Let’s begin by stating the obvious: this will not be a normal election season. As it has for so many aspects of everyday life, COVID has radically altered the basics of voting- from a huge uptick in advance and absentee ballots to the near-elimination of traditional campaign rallies.
We know that markets hate uncertainty – and that’s one thing in ample supply these days. Uncertainty creates hesitancy to invest in initiatives that could be upended based on the election outcome. This is especially problematic in our current environment, with so many critical issues clamoring to be addressed.
While attempting to avoid the partisan fault lines, let’s consider how November’s election results could alter the payments landscape for banks and credit unions in 2021 and beyond.
In a Highly Regulated Industry, Regulation Matters
It seems clear that the coronavirus pandemic will prompt some form of legislative and/or regulatory action impacting financial services. Bear in mind that the Federal Reserve has already restricted dividend payouts and share buybacks for the nation’s largest banks in an effort to preserve capital. Recall also that the Dodd-Frank Act was passed in response to our last economic downturn. Some type of banking reform almost certainly would have been passed in 2009 even if the GOP had controlled Congress and the White House, but it may have looked quite different.
We’ll likely face a similar situation in 2021. Revised regulation is nearly inevitable; the question is: “What form it will take?” The current administration’s guiding principle of eliminating two regulations for every new one may also be nearing its end. Since banking is a heavily regulated industry, these changes carry additional weight. Management teams noticeably shifted investment strategies and focus based on election outcomes in both 2008 and 2010.
Faster Payments Please, Now
One specific initiative, FedNow, is likely to be impacted by the election outcome. Real-time and instant payments have become an even hotter topic with the post-pandemic shifts in consumer and business behavior. The Federal Reserve is scheduled to launch its FedNow payment rails in 2023 or 2024 – under the next administration. This effort has already generated an unusual volume of public comments and industry debate.
Taking this into account, it is hard to imagine FedNow’s ultimate form will be totally immune to the political winds.
Adapting Investments to COVID’s Lingering Effects
Banks and credit unions face a double dose of uncertainty when considering this presidential election comes in the shadow of a pandemic. The rethinking and reprioritizing of digital capabilities are – quite rightly – taking center stage at present. Some of the market’s recent shifts toward digital will likely revert to past behaviors once the public health environment stabilizes, but no-one should expect it to return to 2019 levels.
The savviest investments will therefore be those that retain flexibility. Although doing nothing is not a viable option, it’s also risky to proceed down a path without wiggle room for some course correction. For instance, robust digital offerings are sure to be essential going forward, so there is no reason to delay enhancements. Precisely how those offerings should interact with FedNow, other instant payment options, and even brick-and-mortar branches will not be clear for a while longer, however. In these areas, leave some room to maneuver.
The Bottom Line: Elections have consequences – and that mantra applies to payments as well. What we can say for certain, is that the coronavirus has further clouded the picture for both. What remains to be seen is whether financial institutions’ strategies will be flexible enough to bend with the shifting political winds, whatever direction they may take, to get ahead of the curve.
For more from this author, Myron Schwarcz, click here.