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Covid-19 Steers Banking to Brink of a Potential Slump

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Covid-19 Steers Banking to Brink of a Potential Slump 1

By Kunal Sawhney, CEO, Kalkine Group.

The closure of various small-scale enterprises to the rising distress of most veteran conglomerates, the banking system is seeing the worst days since the financial crisis of 2008.  The unforeseen business challenges arising on the back of the global health emergency and the situations for which the enterprises didn’t have a robust alternative have given rise to a possible case of a severe downturn.

Banking in Covid-19 era

The banking and financial services sector has been deeply affected due to the collapse of businesses, disrupted operations, and an extended delay to an unsought deferral in the receivables. All these factors have collectively led to an acute hollowness within the banking system. The banks were forced to write-off a major proportion of assets from their respective books that constituted a considerable chunk of net assets. The abrupt provisioning to cover the bad assets has triggered a series of losses quarter after quarter.

From dismal to no guidance along with uncertain forward-looking statements, all the banks have recognised alarmingly high depletion of their top line and the operational profit metrics. We talk of corporate losses, the business foregone, and minimal growth rate in this period, but the retail section of the client has also contributed substantially to the net losses, if not equally.

Complicated mess

According to the Global Banking Annual Review 2020 by McKinsey & Company, the money parked by the global banks as provisions to offset the loan-based losses in the first three quarters of 2020 has already surpassed the total provisioning that was earmarked in 2019.

The losses incurred on account of loans extended to corporates and the retail clientele have spiralled beyond the limits ascertained after the world went into a collective lockdown for about two to three months. With the present touch-and-go situation in most economies, the provisioning to cover the loan losses could exceed the total amount set aside to envelop them during the 2008 global financial crisis, the New York-based global management consulting firm said.

The Covid-19 pandemic has been the biggest challenge faced by the policymakers in the recent past, said Agustín Carstens, General Manager of Bank for International Settlements, in a virtual session on the post Covid-19 banking system held in Basel on 9 December. The crisis situations are always different, but the global health calamity has tested the capabilities of financial sectors, national economies, and our health systems, Carstens opined.

He added that the Covid-19 induced shock had created a difficult task for the supervisors responsible for safeguarding the stability of the financial system.

Stress beyond normal rescue

Carstens said finding a right balance between “microprudential and the macroprudential objective of system-wide resilience” has been a tough task. Banks sitting on credit would freeze the already disrupted credit cycle, and the small-to-medium scale enterprises that need capital urgently will be left unserved, and the institutions might have to witness a notional loss.

On the other hand, lending in excess to the subprime retail borrowers or the corporates with a lower rating grade eventually hurts the financial robustness of the banks and develops a possible case of counterparty default in near future. The gradual drop in the credit requirement for the longer than expected stretch in recent months has trembled the business for the banks.

Furthermore, the lending rates hovering at historic lows across the globe have shrunk the portion of gains and the targets that were achievable in the pre-pandemic era.

However, McKinsey’s annual review suggests that the global banking industry has entered the coronavirus crisis in an adequately capitalised position and is now far more resilient as compared to the situation during the 2008 mortgage crisis.

McKinsey has added that the worldwide pandemic paints a two-stage hurdle for most banks — severe credit losses and lacklustre global recovery. As far as the discussion over the global recovery rate is concerned, the who’s who from the analysts to veteran industry experts have failed to reiterate their initial recommendations.

At the beginning of the Covid-19 crisis, experts suggested a V-shaped recovery that swiftly switched to U-shaped, then Nike’s swoosh-shaped recovery. At the moment, there is no concrete evidence or rigid outlook that can support even an inverted square root shaped recovery on a global scale.

Estimating the loss

As per estimates by McKinsey & Company, the global banks have allocated a total of $1.15 trillion in the provisions on account of loan losses for the nine months until September, much higher than the complete provisioning of 2019.

Although the governments, the World Bank, and the International Monetary Fund have announced stimulus packages as per their respective capabilities, a few in the business expect this “state of suspended animation to last”, McKinsey said in the review.

The loan loss provisions in the forthcoming period will exceed the losses recognised during the Great Recession in the base-case scenario, whereas the revenues could plunge by nearly “14 per cent from the pre-crisis trajectory by 2024” as the banks will face a profound challenge that may escalate beyond 2024.

