While financial institutions have weathered the COVID-19 pandemic fairly well, there’s still some question about the extent of additional stimulus and what pandemic-related challenges may lie ahead.
Here, gain insight into major changes to the finance industry since the COVID-19 pandemic began as well as key ways financial institutions can navigate disruption, build value, and stay competitive in 2021 and beyond.
In an unprecedented move, Congress took several actions in March 2020 to alleviate troubled-debt restructuring (TDR) accounting and disclosure concerns, including effectively overriding US generally accepted accounting principles (GAAP).
This occurred as regulators simultaneously encouraged banks to proactively work with borrowers challenged by COVID-19.
For many financial institutions, however, TDR accounting and disclosure are the least of their concerns, and whether a customer can resume normal payments after a deferral has become paramount.
Results for fourth-quarter 2020 improved for many companies. This was likely influenced by reduced loss provisions compared with prior quarters as the evidence of anticipated credit deterioration remained muted.
As the pandemic continues, however, future credit deterioration is increasingly likely.
Looking into 2021 and beyond, the following themes continue to emerge in community banking.
A key question for financial institutions is whether digital strategy should be independent from or fully integrated into a customer service strategy.
All institutions have some form of a digital strategy, regardless of its scope. Even prepandemic, many institutions were working toward accelerating their digital strategies, which traditionally focused on directing customers to more efficient and lower-cost digital channels.
That said, the pandemic greatly accelerated digital strategies, increasing interest in partnering with financial technology (fintech) that improves key operating components, such as:
Cost savings and interest rate margin pressure remains the underpinning in a challenging operating environment, but realistic opportunities to implement technology have clearly multiplied.
Historically, the banking industry hasn’t moved very quickly—but 2020 and 2021 are exceptions. In the past year, many institutions accomplished in a matter of days what used to take 12-plus months to implement—enhanced mobile banking, improved apps, increased customer resources, and more.
These developments were a key factor in the industry’s ability to deliver much-needed Paycheck Protection Program (PPP) loans to eligible customers. While many financial institutions started their PPP implementation process manually, most migrated to a higher level of automation to accommodate for the drastic increase in time-sensitive, high-velocity decisions.
Moving forward, financial institutions will likely benefit from anticipating the conveniences their customers are going to expect after becoming accustomed to the industry’s increased capabilities.
Many financial institutions are restructuring their focus on diversity, equity, and inclusion—creating opportunities to strengthen the business while making a seismic and necessary change.
That said, institutions that view environmental, social, and governance issues as part of corporate responsibility but haven’t yet integrated these elements into their business strategies are falling behind.
Consumers are increasingly intent on flexing their purchasing power and demanding to know where financial institutions stand on key matters, such as unconscious bias, systemic racism, climate change, and more.
In an industry already challenged with talent succession, an institution’s decision to proactively address these issues can make the difference between positively reaching their desired employee and customer base and losing relevance.
To create stronger diversity, equity, and inclusion policies, companies can elevate talking points about these matters to central components of their missions. They can also commit to hiring team members who reflect their values and professional ethics while having diverse opinions, experiences, and specialized skills that strengthen their overall company culture and the larger community.
Mergers and acquisitions (M&A) always seems to have a place at the table. That said, 2021 provides a challenging operating environment, making it difficult to meet investor return demands, grow strategically, and navigate regulatory burdens.
To stay competitive and unlock value in these challenging times, organizations can contemplate and ask themselves the following questions, based on insight from bankers around the country.
When wealth eventually transfers, your new account holder and decision-maker will likely have a different risk profile and won’t have any qualms about moving money around—if they don’t already have plans to spend it.
This doesn’t speak to the issues of payment and digital currency, which could be bigger issues with shorter timelines, in terms of degrading the traditional source of institutional value.
Those who were previously willing to take a branch facility off your hands might be less interested in doing so today.
While 2021 certainly comes with challenges, there are many financial, technological, and structural opportunities financial institutions can benefit from exploring.
To learn more about how to build value and stay competitive in 2021 and beyond, contact your Moss Adams professional.