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Update: How COVID-19 is Impacting the Financial Services Industry

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This is an update on my last blog on the impact of COVID-19 on the financial services industry. Since then, I have interviewed many more industry executives both at banks and at operations services vendors. Industry responses are still muted, but clear signs are emerging that banks will be focused on prioritizing those activities which maintain continuity and support adaptation in an operating environment with larger volume swings.

Key transformation initiatives where banks are accelerating investments include:

  • Remote delivery focused on workforce engagement and a relatively reduced effort in remote customer engagement 
  • Migration to cloud delivery, with its ability to manage large volume swings
  • Data management initiatives, with a focus now on default management applications
  • Consolidation of operation solutions and methodologies. These are longer-term initiatives, but much higher ranking for global institutions than before COVID. At the same time, banks are increasing their search for multiple supply sources.

Banks have reduced their activities focused on support for: 

  • Marketing and sales campaigns: business growth which requires capital has been sidelined 
  • Expansion of suppliers: banks are now focused on vendors with the strongest financial positions. 

Impact on banks to date

To date, the impact on retail banks and capital markets firms has been to move workforces to a work-from-home (WFH) environment. This has not been a hard initial transition for banks in markets with mature internet infrastructure; however, banks in markets with weak public internet infrastructures, such as some Asian markets and most of Africa, have faced significant challenges moving employees to a home environment.

Even within markets, the success of moving to WFH has varied as government policies have changed. In India, the nation went into lockdown on March 24 for 21 days. This was extended to May 3 on April 14. Initially, many delivery centers struggled to move workers to a WFH environment, given a limited number of laptops per worker and poor connectivity in some regions. Over time, bank operations have been able to obtain permission for critical processes to be delivered from centers, with dormitory and hotel housing provided for workers. Non-essential processes have continued to be delivered from home. This has led to worker utilization rates at the largest delivery centers moving from an initial capacity utilization rate of 20% in late March to 60% utilization in early April, to 90% utilization rate with essential work done in centers and large numbers of WFH workers.     

While operations delivery has rebounded,  bank executives we have interviewed expect their businesses to aggressively deteriorate in Q2 2020. Specifically, they expect sales to decline ~25%, costs to increase ~7%, and profits to decline ~45% in Q2 2020. Fortunately, their operations supplier contracts are adequate to support a 20% decline in volumes (and a 25% increase in volumes). No one is sure how long the impact on business will continue. Based on announcements by governments and universities in the past few days, this analyst expects the COVID-19 lockdowns to continue, at some level, for at least six months. The saving grace may be that the continuing shutdowns will be at progressively lower levels of restriction.

Banks have been asked by regulators to provide BCDR plans for themselves and their suppliers. These have been supplied. Of note is that private conversations indicate banks and suppliers are setting triage plans for who and what to focus resources on if the impact of COVID-19 worsens. If that happens, expect to see suppliers retaining service to their most important clients and banks cutting back on product lines (i.e. low margin and risk products) and reducing suppliers to financially stronger vendors.

Transformation projects in production have continued as planned. However, new projects have been stopped in anticipation of restarting the process when lockdowns are lifted. However, as profit levels fall, the focus on cost-cutting will increase. Banks will have to prioritize which projects to restart as they face reduced capital to invest in transformation. Currently, many banks are looking to restart RPA projects when they resume projects. Successful RPA projects can scale processing volumes with a smaller workforce. Because scalability has become so important, banks are looking to restart initiatives that enable scaling, such as RPA and cloud migration.     

Finally, bank product lines have been aggressively impacted. Lending, except for government support loan programs, has all but stopped in all countries. Payment volumes, especially cross-border payments, have plummeted by over 20%. Physical branches have been shut down for business. The fall in activities has reduced operational requirements, but at the cost of profits for banks and revenues for their services providers. While bank executives have not projected volumes beyond Q2 2020, the outlook is very weak for a turnaround during the remainder of this year. ITS and BPO vendors will have stable revenues from long-term contracts. However, these vendors will find that new contracts are few and far between. Some BPO vendors are expecting to grow their business at +20% (annual rate) by buying bank or service vendor captive operations. As bank and vendor liquidity becomes a concern to regulators and investors, there are now captive operations actively for sale. For the next year, successful BPO vendors will have an active M&A strategy in place.        


To summarize, banks have not yet changed their operational delivery activities with third-party vendors. They have reassessed their BCDR plans. Financial institutions have begun to see very substantial drop-offs in transactional activity, and they expect this to impact their revenues and profits starting in Q2 2020. The largely anticipated drop-off in revenues and profits will drive a reassessment of their services contracts to drive lower pricing and sale of operations. There will be a consolidation of vendors and pressure on pricing. The scale and scope of the transformation in sourcing arrangements will be driven by the length of the COVID lockdown. When the lockdown abates, banks will redouble their efforts in digital transformation to prepare for any future pandemics.

My next blog post will address the impact to date of COVID-19 on services vendors to the banking industry.  

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