Dylan July 6, 2020 The Impact of COVID-19 on Bank Innovation Internal Impact External Impact Some of the effects of the pandemic on the banking sector are evident, while others are still unpredictable and unknown. The financial vulnerabilities brought on by the macroeconomic and monetary instability, the volatility of capital flows, and the decline in economic growth have put banks in a rough situation. In addition to this, certain risks tied to the contagion have forced banks to adopt new measures, such as social distancing, which are difficult to implement in a delicate setting. What is clear is that financial institutions, almost overnight, were faced with the need to radically change the way they work to survive. Specifically, digitalisation and financial technology have become a top priority. So, what arof COVID-19 on bank innovation and how financial institutions around the world are evolving to safeguard themselves from potential downfall. Internal Impact Between social distancing and increased lending risk, banks have been finding ways to adapt internally. Most of these solutions come from the digital world. So, what internal changes have been necessary? Remote Working and Collaboration One of the main measures to survive this pandemic is social distancing. The world is being bombarded by government and company advertisements that promote social distancing to its fullest extent, which is necessary for highly infectious diseases such as this. Businesses are turning to “smart working” and digital conferencing tools in order to maintain a certain level of productivity. However, financial institutions have always required face-to-face engagement for security reasons. Thus, banks are faced with a unique challenge. They must adopt remote working too. Of course, for an already complex IT system, these changes present several challenges. Firstly, there’s the risk of network crashes due to the increased pressure caused by access requests. Secondly, adapting to remote collaboration is not a walk in the park, especially for more traditional institutions. And last but not least, cybercriminals are always on the lookout for an opportunity to get into the system. This shift has caused a spike of 38% in cyberattacks targeting financial institutions between February and March, according to Carbon Black. So financial institutions have been rushing to acquire more devices and increase their network bandwidth to accommodate this change. Then, after securing their networks against cybercriminals, they’ve jumped onto the remote working galleon that will steer them to safety without costing them operational power. This change may be easier for management and operational employees, but more complicated for cashiers and other branch workers. So, banks have to adopt certain tools and adapt to operational changes to ensure that remote working works for them. Tools such as MS Teams, Zoom, and Slack make collaboration with employees and bosses relatively easy. Of course, they make security loopholes possible, which is of high concern for financial institutions. Aside from working together, many banks have stepped up to support their employees in their self-quarantine and self-isolation through these very tools, proving that even financial institutions can adapt to remote working and get the best out of it. Secure Data-Sharing Data compliance issues surrounding the handling of sensitive customer data are erupting around the globe. Employees are connecting to the internet using different connections and varying levels of security, which presents a high-security risk. To protect sensitive data in this situation, employees must be able to access the organisation’s Virtual Private Network. In addition, a combination of data loss prevention software, malware and anti-virus software, behavioural analytics and anomaly detection tools must be adopted to identify and eradicate a threat immediately. However, these are not enough to safeguard a bank’s sensitive data. Employees must be educated in cyber awareness for any of these to work. To educate employees for additional threats, a cyber awareness training plan must be in place and they must partake in continuous learning. Enhanced Risk Management Moving away from cyber risk and onto other major risks. The coronavirus pandemic has introduced a veil of uncertainty that brings with it several types of new risks. To detect and mitigate these new forms of risk, there is a need for better and more sophisticated data. However, financial institutions might not be able to handle such volumes of data with the current systems at their disposal. One type of risk that we can bring as an example is credit risk. The financial collapse has left several individuals and businesses unable to repay their loans, and others in need of new loans. However, the situation poses an increased risk for banks everywhere as the pandemic is a major driver for credit risk. Furthermore, traditional credit data is of no use in such a situation. That’s where financial institutions turn to innovation. As banks brace for a wave of defaults, there is a light at the end of the tunnel. AI-driven credit risk modelling could help credit institutions detect potential defaults before they happen, allowing them to mitigate this risk by negotiating different terms to avoid losses on behalf of both parties. But there is also a place for Open Banking in this heroic technological manoeuvre. Instead of using traditional payment data, banks can make use of transaction data to identify risky borrowers amongst sound individuals. Of course, this type of financial innovation was already in the pipeline for some institutions – the pandemic has simply expedited the process. Plus, it has changed not only the internal