In absolute terms, COVID-19 crisis may cost a colossal sum to the tune of $3.7 trillion to the global banking industry, the report stated. The banks stand to lose something between $1.5 trillion and $4.7 trillion in cumulative revenue between 2020 and 2024.

Going forward, McKinsey has highlighted that the banks should revise their business models to survive the uncertain period of zero per cent interest rates and economic challenges or lower demand.

Although it is difficult to predict how the state of the global banking system will be in the near future, we can hope that the banks move towards diversification and become sources of stability against the pandemic’s upheaval.

Banking

Over a quarter of Brits now have an account with a digital-only bank

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Over a quarter of Brits now have an account with a digital-only bank 2

Over a quarter of Brits now have an account with a digital-only bank 3 The number of Brits with a digital-only bank account has gone up by a percentage increase of 16%

Over a quarter of Brits now have an account with a digital-only bank 4 Almost 1 in 6 Brits (17%) plan to open a digital bank account over the next 5 years

Over a quarter of Brits now have an account with a digital-only bank 5 The top reason for opening an account was the convenience of banking online for the third year running

Over a quarter of Brits now have an account with a digital-only bank 5However, 16% of traditional banking customers who aren’t planning to switch said their bank had been helpful during the COVID pandemic

Currently over a quarter of Brits (27%) say they have at least one bank account with a digital-only bank, according to personal finance comparison site finder.com.

This is a percentage increase of 16% from last year when 23% of Brits said they had an account with a digital bank. It is also over 3 times the amount of Brits who had one in January 2019 (9%).

Finder’s 2019 research found that 24% of Brits intended to have a digital-only account by 2024. However with 27% now having an account, Brits have gone digital 3 years earlier than expected.

A further 17% of Brits intend to join them over the next 5 years, with 11% planning to do so over the next year. This could mean that 44% of Brits could have an account with a digital bank by 2026. If this percentage were applied to the UK adult population, it would equal almost 23 million people.

The top reason for opening an account continues to be convenience that digital-only banks provide, for the third year running (26%). The second most common reason was that users needed an additional account and setting up a digital account seemed to be the easiest option (20%). Customers also wanted to transfer money more easily (19%), making this the third biggest priority.

People wanting a trendy card is still driving signups as well, with 1 in 10 (10%) existing, or future, customers citing this as a reason to get an account.

Despite the increase in digital-only banking customers, the numbers who aren’t considering one have actually risen. Last year, 23% of respondents said they aren’t considering a digital-only bank account, but this has risen substantially to 42% in the latest survey.

This is likely a result of increased customer loyalty, 58% of those without a digital bank account said they felt as though their incumbent bank had treated them well and therefore had no desire to open a digital bank account. Additionally, 16% felt as though their incumbent bank had performed particularly well during the pandemic.

Over a third (36%) of those without a digital bank account said they had not decided to bank with digital providers because they preferred to be able to speak to someone in branch.

Digital banks are still most popular with younger generations, 46% of gen Z say they currently have a digital bank account, with a further 28% intending to get one over the next 5 years. This would mean that by 2026 just under three quarters of gen Z (73%) could have a digital bank account.

To see the research in full visit: https://www.finder.com/uk/digital-banking-adoption

Commenting on the findings, Matt Boyle, banking specialist  at finder.com said:

“This research shows that digital-only banks are here to stay, with the number of users in the UK rising for 3 years straight. On top of this, Starling and Revolut announced this year that they have made a profit for the first time, really demonstrating that digital banks are starting to become a serious part of the banking furniture.

“The pandemic has also played a role in the rapid digitalisation of the banking industry, with those who had never experienced online banking having no other choice but to take their finances online. It seems that Brits are starting to realise the convenience that can come with digital banking and this is reflected in our research.”

Methodology:

Finder commissioned Censuswide on 6 to 8 January 2021 to carry out a nationally representative survey of adults aged 18+. A total of 1,671 people were questioned throughout Great Britain, with representative quotas for gender, age and region

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Banking

The Impact of the Digital Economy on the Banking and Payments Sector

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The Impact of the Digital Economy on the Banking and Payments Sector 7

By Gerhard Oosthuizen, CTO Entersekt.

