Preparing Your Financial Institution for COVID-19 Impacts

Posted by Larry Pruss on Mar 12, 2020 12:00:00 PM

Covid blog

Being prepared for any potential downside is something bank and credit union executives take quite seriously and, since the early 2000s, have been required by regulators to maintain a pandemic crisis plan. Now all of these plans are being put to the test, especially after the announcement by the WHO that the coronavirus is officially a pandemic.

Even as the business world improves at predicting and defending against risks, Black Swans will always be a possibility. As is characterized by such an event, it’s easy in hindsight to say, “We should have seen this coming,” but the fact remains that we don’t know what we don’t know; e.g., the impacts on the stock market and disruptions to daily life brought on by COVID-19.

Financial services are not immune to the effects of this pandemic; early symptoms are beginning to show, both at the FED and in the branch. Fortunately, bank or credit union professionals can absolutely take measures to serve their communities while also preserving their institutions’ financial well-being.

Consumer Behavior, Bank Behavior

As the pandemic plays out, financial institutions can mitigate risks to consumers by encouraging them to opt for digital banking over branch visits wherever practical. Note:

  1. There will be new digital banking users;
  2. There may be gaps to be filled between the branch versus digital capabilities; and
  3. Increased digital volumes could also expose scalability challenges.

Call center bandwidth and capabilities deserve a revisit, too, especially for transactions less suited for digital channels. Call centers will serve as backstop for both the mobile users and less tech-savvy users with complex needs. At present, they’re also a more effective sales channel than digital, which often relies on the branch to drive originations. Further, call center providers may be challenged to meet contracted support levels as they confront their own virus challenges.

For banks and credit unions operating in areas where the virus is spreading quickly, plan for 20% or more of FTEs to be unavailable due to illness or self-quarantine. Contingency planning and cross-training is critical. Examples include designating priority locations to keep open and cross-training tellers to handle call center volume, and vice versa.

Further, while working from home is an option for many, there are regulatory requirements restricting the duties bank and credit union employees can perform off-premise. That said, any functions that can be done remotely are likely identified in the crisis plans of banks and credit unions, allowing them to deploy another countermeasure against the virus.

Responding on Many Levels

As a trained and active first responder, I have been keeping tabs on the events unfolding to offer a unique and informed point of view. I anticipate first a surge in demand for cash as consumers prepare for the chance of infrastructure and supply chain interruptions – a corollary to the recent stockpiling of toilet paper and bottled water. After that initial burst, however, there will be a shift from cash to plastic as consumers start seeing cash as a potential source of infection. (Witness news reports of Asian governments disinfecting and/or incinerating currency.)

In the short term, consumer spending patterns will change. We are already seeing larger than usual expenditures on necessities (groceries, disinfectant, medical supplies) offset by reductions elsewhere as people start pulling back from travel and everyday business – effectively quarantining in place.

In the long term, COVID-19 may permanently change consumer payment behavior – or at least speed payment evolutions already underway in how people spend, where they spend, and the way transactions are processed. This remains a matter of speculation, but COVID-19 could push us toward more “hygienic” transactions that don’t involve handing a card to a person or touching a public terminal – in other words, internet and contactless-via-mobile payments.

More than ever, banks and credit unions need to enact programs to encourage use of their debit cards for e-commerce purchases. Consider promoting shopping online as a safer option, perhaps offering a “rounding-up” program or other incentive to encourage the consumer. Since higher Card Not Present rates apply to e-commerce, these transactions can pull extra weight in offsetting declines in everyday spend on items such as entertainment and restaurants, though they’re unlikely to fill the gap entirely. 

The Bottom Line: We expect our bank and credit union clients to see a dip in card transactions, spend volume and overall growth for the first quarter of 2020 due to the Coronavirus, and for the effect to likely bleed into next quarter as the world gets a grip on its impacts, treatment protocol, etc. More importantly, however, COVID-19 represents a “moment of truth” through which banks and credit unions can reinforce their trusted agent status with their communities.  

Topics: Digital Banking, Cash, COVID-19, Card Not Present, Coronavirus, Contactless

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