workings of financial institutions but also how they interact with customers externally. External Impact Social distancing doesn’t just affect employees and stakeholders. Customers have been confined to their homes, unable to handle their everyday duties. Unfortunately, certain duties must be carried out and, unsurprisingly, their banking responsibilities and needs are a part of the necessities of life. As a result, financial institutions have been changing the way they face their customers. Again, the virus has thrown banks to the digital side abruptly by implementing contactless processes. Branchless Banks Challenger banks may have had a head start, but traditional banks are close behind thanks to external influences. Branch usage has reduced substantially and, as a result, many branches have shut down, which is why financial institutions are considering the move to a purely digital branch or e-branch. But this is no news. In several parts of the world, branchless banking has already been coming to light. For example, Piraeus Bank in Greece is a trailblazer in this sense. In 2017, it already had three e-branches scattered across Greece and is looking to open more. In Nigeria, branchless banking has been the goal for a few years now as it is an excellent way to reach out to the rural areas that are underbanked. However, financial institutions must be careful not to dive too deep with branchless banking. It may seem tempting at first – challenger banks boast this as a unique value proposition – but it might not be suited to traditional banks as physical branches are also their own unique value proposition. There are many who still look for physical branches and the personal human touch. Nevertheless, it is possible that even when the lockdown and social distancing measures have ended, customer expectations will have shifted to the digital end and branches will have undergone a revolutionary transformation. When banks innovate, they must always take into consideration how the future will develop and if the choices they make now will be relevant and, most of all, either useful or harmful. Digital ID Verification Digital banks were ready to onboard new customers during the pandemic. They already had non-physical ID verification capabilities from the start. Traditional banks, on the other hand, had to race to improve their onboarding processes in order to maintain their flow of customers during and after the lockdowns. A combination of biometrics, video conferencing and more, according to PYMNTS, will prepare banks for ID verification in a COVID and post-COVID battleground. Such a feat can be achieved either internally or by partnering with fintech companies that offer such services. In the age of digital ecosystems, the latter should not be an impossible challenge to overcome. Electronic Documents and Signatures One thing that banks are never short on is paper documents. There are mountains and hills of important paperwork lying around, but is it efficient to work this way during a lockdown? In the first article of our Living with Coronavirus series, we talked about automating payment holiday requests. By using chatbots, banks could automate these requests – but what about proving eligibility and identity? eDocuments and eSignatures are becoming increasingly accepted, especially now that physical presence is a health hazard. Though documents sent through a chatbot could generate errors (the clients could, for example, upload the wrong document), there are ways to optimise the flow. With advancements in robotic software automation, documents can be examined and validated without the need for a manual review. These changes in how financial institutions collect documents were already underway before the pandemic due to the new generation’s digital expectations. Now, remote document collection and eSignatures are becoming essential for all financial institutions. New Expectations In addition to these impacts that COVID has had, it has also urged customers to expect remote services and rapid product delivery. In order to juggle these new risks and changing customer expectations, banks should seriously consider – and are considering – enhancing their legacy IT systems, moving to cloud core banking solutions, and partnering with FinTechs. As we know, overhauling legacy IT systems is no cushy number. But in times of pure crisis when clients expect quick quotes and instant products, one must push to keep the situation under control. Digital acceleration is one of the effects of COVID-19, an effect that no one expected would happen to this degree. In order to accelerate digital transformation, banks must make use of three things: Digital Strategy, Digital Partnerships, and Digital Risk Management. In other words, they must incorporate Open Banking into their business models, create fruitful partnerships with fintech startups, and improve their risk management processes by leveraging new technology. This combination will act as the foundation upon which we will build the post-COVID financial services. And all things considered, interestingly enough, the financial services industry of today was somewhat prepared for such an event. Contactless payments, mobile banking, and eDocuments are all things that were missing in past pandemics of this magnitude, and yet we have them in the present because we invested in financial innovation. Nonetheless, the pandemic has greatly affected the banking industry and the financial services we know are experiencing great changes. Will these changes be widespread? Will they last? Only time will tell, and only time will heal. Useful reading: DIGITAL RAPID RESPONSE MEASURES TAKEN BY BANKS UNDER COVID-19 by the International Chamber of Commerce Digitalisation Working Group