Finance
Current trends in consumer and business lending, driven by the COVID-19 lockdown and its effect on the economy
By Fabrice Gouttebroze, Managing Director of S&G Services, part of Sirma Group.
COVID-19 has had an unprecedented impact on our lives, and it has caused significant economic hardship. This highly infectious disease has pushed the world to the brink of the most severe recession in recent history.
Governments, financial institutions and global bodies have stepped in quickly to mitigate the economic impacts of COVID-19 as far as they can.
Governments have responded
The lockdown periods around the world have caused a complete disruption to business and usual ways of life.
Governments and central banks have instigated a range of policies and support packages to help their countries through this sharp drop in economic activity. Officials want to avoid a full-scale financial crisis at a time when they are already battling health and economic issues.
In the UK, the Bank of England dropped its rates to a record low of 0.1%[1] and relaxed banks’ capital requirements. Reports estimate that the UK’s efforts to keep its economy going could cost £298bn for the current financial year or even as much as £337bn[2].
In the US, the Federal Reserve committed to take every means possible to reduce the impact of the virus on the economy. The Senate approved a $2 trillion stimulus package[3] which includes payments to individuals, financial support for businesses, increased employment benefits and support for health care providers. Regulators have also eased the rules on lending.
The International Monetary Fund has set aside $100 billion of loans for countries facing economic crises[4].
Lenders have been supporting borrowers
Banks in several countries are offering deferred payments on credit cards, loans and mortgages for consumers and businesses facing hardship due to COVID-19. For example, UK financial providers froze interest on loans, overdrafts and credit cards for struggling consumers and business from mid-April to 31 October 2020. Consumers have been supported with reduced or deferred repayments and interest-free overdrafts of up to £500 to get them through periods of lower earnings. UK Finance reported that financial providers granted 1.6 million payment holidays as of 24 April 2020[5].
However, these efforts may only be enough to keep the individuals in their homes and businesses operating in the short term. If economic conditions remain challenging, then their hardship could continue for much longer.
There are also some signs that the availability of credit is decreasing. In the US, Wells Fargo and JPMorgan Chase have paused offering home equity lines of credit [6]and other providers have suggested that finance for small businesses could be harder to secure.
Open banking is increasingly important
COVID-19 has increased the financial industry’s focus on digital offerings and increased demand from consumers to use them. With bank branches shut and long waiting times for phone support, even previously nervous digital users have turned to these channels.
According to PYMENTS.com, the number of accounts opened through digital channels was up 200% in April 2020, and mobile traffic had increased by 85%. These are trends which could last, as only 40 per cent of bank customers are intending to return to branch banking post-COVID-19[7].
Banks have to respond by putting increased efforts and resources into developing their digital channels. One of the key pain points for customers is the onboarding process where only part of the process has been digitalised. Many customers still need to go to a branch for ID and verification.
A recent study of financial institutions (FIs) in North America by ISMG and OneSpan highlighted that improving the customer experience is their top business objective for digital account opening in 2020.[8] For 49% of respondents, the biggest obstacle for to digital account opening for FIs was legacy, manual ID verification and 35% found that knowledge-based authentication tools had become a point of friction to onboarding.
Banks are realising that partnerships with technology providers are critical to making progress with digital onboarding. Most lack the digital expertise and agility to achieve this in-house. 41% of respondents in ISMG’s survey planned to invest in new or existing partnerships to deliver a better digital onboarding experience.
The time to act is now and two Canadian banks have already announced they will be introducing biometric tools into their mobile onboarding processes.
The economic outlook is uncertain
Data from The World Bank has predicted a 5.2% reduction in GDP in 2020, making it ‘the deepest global recession for decades, despite the extraordinary efforts of governments…’[9]. The OECD’s data suggests that the economies likely to be worst hit in 2020 are France, Italy and the UK[10].
At this stage, no one can accurately predict how soon the economy will recover from the effects of COVID-19. It seems more likely that we’ll see a new normal as lockdowns ease and finish, but some of the practices, such as working from home and reduced consumer spending, may continue.
It will take time for consumers to feel confident doing all the activities that they used to, such as eating out, going to concerts and travelling abroad. Businesses and financial providers must adapt to changing customer habits and ensure that their online offerings are robust and customer-centric.
[1]https://www.theguardian.com/business/2020/mar/19/bank-of-england-cuts-interest-rates-to-all-time-low-of-01
[2]https://www.bbc.co.uk/news/business-52663523
[3]https://www.wsj.com/articles/trump-administration-senate-democrats-said-to-reach-stimulus-bill-deal-11585113371?mod=article_inline
[4]https://www.europarl.europa.eu/news/en/headlines/society/20200416STO77205/covid-19-s-economic-impact-EU100-billion-to-keep-people-in-jobs
[5]https://www.ukfinance.org.uk/press/press-releases/lenders-grant-1-6-million-payment-holidays-to-mortgage-holders
[6]https://www.forbes.com/sites/brendarichardson/2020/05/04/wells-fargo-joins-chase-in-suspending-applications-for-home-equity-lines-of-credit/#3b5342e64921
[7]https://www.pymnts.com/news/ipo/2020/albertsons-proceeds-with-pared-down-800m-ipo/
[8]https://www.onespan.com/resources/ismg-state-digital-account-opening-transformation
[9]https://www.worldbank.org/en/news/feature/2020/06/08/the-global-economic-outlook-during-the-covid-19-pandemic-a-changed-world
[10]https://www.oecd.org/economic-outlook/june-2020/
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