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Impact of COVID-19 on the Financial Services Industry: "Beyond the Symptoms to the Cure"

Impact of COVID-19 on the Financial Services Industry: "Beyond the Symptoms to the Cure"

A view from NIIT Technologies Financial Services Advisory Team

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Impact of COVID-19 on the Financial Services Industry: "Beyond the Symptoms to the Cure"

View from NIIT Technologies, Financial Services Advisory Team Joseph Mendel and Babita Wadhwa

The impact of COVID-19 on the financial services business is seismic. While other industries such as the Travel, Transportation, Hospitality, Insurance, Retail, and Telco are severely impacted it is the resiliency and continuity of the financial services markets that will support Governments and businesses during and post crisis; ensuring liquidity is available. All eyes will be tuned to the financial services industry to see if they can respond in a manner that reduces the global economic impact of COVID-19.

In the UK, the Financial Conduct Authority (FCA), the Prudential Regulation Authority and HM Treasury recommended precautions, such as social distancing, to minimize the spread of coronavirus in a March 25th website statement to their members. FINRA member firms in a March guidance (Memo 20-01) were “encouraged to review their BCPs to consider pandemic preparedness, including whether the BCPs are sufficiently flexible to address a wide range of possible effects in the event of a pandemic in the United States. These effects may include staff absenteeism, use of remote offices or telework arrangements, travel or transportation limitations and technology interruptions or slowdowns”. FINRA also said on March 3rd, that “banks might need to alter policies for supervising traders who are relocated to remote offices or working from home because of the spreading virus”.

NIIT believes this is the new post COVID-19 model, where firms embrace technology that enables them to adopt the new operating model, being compliant while conducting business-as-usual in a not so usual world.

How can the financial services market best rise to the challenge?

As the financial ecosystem is in uncharted territory and the situation is evolving every day, it is imperative that financial service organizations be flexible, agile, transparent and act decisively in response to the challenges that COVID-19 has posed. It is an operating model far beyond normal business continuity planning that walks a fine line of balance between remaining fiscally solvent, regulatorily compliant, humanly true to the “banking mission” while also minimizing the impact on employees and customers, and promoting efforts to limit the spread of the virus. NIIT feels that banks have the duty of having to react in the best interests of promoting their own solvency, providing for customers, and, maintaining the stage for a viable financial economic recovery.

Where does the rubber hit the road with this delicate balance?

In the US the Fed has cut Fed Funds rates and pumped in excess of $1.5 Trillion into liquidity relief for banks to keep them viable. Other central banks including the European Central Bank have infused liquidity in similar ways, but ultimately consumers will only care about how this affect them. We feel that this consumer sentiment will be a key indicator of which financial service organizations emerge with a strong future.

We anticipate that financial consumers will:

  • Want to know when and if banks will be offering extension of credit terms, credit holidays, forbearance, socially-distanced branch access, remote account opening and onboarding, document execution, remote trading and settlement, and more to help them financially survive the lock downs. Conversely, we also believe that most financial services organizations will experience and prepare for:
  • Consumer cash flow pressures, covenant breaches, increased provisioning, reputational risk, falling investment demand and a move to cash equivalent holdings as rates decline.

Banks will have to comply, without knowing the ultimate profit and loss and balance sheet consequences, in a way that allows them to react to events and drive everything through the lens of what can help the customers and be allow them to be sustainable.

NIIT feels that operationalizing this delicate balance is a primary key to success and one of the most important criteria in restoring the overall health of the financial ecosystem.

Banks have been working hard since 2008 to regain the trust and confidence of the consumer, so how they approach the COVID-19 crisis and work through it, will go a long way to re-establishing that trust.

In that case, what is the prescription for a sound recovery?

NIIT Technologies believes that following areas of focus are important foundational themes that are rapidly becoming the new business-as-usual standard practices:

Accept That There is a New Operating Model: By default, the old ways of conducting business-as-usual have expired.

