As we continue to focus on “flattening the curve,” it may seem premature to talk about how the banking sector will look post-COVID. Right now, Canadian banks are heads down supporting their clients and the various federal programs directed to businesses and individuals. The pace with which they’ve ramped up to do this is commendable and a testament to the strong investments they’ve made in technology over the past few years.
At the same time, it’s important to begin identifying some of the features of a post-COVID banking landscape:
- COVID-19 is catalyzing an even faster move to digital channels, paperless approaches and automation. It has also catalyzed a new mindset around new, more agile approaches to risk management and client interaction. For instance, we’ve seen our banks upgrade both back-office and client-facing digital capacities to successfully adjudicate and process literally millions of new loans and loan modifications. There is little doubt that these developments will accelerate. To facilitate them, regulations in the areas of anti-money laundering, digital signatures and privacy will need to continue to foster innovation.
- Banks will need to revisit their branch networks. With 20 branches per 100,000 people (as of 2018), Canada isn’t the most heavily branched country in the world, but we are slightly above the average. And with many branches in Canada now temporarily closed or on modified hours as clients settle in to new patterns of interaction, now is a good time to start scaling back these very expensive networks—while preserving sensitivity to the requirements of our spread-out population and less digitally savvy Canadians. This may require some coordination between the banks, but we have already seen this during COVID-19, where non-customer fees for things like ATM transactions were waived.
- Similarly, corporate real estate will also be heavily impacted. Our banks have mobilized quickly to enable the vast majority of their workforces to work from home. Some banks have said they expect a portion of their staff to continue working from home even after the crisis has passed. Given that the banks account for a large portion of corporate real estate square footage in our largest cities, banks and landlords will need to start to plan for a new equilibrium. We should expect different configurations as the open concept approach loses its appeal in a world where social distancing could persist for some time.
- Cash usage is dramatically down. While cash use was already declining, fears of coronavirus-contaminated bills have pushed people to electronic payments, leading to an estimated additional decline in cash usage of 62 percent, according to Payments Canada. While we can expect this rate to bounce back to some extent, it will not return to pre-COVID levels. Banks in Canada, along with the central bank, will therefore need to develop plans for rationalizing the high costs of managing cash each year.
- Canada’s massive “Payments Modernization” program must continue. This initiative, funded largely by the banks, will update our payments infrastructure and develop “real-time” payments capabilities, providing Canadians with a more efficient and safer way to pay bills, transfer money to friends, etc. It will also serve to increase competition in the payments arena, which will be welcomed.
- The need for a Canadian digital ID solution and the banks’ key role in this seems now clearer than ever. The Digital ID and Authentication Council of Canada recently estimated that a digital ID could add $4.5 billion in value, with most accruing to small and medium-sized businesses. Now is a good time for various levels of government to help drive a pan-Canadian solution with the development of clear standards that ensure interoperability of systems, security and reliability.
- New respect for operating risk and new ways to assess credit risk. COVID-19 has sorely tested our standard approaches to managing and accounting for all dimensions of risk. To put it bluntly, the “risk playbook” needs to be revised and rewritten. For example, more timely tracking and reporting of liquidity metrics, different approaches to valuation and new ways of monitoring obligors are just a few of the areas that should be reassessed. The Office of the Superintendent of Financial Institutions will need to work closely with our banks to define and agree to these new approaches.
While the COVID-19 crisis is far from over, there is no question that the banking industry will be forever changed. Banks in Canada were already transforming to become more digital, to reduce costs and to improve the customer experience. But this pandemic will vastly accelerate the drive to this new operating model, and both governments and regulators must work to remove obstacles and facilitate the innovation required to get there.