By Mike Hampson, CEO of Bishopsgate Financial 

The shock to the global economy from Covid-19 has been more severe than the 2008 global financial crisis and even the Great Depression. These previous episodes shook the world, saw the markets collapse and caused credit markets to freeze all in a few years. However, the current situation only took three months to shut down the globe country after country. Now, while many countries are opening up again, we need to be cautious. As has been said, we’re probably just at the end of the beginning.

Writing in the FT, John Flint, former chief executive of HSBC said: “think about a crisis not as a single event, but as a series of episodes much like waves breaking on a beach.” This pandemic illustrates why regulators have spent the past decade pushing the banks to demonstrate resilience. After all, this is all about being able to prevent, adapt, respond, recover and learn from a series of disruptions. All much-needed in the current situation.

Earlier this year, we published our Change Perspective Report looking at the factors driving change in the banking industry. One of our key findings was the need for banks to focus on their operational resilience to ensure they can continue their operations through disasters, crises or extreme events. Who knew that weeks later, those plans would be tested for real.

Banks and other financial institutions worldwide are facing unprecedented challenges. Not only are they providing services as usual during a time when this has become more difficult; they are also tasked with being the conduit for distributing funds from central banks to those in need, as well as providing support to anxious customers. Beyond this, none of the challenges the sector faced in February have gone away. Here’s a brief run-through of some of the issues facing financial services:

Digital Transformation

The year ahead is likely to be defined by the digital transformation at pace and scale as seen when banks moved to home working. Some organisations have struggled to get this up and running, with banks rushing to buy thousands of laptops at short notice, internet bandwidth issues causing costly delays when executing trades, along with infrastructure limitations around platforms used to facilitate remote access. Yet in general, this shift has been achieved smoothly.

Because of this, finance directors will be looking at the potentially huge savings that can be realised by reducing office space if working from home becomes the new normal for large parts of the workforce.

With people handling sensitive data while working off-site, cybersecurity becomes a key consideration. Our data shows that 95% of firms see it as a priority. With revelations about data breaches regularly appearing in the press, banks are becoming acutely aware of the risk of pushing digital innovation without also rethinking and investing in security.

Culling of Challenger Banks

Over the past few years, we have seen the headlines announcing launch after launch of start-up, digital-only banks. Yet in the current environment switching banks is on no one’s priority list. This crisis could see a clear-out of fintech start-ups in the same way that the .com bust earlier this century removed many of tech start-ups, wiping out hordes of large and exotically valued businesses.

Customers and clients need stability from their bank, and it is not clear what the long-term outlook for challengers will be. Most, if not all of these, are heavily loss-making. Monzo and Starling have already furloughed a large number of their staff (while still running expensive TV advertising campaigns). N26, which had 200,000 customers, closed in the UK in mid-April.

The number of challengers also presents problems, and even without COVID-19, consolidation would have been likely. At the same time, incumbents have been closing the gap between their offer and that of the newcomers. Retail banks have dramatically improved their digital services and thus there’s no reason to swap.

Coupled with this the challenger banks have lower lending volumes and so they are more exposed to external elements than traditional banks.

When all this is added up, and as we enter a new age of anxiety, the future for challengers looks bleak.

Regulations

Three key topics continue to dominate the regulatory agenda: anti-money laundering, privacy and financial crime.

However, in March the UK’s financial regulators announced that various regulatory work would be postponed, alongside 2020’s bank stress tests being cancelled. This is to allow banks the space to focus on customer needs during the COVID-19 crisis. This breather is no doubt welcomed and appropriate. That said, the Prudential Regulation Authority announced that EU withdrawal and climate change operational resilience remain priorities, and that work will continue on these.

Compliance remains at the top of banks’ to-do lists, and financial crime remains a significant concern.

Reports of phishing attacks and fraud are on the rise, with criminals swiftly adapting and using corona-led messaging to con people out of money. Under the guise of panicked money movement, there are less obvious financial crimes happening, too.

As fraudsters seek new ways to launder proceeds, regulators will continue to expand the scope of their vigilance and banks will look to ways to identify and stop criminal activity. While banks become more mature in their approach to identifying and understanding clients, some are beginning to consider ‘’perpetual KYC’’ as a solution to client data needs. Besides, there is a lot of effort being expended on Artificial Intelligence and Robotic Process Automation solutions to reduce the need for large teams and manual processes.

Flexible Workforce

The current environment once again highlights the need for a flexible workforce across the economy. No sooner has the government clamped down on IR35 than we run straight into a situation where flexibility would have benefited businesses, the economy and individual workers.

The banking industry relies on a flexible, multi-skilled workforce that enables it to implement change programmes successfully and cost-effectively. This creates a constant drive to maintain the appropriate workforce mix and, with potential legislation affecting the supply of skilled workers, banks are looking at strategies to help them maintain access to the talent they need.

Employee Wellbeing

77% of respondents of the Change Perspective report listed employee wellbeing as a key factor. Mental health and stress at work can manifest itself in many ways and large numbers of companies have upped the support available to their people.

By broadening the conversation to talk openly about both work-related stress and personal life events, organisations are seeking to provide a more supportive environment for their staff. What’s more, there’s an open acknowledgement of the performance benefits a healthy workforce can bring.

While change is a constant, the current pace and impact are beyond anything anyone could have forecast. Yet, change leaders are flexible, resourceful planners able to respond rapidly to organisational and systemic challenges.

Which is lucky as they’re about to feel the heat.