New research from 11:FS has argued that the Coronavirus-caused recession will force financial services to become digital by design, requiring long-term recovery and reinvention across the industry.

The consultancy firm’s director of research Benjamin Ensor and research lead Sarah Kocianski suggested that faced with falling revenues and a shortage of capital, weaker firms - particularly banks - will be forced into mergers.

“Acquisitions will occur across financial services, including FinTech firms, with a mixture of purchasers including venture capital and private equity firms, as well as well-capitalised big tech firms,” the report stated.

Meanwhile digital partnerships will accelerate. “As they strive to cut operational costs to match their falling revenues, firms will look for partners that can provide non-core services more efficiently than they can deliver those services themselves – expect to see rapid growth in the provision of capabilities like anti-money laundering detection as a service.”

The longer the crisis lasts, and the more defaults pile up, the more likely it becomes that at least some banks and insurers will risk becoming insolvent. At that point governments will have little choice other than to bail out those firms or risk a systematic collapse of the banking and insurance system, the authors predicted.

11:FS stated that the pandemic will accelerate changes in what people do as companies rapidly digitise and automate in response to the pandemic. Machines will take on more routine tasks, such as spotting fraud, while other tasks - such as check processing - will be reduced or eliminated entirely by software.

“Although some banks like Lloyds in the UK have suspended job cuts, in the long term job losses are inevitable as firms are forced to cut their costs in line with lower revenues,” the report continued. “Far fewer employees will be needed in order-taking, clerical and administrative roles; but firms will need to hire for newer roles like software developers, interaction designers and partnership managers.”

The paper also suggested that many branches that have been temporarily shuttered, will close permanently as banks and customers realise they are not required for day-to-day banking.

Marketplaces will also play a bigger role in product distribution as customers shift to digital channels, according to the consultancy, with platform-based companies gaining share at the expense of other distributors.

“The COVID-19 pandemic has created an immediate operational crisis in financial services firms that have ignored the digital imperative,” commented Ensor. “They have been caught out by the sudden switch to remote working, the mass closure of branches, contact centres and agencies, and the fundamental flaws associated with paper-based processes.”

He concluded: “While so much is still in a state of flux, there are trends already emerging that point to how financial services firms must react – by demonstrating the advantages of being digital by design, the crisis has created the impetus for the whole financial services industry to embrace new ways of working and delivering services to customers.”

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