Banking in a COVID-19 World
As the novel coronavirus is spreading across the world and shutting down entire economies, financial institutions are trying to understand how this crisis will impact their businesses and their customers’ lives. Things have changed rapidly over the last few weeks and will probably continue to do so for the foreseeable future.
In these uncertain times, it is vital to have ongoing market insight. Relevant, up-to-date information helps financial institutions make crucial decisions about deposit strategies and how they can position their business in the future.
So…where are we now? As things stand, 22 million Americans have filed for unemployment in the last four weeks. The probability of a recession is between 40% and 45%, and the I.M.F. is warning that the worst downturn since the Great Depression is ahead of us. The Federal Reserve has very limited additional tools to further help the financial market.
In response to this crisis, the Federal Reserve slashed the benchmark rate to virtually zero, and it looks like the low rate environment will stick around for a while, which will have a severe impact on banks’ net interest margins. And once the Feds decide to raise the rate again, it will be a slow and gradual increase. The impact of COVID-19 on the economy and financial institutions will ultimately depend on how long it lasts and how severe it gets.
Most banks are wondering how they can best serve their customers during these turbulent times?
First, in uncertain times it will be more difficult to lure in new customers, which in turn will make it harder for banks to win new deposits.
Second, with deposit rates dropping to new lows, customers have very little incentive to lock up their funds for longer time frames.
However, not everything is doom and gloom. There are a few things that banks can do to change course and grow deposits during this volatile time. Besides that, they can turn this crisis into an opportunity to reposition their products and build on their customers’ loyalty.
With digital banking on the forefront, it is essential that account opening is an effortless process and that the overall digital experience is as smooth and user-friendly as possible. Since customers cannot have face-to-face interactions with their bankers in the branch, it is crucial that banks try to be as responsive as possible through the remaining communication channels to ensure customers feel supported during this crisis.
Another thing banks can do is to highlight their value proposition. They can emphasize their solid product offerings as well as their service quality, which is vital during this crisis. They should also spotlight their financial strength, steadfastness, and resilience, showing customers that the bank can weather this storm. Overall, it is important to remember that during uncertain times, consumers will always gravitate toward safe, reputable places to deposit their funds.
Considering the unusual circumstances, banks may have to become a bit more creative to deepen relationships and to deliver value to their customers. Banks should consider offering products that encourage savings, provide liquidity assurance, and have appropriate fees. Another option could be to create a deposit product that can help those customers and communities in need, such as Valley Bank’s recently released Community Recovery CD.
This could also be a good time to introduce rewards for loyalty, for example rewarding depositors who refer their friends and family, because it is crucial to bring in new customers and their deposits. It is equally important to hold on to the customers the bank already has, as we all know it is less expensive holding onto an existing customer than trying to attract a new one.
At the moment, traditional banks may feel less competitive pressure from digital savings accounts. These accounts typically have very high interest rates, which is a major selling point for these products. However, these highly competitive rates pack less of a punch now that the Federal Reserve has cut interest rates to zero, forcing some of the nation’s largest fintechs to slash the APYs on their savings accounts in a necessary move during these unprecedented times.
The bottom line is that while banks need to ensure profitability, they most importantly have the chance to step up, lend a helping hand, and create a long-standing partnership with their customers. Banks can strengthen their relationships with their customers by working side-by-side with them, protecting their financial well-being, and guiding them through this crisis. This support can go a long way in terms of customer loyalty, because once this is over many customers are likely to remember who had their back during a time of crisis and economic hardship, and who helped them get back on their feet.
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