Amid the Corona crisis, governments worldwide are urgently deciding on numerous actions to limit the economic impact of this unprecedented health crisis. Top priority in these plans is to help people and businesses overcome a period of low
to zero income, which completely breaks their predicted liquidity forecasts. Such a shock in liquidity can even bring strong businesses on their knees, if no supporting measures are put in place.
Governments are taking measures such as simplifying and extending temporary unemployment, providing subsidies to businesses that have to close during the “lock-downs”, granting payment delays for government taxes, etc. At the same time, governments are forcing
the financial sector to chip in for billions of euros in a similar way as the bank saving plans during the 2008 financial crisis.
In all European countries, banks are forced to offer capital repayment holidays up to 6 months for mortgages and business loans, and to more easily grant credits in the coming months, especially to businesses. The loss of
interest revenues and the expected increase in credit defaults will most likely cost the financial sector billions of euros. But drastic times require drastic measures, so most banks seem to accept these plans without much debate.
While economists will certainly write many articles in the coming weeks and months about the financial impact of these plans on the financial sector, I will look at this here mainly from an operational and technological perspective. In my
“Are credits not too commoditized?” - from before the crisis - I mentioned that much more flexibility should be put in place regarding loan repayment conditions. Currently many banks are struggling to implement these capital repayment holidays from a technical
perspective, as many legacy systems do not easily support this type of automated mechanism of putting “credits on hold”.
But even if the lending software can support these measures like introducing repayment holidays, it will be even more difficult to (automatically) determine if a person or a business is eligible. Currently - the situation might still evolve of course - based
on measures in Belgium and neighboring countries, we see 4 conditions that need to be fulfilled to get qualified:
- Customers need to make a request, i.e. the repayment holiday will not be granted automatically. Ideally this means the bank should provide an online request form, but due to lack of IT-agility in many banks, this will usually
be handled via filling in a paper form, calling the help desk or sending a mail to your branch. How these requests can be inputted in the legacy systems, is likely already a concern of many banks today.
- The customer should not have missed any credit repayments prior to the Corona crisis. This criterium is probably the easiest of the 4 to verify as this info is readily available in most banks.
- The customer (person or business) should be able to demonstrate that they are financially impacted by the Corona crisis. For example an employee who continued to work from home during the crisis will not qualify. Apart from an extensive
interview with the customer, it is unclear how this criterium can be evaluated, let alone in an efficient and automated way.
- The customer should not have any other assets available (unclear if these assets should be liquid or not). While it’s easy to identify the financial assets deposited at the bank itself, it will be hard to know more about assets at other
banks. PSD2-based account aggregators can help (if already in place at the bank), but a holistic client wealth profile would be ideal.
This shows that a simple government decision like offering a delay in credit reimbursements can lead to severe operational and IT impacts at banks. The most innovative and agile banks will likely be able to digitize this process to a maximum,
but a lot of the incumbent banks will need to choose between a complex and very time consuming manual qualification process or a process where defacto all requests are accepted, leading to high risk of fraud and potential financial losses.
At the same time, the Corona crisis will lead to an increased and accelerated digitization of the credit origination process. Not only will there be a lot of new credits that need to be granted (which should be processed as efficient as
possible to stay profitable), but people will insist to handle this fully digitally (on one hand because of ongoing health restrictions forcing people to transact with their bank in a digital way and on the other hand as people have undergone a crash course
in digital citizenship in these troublesome times).
Once again, it is important for banks to think long-term and transform their credit application landscape, so that credits can be originated and serviced in an almost fully digital way, while offering maximum flexibility to a credit during
its life cycle : pausing repayments, changing repayment amounts, increasing/decreasing duration, changing interest conditions, (partial) early repayments, adding/removing/changing collaterals during the credit life cycle, etc.
There is no real script for this crisis. Banks are not ready for the amounts of calls they receive from panicking people. But they have the unique opportunity today to regain our trust and to show that they are there to serve society.