The use of technology to enable work to continue without physical proximity will be essential to all industries. But for financial services, the ability to securely conduct business outside the normal firewalls and not within protected sealed off areas will be critical. Compliance restrictions for certain highly regulated activities such as trading will be handled through innovative solutions e.g. multi-channel trade surveillance, on-demand trade reconstruction for auditing purposes etc.

The leverage of collaboration tools to produce virtual town halls and internal “water-cooler” chat services (like “Yammer”) for co-workers to interact, needs to be implemented. Humans engage visually and it is paramount to maintaining and promoting trust and cooperation. Remote working, split worksites and rotating shifts will result in several benefits including positive impact on environment and employee morale and a reduction of both capex and opex.

Financial Service Organizations should re-examine their long-term strategy to support remote working; this should include security, connectivity, capacity, and increased use of cloud and SaaS based platforms instead of the current legacy on-premise solutions.

It is NIIT’s opinion that with group restrictions, quarantines, and social-distancing guidelines in place, having a face-to-face conversation (video chats), adoption of innovative tools & solutions to handle regulatory compliance is going to be a key to survival and sustainable success for financial services.

Stabilize the Enterprise-wide Operation: The burning question for banks is if their current operations on-, near- and off-shore, are resilient and have adequate contingency plans in place for a crisis level of business continuity. Traditionally, the alternate location is planned to be the BCP location, however in today’s environment it is not enough. With COVID-19, it is imperative that business continuity planning is rigorously enforced and tested for resilience like never before.

Communicate Regularly and Effectively: Financial services organizations have struggled with consumer trust and confidence, especially in times of crisis. When a customer can’t get in touch with its banker or get access to its money, it can be frustrating and cause much discomfort. In such situations, a proactive, customized, omnichannel communication plan is required. Banks can look at positioning chatbots, Robo advisors for handling 24X7 customer interactions. NIIT believes that you cannot overemphasize the value of a good communication plan as an integral part of crisis planning and business resilience.

Protect your customers: Cyber criminals take advantage of environments of uncertainty and panic to launch their attacks. Consequently, cyber-readiness and security will be more important than ever to protect against phishing scams offering “COVID-19 cures” that steal information and install malicious code, for example. We believe that financial service organizations will benefit from being hyper-vigilant with proactive security measures and push communication alert messages.

Monitor Your Supply Chain: Financial Service organizations may be inwardly focused right now but it is important for them to monitor their external partners and suppliers (e.g. Infrastructure support partners, software product/platform partners, software development and maintenance partners etc.), continue to evaluate their situation and ability to support them and their supply chain as an anticipated COVID-19 related risk. If they are experiencing catastrophic issues, it could severely limit the bank’s ability to continue to perform. We strongly feel that a key component of risk management in the face of the crisis is monitoring of critical key indicators related to third party risk management.

Stay close to changes in Governance, Risk and Compliance: New regulatory, tax, accounting and reporting requirements as a result of COVID-19 will require immediate action by a newly collaborative, distributed and remote workforce. NIIT believes that firms should focus on establishing a new operating model to engage cross functional risk and compliance teams to effectively work together to mitigate risk in a constantly evolving environment.

Keep an Eye on Your Cost Structure:The COVID-19 virus will have a profound impact on the financial service organization cost structure and balance sheet as the new working arrangements are adopted and customer profitability changes. NIIT Technologies believe that new opportunities for optimizing workflows, cloud and as-a-service strategy, streamlined operations and resource requirements will surface as well as the need for installing new intelligent automation solutions designed specifically to improve output quality and reduce costs.

As a final thought we would like to remind financial services firms to look at other industries to evaluate the success and effectiveness of their methodologies for coping and innovating. Pay attention to what works, what falls short and what should be adopted.

We at NIIT believe that there is no simple or short-term answer. This is a life and business altering crisis, the likes of which we have never experienced in our lifetime. Use these bullets as the foundation for your decisions and your organization will be well prepared for whatever comes next:

  • Continually monitor the crisis and be ready to change course at a moment’s notice as the situation evolves.
  • Communicate frequently and be brutally transparent – your organization will be respected for it.
  • When making decisions, remember to have humanity, we are all in this together and only collectively will we emerge healthy.