COVID-19 and the financial services sector

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Expert Opinion
April 14, 2020

What are the immediate effects on the financial services sector?

With the COVID-19 pandemic impacting almost every sector, it comes as no surprise that the economic ramifications of this global crisis are stark. Almost immediately, the Financial Policy Committee of the Bank of England reduced the UK countercyclical capital buffer rate to 0%. With that being said, the actual financial sector hasn’t taken quite as much of a direct hit as others.

Maintaining the trust of their customers will be a primary focus for many banks. With unprecedented economic uncertainty, the forced closure of entire sectors, a sudden wave of unemployment and a host of other extraordinary outcomes, the lending needs of both customers and businesses will only increase. Following the slashing of interest rates, this will see further pressure placed on banks. We have already started to see the suspension of loan repayments and this will likely spread to also include mortgages and credit cards, among others.

Without the need for a third party, challenger banks such as Monzo or Revolut have an entirely electronic user experience. With an almost overnight move to transacting online, this may have given them an initial notable advantage over high street banks. This does not however mean they are entirely immune to the current situation. With a shift in priority for funding and investors, we will likely see a lack of funding rounds making their way to the challenger banks which will undoubtedly hit them hard, especially the earlier stage start-ups.

One interesting way in which we’ve seen a company respond to the situation is Revolut’s offer to its staff of shares in exchange for lower pay. Employees will be able to swap £1 worth of their salary for £2 worth of share options. Additionally, the co-founders will reportedly forego their own salaries for a year.

Those who are self-employed are all too familiar with the impact of current events. Experiencing little to no work and finding it difficult to qualify for the government’s support package, freelancers have been hit particularly hard. In response, insurtech company Dinghy is offering two free months’ of professional indemnity cover while they are out of work. Because the cover needs to be in place at the time a claim is made, Dinghy aims to protect those claims that could potentially spell financial ruin without insurance in place. Another insurtech company which is offering one of its services for free is Zeguro. Those who have signed up from 1st March will be able to get Zeguro’s Cyber Safety solution free of charge for a minimum of six months. Mitigating cyber risk has become more important than ever with an increased number of companies utilising remote working platforms during the outbreak.

Working from home can see new opportunities present themselves. Many of our clients have been seen to have more time in their diaries. Consequently, there is more time to focus on tasks and projects which otherwise have been pushed to the background. Meetings continue to be held, albeit on video conferencing software such as Microsoft Teams or Zoom.

How could this change in the near future?

Big lenders, high street banks and building societies will most likely turn their attention to retaining customers. Since 2008, banks are in a much better position to deal with a financial downturn. Without access to their local branch, and many businesses denying cash payments, consumers will turn to the use of more digital channels to manage their finances. Those banks with better, more established internet banking infrastructure will see to benefit.

For challenger banks, how this develops over the coming weeks will largely depend on what the government says and implements. With uncertainty around the continuation of funding, start-ups yet to establish themselves within the sector will face a tough few months and might not make it to the other side. Larger-scale companies on the other-hand will no doubt see funding continue, but focus will shift to maximising customer retention and will likely be seen to move forward launch dates of new products and services.

Now is the time start focusing on understanding the situation. A crisis such as this one hasn’t presented itself for decades and so companies, big and small, need to analyse their strategies more closely. There is a lesson to be learned here, from both traditional and challenger banks alike. With uncertainty being one of the biggest challenges, those with a robust R&D claim can benefit from the financial stability this brings. It can be quick, and the cash delivered within weeks. Relief which will be welcome in a time such as this.

Last updated: 21st April 2020, 1:56pm