Ramifications of the coronavirus pandemic on the banking and financial services sector were severe this last year. Globally, banks have reported diminishing earnings due to asset write-offs, lower interest rates leading to reduced return on assets, massive credit impairment, increasing operating expenses, and huge regulatory, compliance, and remediation costs. The situation has been further compounded by a shortage of staff and poor digital maturity – leading to high volatility and instability in the profitability and valuation of capital markets.
Some of the key areas in the banking and financial services sector likely to continue to be adversely impacted by COVID-19 include:
- Credit management and profitability – overall profitability reduction due to low interest rates
- Increased credit risk of retail and corporate customers – quality of credit will be impacted due to increasing provisions for loan losses (bad loans)
- Highly volatile stock markets – banking stocks are set to suffer due to rapidly declining bank valuations
Cross-sector impacts include:
Will the challenges in 2020 create new opportunities in 2021?
Even as COVID-19 continues to shake global economic systems to the core, the pandemic has greatly accelerated disruptive digital transformation, especially in the banking and financial services sector. After all, necessity is the mother of invention. Global lockdowns have changed the way people bank, leading to a technological transformation of the sector.
Rapid digitalization is required to address the various challenges facing the banking and financial services sector. Data-driven tech will be key to facilitating increased transparency and a more customer-centric approach, as well as help banking and financial institutions leverage the technological advancements that will emerge in 2021 and beyond. Traditional banking will most likely be replaced by digital banking in the future. While this is a tall statement to make, intelligent technologies have already been successful in dramatically shifting how banking is done today.
A recent report projects the global FinTech market will reach a valuation of around $305 Billion by 20251 due to increased investments in new technologies and infrastructure. This is indicative of the burgeoning transformational tech innovations likely to hit the banking and financial services sector in coming years. Let’s look at some of these innovations below.
With great transformation comes greater challenges – can banks and financial institutions keep up?
Shifting business models, FinTech innovations, regulatory and compliance mandates, the pressure to exceed customer expectations, and urgency to maintain a competitive edge are just some of the complexities challenging the sector. Traditional banking is being forced to reorganize existing business models to keep up with the evolution of the sector, often leading to a rush to “FinTech-ize” systems and processes just to stay in the game. The pandemic has undoubtedly been a key driver of digital transformation in the banking and financial services sector – and digital banking is slated to reign supreme in years to come. For example, an older study forecasted the frequency of customer visits to physical bank branches likely to drop 36% between 2017 and 2022, with mobile transactions rising 121% during the said period2. This trend represents a growing digital centricity among both consumers and banks alike. Banks will continue to adopt intelligent digital technologies such as predictive analytics, voice recognition, and recommendation engines to create more hyper-personalization in their offerings and customer communications.
According to recent research published by the Economist Intelligence Unit (EIU), around 66% of global financial institutions believe advanced technologies such as AI, ML, Blockchain, and IoT will significantly impact the banking sector in the next five years3. In the near future, the adoption of Banking-as-a-Service (BaaS) with top players partnering with Software-as-a-Service (SaaS) vendors will offer differentiated products and value-added services to customers. In an uncertain environment plagued by loan repayment delays, narrow profit margins, liquidity and capital challenges, and increased credit risk, the only option for banks and financial institutions is to embrace innovative digital transformation and align internal systems, processes, and cultural mandates to create a sustainable and profitable digital future.
In 2021, we will see a leapfrogging of digital innovation by banking and financial services organizations. Need help leveraging transformational digital technologies to future-proof your business? Contact us.