New banking regulations, digital consumers, the eradication of passwords, contactless technology – these are just some of the trends that will shape financial services and payments in 2021, writes Entersekt CTO, Gerhard Oosthuizen.

Since the outbreak of COVID-19, traditional businesses have been compelled to further undergo the digital transformation to meet the needs of a consumer base largely confined to their homes. Indeed, we estimate that there has been a 30% growth in the digital space. With this acceleration towards a digital world, banking, transacting and payment trends have and will continue to be redefined into 2021.

We have witnessed a rising number of digital first timers. That is, people signing up for online banking and e-commerce, whilst progressively shifting away from traditional channels. Businesses that have previously depended on walk-in stores and having a physical presence have also had to recognise that online transactions are now the new norm, and to adjust accordingly.

Whereas in the past, registering a customer for a service could take place in a shop, a booth or a branch, today it has become more important than ever to have a remote digital registration option available as well. Even working behaviour has changed considerably, with many businesses accommodating for remote working in the long term.

This is what sets the scene for 2021 – people expect to work from home as well as carry out their transactions from home.

Banking and Payment Trends in 2021

The use of contactless technology is undeniably growing, but on top of more people tapping with their cards, we are also seeing much more engagement with QR payments. A technology already frequently employed in Asia, we know QR codes can work. It would enable consumers to authenticate themselves when making a transaction without needing a PIN pad. More importantly, it allows consumers to gain complete control of their transactions from their own device and have an overall richer experience. Recognising this, we anticipate noteworthy developments in QR and NFC-enabled tap and go payments over the next year.

In light of FIDO (Fast Identity Online) and the ever-expanding network of FIDO-compliant solutions, we also expect the emergence of entirely passwordless systems. Organisations will likely begin enlisting customers by way of biometric authentication through devices and digital identities that already exist, such as banking apps. Long gone will be the days of having to remember numerous passwords, only to forget and reset them again. That is the idea anyway.

In 2021, there will probably be a pronounced adoption of delegated authentication as well, whereby

Gerhard Oosthuizen

Gerhard Oosthuizen

merchants as opposed to traditional issuing banks will take the reins of authenticating e-commerce payments. In this way, consumers will be offered a greatly improved online shopping experience with a simple and intuitive checkout that acts as an extension of the retail brand.

The Challenge of PSD2

While each of these transitions will undoubtedly introduce growing pains, PSD2 will be among the most challenging. Europe is already going through PSD2 now, implementing a number of regulations that is opening up competition in banking and electronic payment services. However, on the 1st of January 2021, these regulations will take a legal effect. At the end of the first quarter, so too will another set of regulations concerning 3-D authentication of card-not-present payments. Europe is simply not prepared to make this leap into “open banking”. As such, banks will face a tough year of struggles with regulators and competition from non-traditional quarters.

In fact, the process towards becoming PSD2-compliant is often arduous for banks and recoups hardly any additional revenue. Many banks see it as a competitive disadvantage as they are being forced to open up their systems and processes for the likes of Google, Facebook, Apple and many smaller niche fintech operations. Their valuable client data risks being taken by a challenger and used to on-board their accountholders.

Regardless of the commercial opportunities that open banking may provide, fraudsters will also endeavour to take advantage of this change and the weaknesses that will appear as systems open. With money moving faster, the faster it can be stolen too. We will likely see some reaction to this in 2021 as fraud returns to being a top priority for banks. Yet, whether through regulatory pressure or by market forces, open banking will become the new normal – and the world needs to prepare for this. Hopefully, many lessons will be learned from Europe’s experiences in 2021.

Next year is going to be about change – and managing that change without alienating already unsettled consumers. Organisations that have customer experience top of mind will emerge as winners, but they must nonetheless expect additional pressure from regulators, new competition, ever more digitally-demanding consumers, and no slowdown in technological innovation.

