2021 Risks and Opportunities for Financial Institutions

While financial institutions have weathered the COVID-19 pandemic fairly well, there’s still some question about the extent of additional stimulus and what pandemic-related challenges may lie ahead.

Here, gain insight into major changes to the finance industry since the COVID-19 pandemic began as well as key ways financial institutions can navigate disruption, build value, and stay competitive in 2021 and beyond.

Pandemic Impacts on the Banking Industry

In an unprecedented move, Congress took several actions in March 2020 to alleviate troubled-debt restructuring (TDR) accounting and disclosure concerns, including effectively overriding US generally accepted accounting principles (GAAP).

This occurred as regulators simultaneously encouraged banks to proactively work with borrowers challenged by COVID-19.

For many financial institutions, however, TDR accounting and disclosure are the least of their concerns, and whether a customer can resume normal payments after a deferral has become paramount.

Results for fourth-quarter 2020 improved for many companies. This was likely influenced by reduced loss provisions compared with prior quarters as the evidence of anticipated credit deterioration remained muted.

As the pandemic continues, however, future credit deterioration is increasingly likely.

2021 Opportunities for Financial Institutions

Looking into 2021 and beyond, the following themes continue to emerge in community banking. 

Digital Strategy Expansion and Integration

A key question for financial institutions is whether digital strategy should be independent from or fully integrated into a customer service strategy.  

All institutions have some form of a digital strategy, regardless of its scope. Even prepandemic, many institutions were working toward accelerating their digital strategies, which traditionally focused on directing customers to more efficient and lower-cost digital channels.

That said, the pandemic greatly accelerated digital strategies, increasing interest in partnering with financial technology (fintech) that improves key operating components, such as:

  • Customer interaction and overall experience
  • Flexibility in core systems architecture
  • Branch and facility footprint evaluations, which now include remote-work considerations for team members and customers

Cost savings and interest rate margin pressure remains the underpinning in a challenging operating environment, but realistic opportunities to implement technology have clearly multiplied.

Expanded Industry Capabilities

Historically, the banking industry hasn’t moved very quickly—but 2020 and 2021 are exceptions. In the past year, many institutions accomplished in a matter of days what used to take 12-plus months to implement—enhanced mobile banking, improved apps, increased customer resources, and more.

These developments were a key factor in the industry’s ability to deliver much-needed Paycheck Protection Program (PPP) loans to eligible customers. While many financial institutions started their PPP implementation process manually, most migrated to a higher level of automation to accommodate for the drastic increase in time-sensitive, high-velocity decisions.

Moving forward, financial institutions will likely benefit from anticipating the conveniences their customers are going to expect after becoming accustomed to the industry’s increased capabilities.

Environmental, Social, and Governance Responsibilities

Many financial institutions are restructuring their focus on diversity, equity, and inclusion—creating opportunities to strengthen the business while making a seismic and necessary change.

That said, institutions that view environmental, social, and governance issues as part of corporate responsibility but haven’t yet integrated these elements into their business strategies are falling behind.

Consumers are increasingly intent on flexing their purchasing power and demanding to know where financial institutions stand on key matters, such as unconscious bias, systemic racism, climate change, and more.

In an industry already challenged with talent succession, an institution’s decision to proactively address these issues can make the difference between positively reaching their desired employee and customer base and losing relevance.

To create stronger diversity, equity, and inclusion policies, companies can elevate talking points about these matters to central components of their missions. They can also commit to hiring team members who reflect their values and professional ethics while having diverse opinions, experiences, and specialized skills that strengthen their overall company culture and the larger community.

Merger and Acquisition Considerations

Mergers and acquisitions (M&A) always seems to have a place at the table. That said, 2021 provides a challenging operating environment, making it difficult to meet investor return demands, grow strategically, and navigate regulatory burdens.

To stay competitive and unlock value in these challenging times, organizations can contemplate and ask themselves the following questions, based on insight from bankers around the country.

Driver of Value  
  • What’s included in your value proposition?
  • How many more years will core deposits and the respective customer bases be considered the primary value driver in most acquisitions?

When wealth eventually transfers, your new account holder and decision-maker will likely have a different risk profile and won’t have any qualms about moving money around—if they don’t already have plans to spend it.

This doesn’t speak to the issues of payment and digital currency, which could be bigger issues with shorter timelines, in terms of degrading the traditional source of institutional value.

Prospective Acquirers
  • If your prospective acquirer is in-market and substantially larger than your institution, why wouldn’t it choose to grow without the hassle of an acquisition?
  • If it simply isn’t for a charter, are you taking care today of the intangibles they want besides the loans and deposits, such as your people teams or technology platforms and products?
Remote Work Considerations
  • How many employees and members of your leadership team never want to go back to the office, and how many can’t wait to get back?
  • What’s the compromise on your office usage and virtual work strategy, and what are you buying or selling into?
Branch Sales

Those who were previously willing to take a branch facility off your hands might be less interested in doing so today.

  • Are you ready to handle the disposition of facilities that don’t get transferred in a branch sale?
  • How often is it going to make sense to sell a branch if your company doesn’t transfer the physical branch location?
  • How valuable is a branch facility with a drive-through in a community with restrictions on building or adding drive-throughs?
  • Is the branch location more valuable to someone else who isn’t in financial services, creating a multiparty, multistep divestiture?
Talent Succession
  • How would you rate your talent succession plan and bench?
  • How does it align with your company’s environmental, social, and governance goals?
Exhaustion
  • How tired are your organization’s leadership and employees in the current environment?
  • Is leadership making critical decisions based on or while experiencing fatigue?
  • Should significant strategic decision-making activities be paused?
  • Does your institution have a sabbatical program?

We’re Here to Help

While 2021 certainly comes with challenges, there are many financial, technological, and structural opportunities financial institutions can benefit from exploring.

To learn more about how to build value and stay competitive in 2021 and beyond, contact your Moss Adams professional.

Additional Resources

For regulatory updates, strategies to help cope with subsequent risk, and possible steps to bolster your workforce and organization, please see the following resources:

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