The coronavirus experience will be a defining event for many societal, business and credit trends. For financial services, much of the impact will be short-term, but Moody’s expects there will be far-reaching longer-term effects that will fundamentally reshape many aspects of the macroeconomy, business life and consumer behavior.
The crisis has accelerated existing disruptive trends and is causing a rethink of conventional habits, potentially reshaping business models, consumer preferences and competitive dynamics. While many of the longer-term consequences are as yet unknown, Moody’s sees three main areas where we can identify an enduring impact for financial service providers.
Interest rates will remain severely depressed, eroding profitability – the global economic recession will compel central banks to maintain low or even negative interest rates for several more years and to drive governments to increase fiscal stimulus with uncertain long-term consequences and varying implications for banks and insurers, not least a profit squeeze.
The impact of low rates will likely be greater in regions where we expect the yield curve to remain relatively flat coming out of the crisis, such as the euro area; and where recent declines in short-term rates have been larger, notably the United States, where banks are also heavily deposit-funded. At the same time, there will be beneficiaries of easy money and credit. Investors and mutual funds holding junk bonds are benefitting from both Federal Reserve and European Central Bank programs supporting the prices of speculative grade bonds, and money market mutual funds are benefitting from investors seeking safety in short-term government debt.
The outbreak will be a powerful catalyst for an accelerated migration to digital processes and services by both consumers and businesses – Within financial services, social distancing has created a surge in demand for online commerce, contactless payments and digital cash transfers.
It is probable that customers who have newly converted to novel ways of working and shopping may not fully return to their old ways when restrictions are lifted, as a result of gains in functionality, user experience and utility. Likewise, financial services companies stand out as a key beneficiary of the work-at-home trend.
They are expense-heavy information-based businesses, in which most of the work can be done remotely, and potential cost savings are considerable. But digital acceleration has also brought risks to incumbents. The convenience and universality of tech companies like Alphabet Inc.’s (Aa2 stable) Google unit and PayPal (A3 stable) for online business transactions or Venmo and Apple Pay for contactless payments will be hard for incumbents to replicate.
The health crisis and economic hardship is increasing attention on corporate social behavior, accelerating a shift in focus to a wider range of stakeholders – Prudential regulations exist partly to balance the natural profit-seeking tendency of capitalistic institutions with the need to maintain financial stability and the wider social good.
The balance between these two forces has shifted in favor of the latter since the global financial crisis, in response to the perception that the financial industry received an excessive share of economic rents. The shift is now likely to be reinforced in favor of the public good.