes. Find out more about our work with financial services clients and reach out to our experts.