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Banking

Protecting the digitally-excluded: biometric identification ensures access to payments in a cashless world

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Britons embrace biometrics but over half will abandon applications if not fully digital

By Vince Graziani, CEO, IDEX Biometrics ASA

The events of this year have exacerbated a number of challenges for vulnerable members of our society. Fears over health have been compounded by the accelerated digitisation of activities in their daily lives, such as video calls with family, shopping online and mobile banking – activities they may have already been daunted by. Chief among these evolutions has been the pronounced lean away from the use of cash. With many not comfortable with the complexity and security of digital payments, banks must explore an alternative in the form of biometric identification.

COVID-19 and subsequent lockdown restrictions have not only made the handling of cash difficult, but even unsanitary. As a result, many retailers have either stated their preference for digital payments, or indeed forbidden the use of cash during transactions. As a result, the UK cash machine network, Link has reported a 55% drop in ATM usage over the course of 2020.

Meanwhile, in the US, a similar decline in cash has led to a rapid rise in digital payments and mobile payment apps, thanks to comparable regulations and an increase to the contact less payment limit of up to $250. According to recent research, 28% of US shoppers would avoid a retailer that doesn’t offer contactless payment options. That hesitation is causing a shift to digital payments, with the US mobile payment market expected to rise to $130.3 billion in 2020.

When the adoption of technology is accelerated so suddenly, it’s understandable that those vulnerable, older or even just reluctant and sceptical members of society aren’t thought about enough. The resultant fear of leaving vast swathes of people behind means we need a new touch-free payment solution that helps to comfortably and securely bridge their transition away from cash.

Who fears the transition, and why?

The idea of digital exclusion isn’t necessarily a new concern. In the UK, Which? has long been calling on the government to protect cash as a payment option, knowing that its eradication could negatively affect vulnerable members of our society.

Despite the concept of going cashless advancing, as many as 27% of UK consumers still operate only in cash, while across the Atlantic, 70% of US citizens regularly use cash. Looking globaly, research by the Global Index has explored the nascency of countries including India, Mexico, Nigeria and Pakistan in transitioning from cash to a digital banking system, finding that 1.7 billion adults around the world lack a bank account, while around 1 billion still pay their bills in cash.

Across the board, there is also a notable percentage of consumers who, while being banked, may struggle to maintain their financial independence. Old age or physical and mental health limitations can make the current transition difficult.

What if you can’t remember your PIN or your online banking password, or even your signature?

Banks must be aware that a wholesale veer away from cash isn’t going to suit or benefit all of their customers. They must therefore seek alternative options that still adhere to the  trajectory towards touch-free payments, while addressing the above digital exclusion challenges that some will face during this transition.

A secure and convenient payment option

Rather than making payment transactions a game of memory or self-controlled security, the banking sector should look towards the benefits of biometric authentication. When incorporated into a bank card, fingerprint authentication offsets the need to put people under pressure to note down, secure, remember and then input various passwords, PINS or usernames. Instead, biometric authentication, through fingerprints, automatically and categorically links a person to their finances in the most understandable and seamless way possible.

For retailers it would ensure that the evolution away from cash can continue seamlessly; also meaning they’re less likely to lose out on an entire segment of the customer base. But, more importantly, for consumers, it provides a more safe, secure, immediate and convenient payment method that balances the positives between cash and digital payments.

It’s an ideal balance that relieves pressure on the digitally excluded. Vulnerable members of society will firstly be spared from a growing need to invest in expensive smartphones, or to learn complex digital banking features in order to carry out purchases.

Additionally, at a time where cash is potentially harmful to health, and equally at risk from a security perspective in the longer-term, they are able to make a safe step forward without any of the innovation headaches that might come with it.

The enrolment of biometric payment cards can even now take place remotely in people’s homes, making the transition even more seamless than the idea of extracting cash from ATMs.

Going beyond payments, biometric smart card solutions can also serve as the direct and unequivocal identification many would need to open a bank account, build credit and enhance their financial footprint, as seen in India’s Aadhaar biometric ID programme.

The solution to a prolific challenge

As we move away from cash and towards a world of digital payments, biometric payment cards provide the ideal balance of security, convenience and hygiene for touch-free transactions, without having to rely on expensive smartphones, mobile banking, or PINs.

Banks and payment providers must now embrace biometric payment cards to provide consumers with a secure and easily accessible means of touch-free payment. In doing so, financial exclusion will be one less critical factor to worry about as we transition to a cashless society.

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