April 28, 2020 | Bill Handel
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.
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.
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.
“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.
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