As much as everyone would like normality to resume and for COVID-19 to be a distant memory, we may still be closer to the beginning than to the end of this unusual period and its economic impact.
“In the West we should be planning for this to be a three- to six-month event,” states Accenture in “Responding to COVID-19: An Open Letter to Retail and Commercial Banking CEOS.”
The experience in China indicates that things could return to something like “normal” sooner than that, Accenture points out. However, a return of the coronavirus in America’s next winter remains a possibility. Talk continues of seeing a “W” pattern, instead of a peak followed by a dip and leveling off.
“This is a situation where it makes sense to plan for the worst while hoping for the best,” the firm says.
That forward planning should embrace not only the short-term but also the medium-term issues that banks and credit unions will have to address. As much as possible, financial institutions should adopt solutions that can continue to be applied after the COVID-19 period has ended, or at least past early days, rather than simply implementing stopgap remedies.
However, while COVID-19 may drive a hastening of trends that banking and the economy were already experiencing at a slower rate — such as increased use of digital channels and the eclipsing of the branch — the industry will also likely have to deal with significant challenges that weren’t on anyone’s 2020-2021 strategic plans.
Accenture’s report reviews these challenges and potential ways to address them.
Preparing for a Credit Downturn Dwarfing the Great Recession
The worst-case scenarios that banks and credit unions have to plan for could very well be just over the horizon. Right now institutions are still reaching out to consumers and businesses with fresh ideas on initial credit relief. Some federal credit aid efforts are just beginning, such as the Federal Reserve’s Main Street Lending Program.
But as time moves on, stimulus checks and relief programs will run their course, savings will become exhausted and jobs will evaporate. Institutions will need to prepare for subsequent relief efforts and to build up their capabilities of dealing with significant increases in delinquencies and defaults. This may require changes in staff organization as well as fresh training.
“Commercial as well as individual clients will remember for a long time how they are treated during the next 6 to 12 months,” the consultancy warns. Lenders need to think not only of the practicality of efforts taken, but also the “optics” of their efforts to restructure or collect outstanding debt.
One of the first challenges to making relief programs work is to set up processing systems to accommodate skip-pays and other temporary waivers. “Many core banking and loan accounting systems are just not set up for this type of operational flexibility at scale,” Accenture states. Further complicating the process side is that much of the relief granted will be tailored to individual borrowers’ circumstances, as time goes by. While lenders have had some experience in handling this, harking back especially to mortgage relief negotiated during the Great Recession, Accenture suggests that the sheer magnitude of requests will far outpace the earlier period.
“This time the loan programs requiring modification may be much more expansive, the timeline to get it done much shorter, and the resulting operational complexity much higher,” according to the report.
Specific Suggestions to Deal with Credit Issues
Relief Can Take A Page From Marketing. Something that could help in pinpointing the appropriate assistance to offer consumers is personalization through data. The data analytics that marketers increasingly use to target specific consumers or consumer segments could also help devise payment relief packages.
“Ideally, banks should be data-driven in their approach to this rapidly evolving credit crisis.”
“Ideally, banks should be data-driven in their approach to this rapidly evolving credit crisis,” according to Accenture.
Appropriate Relief May Demand Out-of-the-Box Thinking. Accenture makes the point that in some cases relief may not only involve modification of the terms of existing credit, but granting additional credit to stabilize consumers’ individual situations.
For example, while mortgage relief is going to be important moving forward, many consumers don’t have home loans. Instead, they are renters, but they may require help with rent payments.
“This will ensure that economic support is not inadvertently skewed towards homeowners and those who are relatively well off,” the firm suggests.
Finding alternative ways to offer credit. For much personal credit the unsecured model has been the path of choice. Accenture says many Americans, with deteriorating credit, may seek loans from pawnbrokers, hocking jewelry and such. Coming up with creative approaches to readjust lending methods may help many Americans.
Creativity may help by introducing new forms of credit, as well. Enabling consumers to borrow against retirement accounts, instead of liquidating them to raise funds, is one suggestion. Another is permitting advances against secured savings products, such as CDs. In that vein, it’s conceivable that variations on secured credit cards, which use deposits to secure credit lines, could be devised.
Accenture also notes that data analytics can be used to help craft better communications with people having credit difficulties, much as it has helped some lenders in devising messages for different credit prospects.
“Many people will be overwhelmed by this crisis, so getting communication right and getting customers’ attention is going to be critical,” Accenture says.
Dealing with Revenue Compression
The Federal Reserve’s extraordinary rate-setting actions and the preference for insured deposits over stock-market investments both factor into financial institutions’ immediate future. There’s a lack of clarity, according to the report, regarding what banks and credit unions can expect to see in depositor behavior in the near future. But one expected impact will be pressure on net interest margins, which will drive down institutions’ returns.
Helping Consumers with Payments Can Help You. One area where income will drop is payments revenues. As people spend less, an obvious way to avoid shrinking net income on payments will be to control costs.
However, the report suggests some measures that address consumer payment concerns while potentially helping issuers. One example is raising the ceilings on contactless payments — issuers who take this step could see their cards become a payment instrument of choice. Another is prepaid cards. Accenture notes that in the U.K. financial institutions have been helping people without other cards to turn cash into prepaid cards which then enable them to make ecommerce purchases while sheltering in place.
Ways to Onboard the Digitally Challenged
A mantra repeated several times in the report is that “perfect shouldn’t be the enemy of good.” The point is that a plan that accomplishes a good deal of a goal is better than a perfect plan that’s either late or never gets launched.
One case in point is the continuing effort to show people who aren’t using digital channels yet how they can avail themselves of this alternative that doesn’t potentially expose them to coronavirus. The report notes that identifying consumers who aren’t using digital channels should be straightforward. Outreach can then get them up to speed. Likewise, certain vulnerable groups, such as the elderly, can be identified through institution records. Building in-app tutorials can also help them to learn to find and use tools less frequently required, once they have been onboarded.
While chatbots and other applications of artificial intelligence are important longer-term, the report indicates that emphasizing live interaction, when possible, may be a better road during the crisis.
“This is a time when customers need reassurance and someone to speak to, not an impersonal alert that tells them their upcoming utility bill is about to put them over the financial edge,” Accenture states.
The report suggested that it may even be appropriate, if the institution can muster enough staff to handle the volume during the COVID-19 pandemic, to temporarily turn off the interactive voice response system and rely only on staff. “Even if they don’t have all the answers, they can provide reassurance, log the issues, and create a personal connection,” it states.
Your ‘War Room’ Should Be About More Than Today’s Challenges
In the relatively short time that COVID-19 has been the focus for banks and credit unions the stress has been on continuing to serve people’s banking needs. Whether an institution centralizes its coronavirus response in a “war room,” or some other arrangement, the decision making must go beyond coordinating business continuity. An eye must be kept on the future, both the mid-term and the longer-term.
“There needs to be tight coordination of actions across investments, regulators, customer groups, employees, trade associations, and the many other stakeholders,” Accenture indicates.
Divert Spending to What’s Important Post-COVID. Looking further down the road can help a bank or credit union put certain projects on hold, or accelerate others that will be of more immediate assistance.
In fact, Accenture suggests the coronavirus environment represents an opportunity to try out solutions.
“This is a great opportunity to test the efficacy of new advice propositions, to understand what works and what doesn’t, in an environment where customers are likely to be forgiving of experimentation,” the report states. “So, don’t be snow blind in this crisis — try to design interventions and initiatives that have long-term value.”