Recovering, rebuilding and restructuring: Covid-19 and financial sector transformation

Financial institutions and the world over have been rocked to their core by the Covid-19 crisis. The pandemic’s seismic impact is far from over; the sector will be monitoring and responding to the many, widespread effects for a long time to come. What are the most-pressing financial challenges for societies and their economies, and how might they be mitigated? Now that short-term impacts have been weathered, how might financial markets face more medium and long-term consequences? Is global banking prepared for similar disruptions to economic activity and downturn?

In an interconnected global environment, the financial system is one characterised by volatility and speed of change. There are implications for the whole financial ecosystem, including asset management, investment banks, capital markets, regulators and insurers. Cross-sector expertise, insights and technology are pivotal to making wise decisions regarding future financial stability and resilience – both in terms of how systems must operate and, crucially, how customers are protected.

Covid-19: The first major test of the world’s financial systems since the 2008 global financial crisis

Despite a healthy rebound in 2021 from the initial effects of the pandemic, the global economy is set to face further challenges. A combination of Covid-19 variants, rising inflation, global debt and income inequality will continue to cause significant consequences – particularly for emerging economies.

With global growth predicted to slow through to 2023, the World Bank Group outline the chronic impact of the Covid-19 crisis on the global economy:

• Global inflation is running at its highest rate since 2008.
• The pandemic pushed total global debt to its highest level in half a century.
• Global growth will decelerate – from 5.5% in 2021, to 4.1% in 2022, and 3.2% in 2023.
• Growth in advanced economies will decline to 2.3% in 2023 (from 5% in 2021), and emerging and developing economies will decline to 4.4% in 2023 (from 6.3% in 2021).
• Growth in fragile and conflict-affected economies will be 7.3% below pre-pandemic trends.
• Growth in small island state economies will be 8.5% below pre-pandemic trends.

Its impact is both widespread and devastating. Terrible suffering and hardship has disrupted lives across almost all countries and communities. Most major economies have suffered losses to gross domestic product (GDP). Stock markets destabilised as economic output plummeted. Many businesses, particularly SMEs, were forced to cease trading. Supply chain shortages impacted – and continue to impact – global energy markets, shipping and transportation, labour, and manufacturing and production. Successive lockdowns have resulted in pent-up consumer demand and increased personal savings. Redundancies, closures and furlough schemes meant businesses and individuals relied on government support and, when that failed, help from within their own communities and sectors.

Concerted, dedicated international commitment to action is needed to both weather this shock and recover from it, together with comprehensive national policy and regulatory responses.

Priorities for financial services in a post-Covid-19 world

How are enterprises across the sector primed to operate – and even thrive – in this new financial landscape?

The impact of Covid-19 on global finance forced change and disruption on a colossal scale. However, with change comes opportunity, advantage and innovation – as well as the chance to future-proof against vulnerabilities. For the sector, the immediate aftermath focused, understandably, on supporting and prioritising customers and employees, enabling business continuity, reinforcing organisational culture, and safeguarding both wellbeing and assets.

Now, according to KPMG, assessments by financial services executives and industry analysts of leading firms around the world advise five key areas of focus:

• Productivity improvement and technology enablement. Digital transformation and fintech are at the core of plans to accelerate, and banks and services must overcome barriers and rapidly scale technology. PwC urges financial providers to maximise productivity by: understanding workforces, rethinking change functions; embracing the platform economy; bringing an agile mindset to the mainstream; and mastering digital labour.
• Reconnecting with customers. Shifting customer requirements and expectations often result in a clear disconnect between providers, their products, and customers. How are customers redefining value? What makes a target audience choose, and trust, certain services over others? What methods can be used to promote financial inclusion? Developing initiatives and programmes to boost re-engagement – supported by new technology and centralising data – can help to bridge this gap.
• Creating vibrant ecosystems and partnerships. Shifts in the global economy and market dynamics, together with new and existing business models, will continue to evolve. Increasingly, providers are turning to non-traditional partnerships to design and implement customer-centric propositions and incentives which centre on adding value.
• Embedding social responsibility and purpose. Corporate social responsibility (CSR) efforts – such as promoting sustainability throughout business operations – have risen to the forefront of consumer consciousness, leading those across the financial and banking sector to prioritise social, environmental and governance considerations. For central banks and financial institutions, CSR can have long-term benefits. For example, it can  boost: economic efficiency; company reputation; workforce loyalty; communication and societal links; and the number and quality of new opportunities.
• Improving risk management and agility. The sector already has much in place to weather macro-financial shocks and maintain liquidity, such as capital buffers. The real challenge now facing banking system leaders is balancing traditional approaches to risk with the lightning-quick response times required across vast operating environments. Updates to risk models and stress scenarios, and restructuring of operations, business practices and policy responses, are required to counteract and prepare for future economic shock and instability. As well as crises such as the pandemic, planning for digital risks is also critical, including cyberattacks, fraud and phishing.

Transformation and implementation are not without their challenges. Capacity and capability – and the pace at which they are required – are the main limitations currently preventing financial organisations from making much-needed, significant changes.

One thing remains clear: the proactive transformation of financial systems must be prioritised today in order to safeguard tomorrow’s fiscal landscape.

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