Changes triggered or accelerated by the COVID-19 crisis are forcing banks globally to reassess traditional products, strategies and business models.
A new white paper, 'Banking After COVID-19: A Look at the Current and Future State of Banking Revenues, Clients and Business Models', from Coalition Greenwich, a CRISIL company, analyses how the crisis has affected banks and their clients, provides short-term projections for key bank business lines like cash management and trade finance, and explores how institutional servicing and corporate/transaction banking will evolve over the longer term in a post-pandemic environment.
Bank revenues in the crisis and beyond
The transaction banking industry has been in steady growth mode for the better part of a decade. In 2020, the global pandemic brought that to a screeching halt. Over the past 10 years, global transaction banking revenue pools grew 2% CAGR, topping US$400bn in 2018 and 2019. In 2020, Greenwich expects the pools to decline 6% on a year-over-year basis. These declines should not last long. In fact, the company is projecting a return to growth in 2021 in the following three areas:
- Cash management: A relatively rapid recovery in volume and the positive impact of stabilising interest rates on expanded deposits leads to a projected 6% increase in revenues in 2021.
- Global trade: Economic activity gradually returns to normalcy, restoring the business to its growth trajectory in 2021 and beyond. As corporates reposition, supply chain continues to outpace traditional trade finance as a revenue driver.
- Security services: Although competitive pressures keep a limit on revenue growth, the industry starts a cycle of steady expansion. Driving that gradual growth are new fee-based products in data services, ETF servicing, and other areas, and a post-COVID surge in demand for outsourcing.
Impact on bank clients
As banks plan strategies for 2021 and beyond, the report notes that they must take into account how fallout from the pandemic has altered client perspectives and behaviours in three key areas:
- Liquidity is king. As the economic consequences of a global shutdown unfold, companies’ desire to preserve liquidity will be one of the defining features of the marketplace in 2021 and beyond.
- Operational risk is real. Before the pandemic, corporate strategy was driven in large part by the quest for operational efficiency. After COVID-19, operational risk will play a much bigger role in corporate planning.
- The digital drive is just beginning. If there is one bright spot in 2020, it might be the near-overnight adoption of digital tools that make doing business easier and cheaper.
The new imperative: delivering digital value
As COVID-19 pushed most business and social interaction to digital channels, banks will no longer have the option of waiting to see how big tech investments play out for rivals. To plot the right course, banks must understand how and where technology investments actually generate returns. The next question to address: Which investments will have the strongest impact on those potential returns? To some extent, the answer will differ from bank to bank - but across all banks, client experience is one area in which technology investments consistently deliver attractive ROI. The reason is simple: Client experience is a key driver of share of wallet.
Long-term scenario: institutional banking/securities
For services in institutional banking, the report says the long-term goal will be to commercialise an end-to-end platform to meet the needs of institutions looking to outsource the middle/back office entirely.
Industry consolidation caused by the COVID-19 crisis could accelerate the process. M&A could create one or more “super providers,” able to integrate the entire institutional servicing value chain from front office to back.
Through it all, the wildcard of tokenisation - which is developing on a parallel but almost entirely separate track - will have the potential to upend these evolving models at any point.
Long-term scenario: corporate and transaction banking
Banks will have to hit the reset button on business practices created for a 'normal' interest rate environment. A case in point is cash management, where banks will have to reintroduce fee-based models to preserve profitability. There will be pushback from corporates, but over the long term, there is likely to be an equilibrium in the spirit of 'co-opetition' to preserve the economics of the industry. Banks will also need a complete revamp of coverage and engagement models that includes rethinking the RM role, re-skilling their bankers, and retooling their processes in a way that harnesses technology and data to create real value for clients.
Finally, the report concludes that banks will have to acknowledge the fact that they cannot go it alone. The proliferation of fintech and techfin providers in payments, working capital and other areas is splintering the client ecosystem, and banks will have to partner with at least some providers to capture a meaningful portion of the modern ecosystem.
Like this item? Get our Weekly Update newsletter. Subscribe today