Although there are differing opinions and predictions about the long-term effects of COVID-19 on the economy, there is one undeniable truth: Right now, the consumer is in quite a state of concern. The focus and actions of financial institutions over the next several months – and perhaps longer – will be critical to our economic recovery process.

The charts below show results from a consumer survey done on behalf of Raddon clients. Of the more than 50,000 responses, half of them indicate they are extremely concerned about COVID-19, with major concerns including declining incomes and declining retirement portfolios.

The economic impact of COVID-19 also is apparent in the significant decline in spending cited by respondents.  A large majority indicate they have reduced their level of spending by anywhere from 10 to 50 percent. Also, almost a quarter of respondents indicate that they are no longer working due to COVID-19.

Industry Impact

For the financial services industry, what is essential is that management operates with eyes on two distinct horizons. The short-term horizon centers on helping consumers and small businesses in their communities to stay afloat. The Paycheck Protection Plan (PPP) loans and other grant programs are helping small businesses, and many different programs for consumers have been implemented by both banks and credit unions, ranging from loan forbearance programs waiving of fees to 0 percent emergency loans or lines of credit.

In our survey, the top-rated form of assistance that financial institutions could offer to their accountholders is a reduction in their current loan rates, but respondents rated many items highly, as seen in the chart below.

In the longer term, the focus clearly will be on assisting our communities in recovery. Innovation in lending, especially for small businesses, will be critical. Organizations should make ample use of items such as grant money to foster community growth.

But beware that significant risks loom, especially for community-based financial institutions.  Even prior to COVID-19, Raddon research was indicating a significant movement of younger consumers – Millennials and Gen Zs, to the large banks, due in part to the perceived technology advantage those large institutions had.  A major risk for community institutions is an acceleration of this trend.

Across both horizons, the challenge for the industry will be maintaining financial stability. Financial institutions will face pressure in three areas: increasing loan loss provisions, declining spread income due to lack of loan demand and shrinking margins, and declining noninterest income due to fee waivers and lower levels of interchange on credit and debit as consumer spending wanes. While the industry remains well capitalized, this crisis will test the business model of many financial institutions.

Key Learnings

Listed below are 10 takeaways from this crisis. If we address these topics, we have the chance to come out stronger on the other side of this event. Note that many of these items are things that already were in process; the COVID-19 crisis has simply accentuated the need to move down this path.

1. Greater diversification in loan portfolios – We have cautioned for years regarding too great a reliance on indirect lending, especially as a method of generating new household growth. Diversification in your growth is your greatest friend in this and in all environments
2. Evolution of mobile and online banking – These need to be more than tools to conduct transactions; they must evolve as true customer or member service tools. Online chat and virtual meetings must become simpler and part of the fundamental offerings of the organization
3. Branch transformation – Branches must continue to evolve, moving from transaction hubs to a place for consultative advice. Many organizations are now doing meetings at the branch by appointment only; this could become more of the norm even after this crisis ends
4. Broader employee skills – We should be looking to use people with a wide range of skills rather than a narrower set of skills. This helps when we rapidly need to redeploy people, for example, from auto financing to home refinancing. This crisis gives new life to the concept of the “universal employee”
5. Consumer-friendly products and processes – All products should be examined to see if the processes, either internal or external, can be improved. A simple example is tap-and-pay credit cards. Cards with this capability are a lot more comfortable to the consumer in this type of environment. An even better example is the Apple Card, where a card never even needs to be pulled from the wallet to make a payment
6. Using data for proactive rather than reactive communication – Financial institutions should be using data to understand when their customers or members are in financial distress and should be proactive in reaching out and helping those individuals. Do you know if a customer or member has begun using a payday lender? You should
7. Better industry business model – The industry business model has not changed much since the financial crisis of a decade ago; I would argue in some cases it is poorer than it was. Margins are the same as in 2009, noninterest income is lower and expenses are higher. The only reason the industry is more profitable is that loan losses were dramatically lower in the recent past than in 2009. That is likely to change this year
8. Accelerated merger and acquisition activity – Not only will credit unions acquire other credit unions and banks acquire other banks, but credit unions will acquire the assets of banks at an increasing pace. Every financial institution should have a set of merger criteria with a clearly delineated strategic priority supporting every potential merger
9. Scalable technology – In many ways, the financial services industry has suffered from the same issue as the health care industry. Hospitals have determined the number of available beds based on the average patterns of sickness that we see – very predictable ordinarily, until something like COVID-19 appears. Then we see a significant shortage of beds. The same is true with our technology. We scaled to be able to meet – typically well – the demands on our technology in an average period, but not in an extraordinary period such as we are in today. We need to be able to scale for these more unusual times
10. The importance of community – We believe that one outcome of this crisis will be a return to community. COVID-19 has decimated our way of life in our communities; community-based financial institutions will be key to restoring it

“May you live in interesting times” is a purported English translation of a Chinese curse, as interesting times are generally characterized by disorder and trouble. Perhaps no quote better describes today. Financial institutions can emerge from this crisis more fully engaged in their communities and better able to meet the needs of their customers and members if they examine the learnings from this crisis and create a new path forward.