Changes triggered or accelerated by the COVID-19 crisis are catapulting banks globally to reassess traditional products and reform strategies and business models. This article takes an exhaustive look at some of the trends, challenges, and opportunities for banks in the post VIVID world.

Banking ecosystem

According to current banking theory, the banking functions can be sorted into three categories – one is maturity transformation and liquidity (loans with long maturities that usually have high interest rates and short term deposits or liabilities of a bank). Second is managing information and examining borrowers. And third, retail and wholesale payment services. Different revenue streams for banks include interest income (through retail facing products e.g., FD/RD, debit, or credit card services), capital market gains (though business/commercial/investment services), and the most stable form of income specially during economic crisis is fee income (e.g., banking account maintenance fee, credit card fee, etc.)

Challenges in the pre-COVID era

In the pre-COVID-19 era, the banking sector was already dealing with several challenges. The banking business models were hampered by a perfect storm of low economic growth and low interest rates, rising compliance costs, and rising competition from digitally enabled agile fintech companies. A low interest rate environment (LIRE) which saw a huge gap in interest rates on deposits that lead to reduced profitability.

Stringent capital and liquidity regulations require banks to maintain more liquidity, them reducing their capability to lend. Rapid digitalization with the emergence of technologies and new players has reduced the costs and improved the quality and accessibility of various services. This downward stress on fees and prices and squeezed margins have further impacted profitability.

Even before the pandemic hit, digital banking had already surpassed personal banking where an individual would visit the branch to carry out any banking activity. Many traditional banks have struggled with digitalization for today’s tech-savvy customers.