BankingCoronavirus impact on transaction banks – leadership in the time of crisis?

Coronavirus impact on transaction banks - leadership in the time of crisis?

Along with the devastating impact on daily life and human health, the coronavirus pandemic has created an economic tsunami of unprecedented size. Economists cannot revise their forecasts of GDP growth down fast enough and the Asian Development Bank predicts that the cost of the pandemic could rise to $4.1trn, or almost five percent of global gross domestic product.

The pandemic is affecting organisations of all sizes and across all sectors – some more than the others. IATA reports that around 8,500 passenger planes, more than one third of the world’s total commercial passenger fleet – have been grounded by April 1.

Even worse markets with severe travel restrictions cover 98 percent of global passenger revenues. Little wonder then that the airlines are estimating they could lose nearly $113bn in 2020. Regulators all over the world are taking active steps to help alleviate the burden.

Central banks are lowering interest rates and increasing liquidity in their financial systems through a combination of measures, including lowering capital buffers and reserve requirements, creating temporary lending facilities for banks and businesses, and easing loan terms. In addition, national governments have adopted various fiscal measures to sustain economic activity.

So many measures have been put in place that the IMF’s policy response tracker states that 193 economies across the globe have injected $14trn to fight coronavirus as part of their efforts to mitigate the challenges posed by the pandemic

However, organisations across the globe are having to come to terms with the reality that business will be anything but normal over the coming months as the impact of the pandemic continues to escalate. And they need to constantly evaluate the likely time horizons for when the situation may return to some semblance of normality.

Companies have accelerated their actions to protect employees, customers and suppliers. The challenges are many and varied, with some companies losing up to 75 percent of their revenues in a single quarter, liquidity is now critical for survival.

Banks are set to play a massive role in this environment as systemic stabilisers for their customers, their employees, and for their economies at large. They need to ensure that essential facilities such as cash and deposit services, credit extension and payments are not disrupted.

At the same time banks must try to reassure consumers, respond to their concerns quickly, and retain their trust during this volatile period – and a lot may depend on just how well their digital infrastructure and services can handle the increased demand.

  1. Delivering the digital capabilities today’s virtual world needs

A Gartner HR Survey in March revealed that 88 percent of organisations have encouraged or required employees to work from home due to coronavirus. Banks themselves have reduced their opening hours and in many cases can only serve a few customers at a time due to social distancing rules.

The increase in volumes is creating challenges, with one bank telling customers that it may take six working days to respond to customer queries because of staffing shortages in call centers. At the same time, record numbers of consumers are frantically trying to contact their bank with questions, concerns or to request special measures as their revenues have been impacted by the fallout from the coronavirus.

In this situation, it becomes imperative for banks to provide their business customers with a comprehensive set of digital tools to ensure non disruptive banking. A BAI survey shows that more than 95 percent of financial services organisations plan to invest more in digital banking in 2020 over 2019.

The survey was done in January, before the crisis really ramped up, so it is reasonable to assume that the emphasis placed on digital banking will increase. Creating an omni-channel experience for customers where they can navigate across multiple channels— a website, a mobile app, a customised direct connection to bank systems, or a corporate banking branch—to transact would help shift volumes from physical to digital channels.

Through these digital channels, banks would also need to provide a series of self service options where business customers can submit documents digitally, open new accounts,  manage cash balances and liquidity structures, initiate and approve transactions, execute their payroll processing, even printing their own cheques if needed- all online.

By removing the need for customers to make physical visits to bank branches, not only would they improve customer experiences but they would also reduce manual intervention, costs and errors.

The uncertainty of the duration of the pandemic crisis means that treasurers will be constantly looking to quantify their companies’ cash on hand as well as any incremental capital they can access. There use of physical transaction instruments such as cheques will reduce and demand for mandate driven electronic transactions such as insta payments (UPI, mobile payments) for 24×7 fund transfers will increase.

The provision of sophisticated liquidity management tools like notional pooling, hybrid pooling, netting and virtual accounts will enable businesses to unlock trapped cash faster. Banks could also help businesses to create short and long term cash flow forecasts – stress-tested to explore likely scenarios – to check for any prospective liquidity-related issues.

In this time of crisis, banks need to keep the communication channels with their customers open, indeed they need to open new channels – from online helpdesk channels for faster query resolution, to alerts and notification tools to highlight urgent pending treasurer actions or even a broadcast section to display new offers/incentives or coronavirus advisories.

Many have also introduced virtual chatbots to help corporate customers with their various transactions, such as seeking account balances, executing Payment transactions and forecasting overdue invoices – AP/ AR; age wise & debtor wise.

  1. Alleviating the global supply chain disruption

One of the greatest concerns of the coronavirus outbreak for most companies has been its effect on their supply chains. According to a D&B report titled Business Impact of the Coronavirus, 938 of the Fortune 1000 companies have a tier one or tier two supplier that has been affected by the pandemic. UNCTAD said that the impact of the coronavirus in China has cost global value chains $50bn in exports in February alone.

Most of corporates’ supply chain partners are small and medium enterprises who have been the hardest hit – particularly because of higher levels of vulnerability and lower resilience. A recent study showed that a third of SMEs in China only had enough cash to cover fixed expenses for a month, with another third running out within two months, putting millions of SMEs in the country at risk.

While various governments and industry bodies are coming out with various financial incentives for this segment, problems still persist. Businesses are struggling with the onerous eligibility criteria for these government-backed loans and often face high interest rates. In some cases, the legislation favors companies that have existing relationships with lenders and leaves out many of the most vulnerable businesses.

The high interest rates could be the result of banks’ valid concerns about the sustainability of the small businesses operations during the time of this crisis. Lack of collateral and credit histories also means that banks are uncertain about the “soundness” of some of  these businesses and whether they will just need a little help to “restart” or if they were on a downward spiral  even before this crisis hit. With supply chains becoming localised and nearly 90 percent of all trade transaction falling in the open account category, supply chain finance could become an extremely powerful tool in the current times.

A new Coronavirus SME Finance Facility (CSFF)/ Covid Business Interruption Loan can be offered to the SMEs by banks in collaboration with their anchor customers who are a part of their value chain ecosystem.

It is a win: win situation for the stakeholders involved – corporates can pay later and not tie up their liquidity now, while suppliers can receive money as soon as or even before its obligations are met. Instead of the transaction hinging on the creditworthiness of the supplier, the bank deals with the corporate buyer, who is usually more fiscally sound.

  1. Preparing for a surge of cyberattacks and frauds

With a majority of people today working from home and transactions becoming more digital, many regulatory bodies have published warnings on the potential rise of cyberattacks and fraud. Firstly home networks generally have fewer security defenses than workplace networks.

Secondly, the people who are still working from office are more vulnerable because of the stress and distraction of the pandemic. And thirdly, fraudsters will be looking for opportunities to exploit any vulnerability in customer processes.

All of this means that today, there is an ever increasing need to monitor transactions as they are processed, looking for anomalies.

In fact, the biggest financial losses due to cyber crime occur through Business Email Compromise (BEC), where attackers take over or spoof the email account of a senior executive, and instruct another member of staff via email to make a wire transfer to an overseas account. In early April the Federal Bureau of Investigation warned organisations about the rising incidence of this type of fraud and noted that between 2014 and 2019 it had received complaints of BEC scams totally $2.1bn. An increased number of staff working remotely presents an increased opportunity for BEC fraud, as the whole scam relies on communications that are never confirmed in person.

Banks need to ensure that their systems have sophisticated anomaly detection tools that can be configured to make sure that any urgent or unusual payment requests – including changes to the details of an existing beneficiary, unusual amounts being paid – are checked and automatically trapped before processing the payment. These tools can also assist in trapping duplicate transactions in the platform which could happen due connectivity breakdown.

Cometh the hour, cometh the banks?

Nations across the globe are announcing financial packages to support private companies and their employees hurt by the economic downturn caused by the spread of coronavirus, including the recently approved  $2trn stimulus package – the largest emergency aid package in US history.

The bulk of these packages will go to financial institutions to enable them to continue to offer trade financing, working-capital support and medium-term financing to private companies struggling with disruptions in supply chains. With all eyes on them, banks need to play the dual role of “transmission mechanisms” and “system stabilisers” really well to ensure their customers get all the support they need.

The support extended could vary- from providing loans and guidance on liquidity optimisation to ensuring minimal disruption in their supply chain and protection against the rising cybersecurity threat. Banks who are proactive and take the initiative in these troubled times will be best placed to flourish when we move beyond crisis reaction into whatever comes next.

As the famed activist and author Grace Lee Boggs once said: “Finding the leaders of the future is just a question of recognising those people who give leadership in a crisis”.

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