// . //  Insights //  The Great Banking Adaptation

This article first appeared in The Treasurer Magazine Issue 2, 2021.

Banks have played a key role in supporting businesses and individuals throughout the pandemic – facilitating government support initiatives and through direct support to their customers. Government-supported schemes have attracted a great deal of attention, but banks have continued to lend commercially to businesses too.

Total gross lending to non- financial businesses in the UK, for instance, was up 23% in 2020, reaching £320bn. Banks have also offered payment holidays on existing loans and have facilitated access to capital markets, with record issuance volumes during 2020.

As a result, insolvencies have been significantly lower than pre-pandemic levels, let alone previous crises – keeping alive companies that would have otherwise failed.

With companies having to rebuild and deal with additional debt burdens, the outlook will remain challenging. Our analysis has shown that nearly a quarter of UK companies needed additional finance to get through the past 15 months and, of these, about half are likely to struggle to service and repay the additional debt (excluding companies that were already loss-making before the pandemic).

Building back better

Many companies, particularly in the most impacted sectors, will require further financing to rebuild inventory and working capital positions, as well as make investments that have been delayed due to the pandemic. A range of financing propositions will be needed, with funding that grows with the business, such as invoice financing.

Other firms will need finance to support changes to business models to adapt to the new normal – particularly the increase in e-commerce, which is growing 3.5 times faster than physical commerce and is forecast to represent 20% of total retail sales by 2024.

This requires a totally different banking model. Banks need to provide financing support to help their customers build new digital business models. They need to provide integrated merchant and payments solutions to power e-commerce solutions. And they need to facilitate access to venture capital and early-stage venture financing to support the fast- growth technology sector given the higher risks and lack of physical collateral.

Spurred on by competition from fintechs, some banks are working on structurally improving digital lending capabilities and propositions to improve speed of decision and access to cash as well as customer experience.

A broader digitisation of bank services has also been triggered by the onset of remote working, with the realisation that both digital propositions and client servicing can be carried out remotely – often with improved service quality. Virtual meetings between bank relationship managers and customers, as well as greater digital connectivity between banks and clients, have been a feature of the past year. Citi reports an increase of 60% in application programming interface (API) traffic in 2020, reaching 1 billion API calls from corporate clients.

These are not the only drivers. Climate transition will be a major driver of change in the coming years and will influence bank allocation of funding during recovery.

It is estimated that more than $5 trillion of investment per year will be needed globally to meet the needs of climate change and energy transition. This will support development of new green technology, as well as enabling companies to change the way they operate to reduce carbon emissions.

Several banks have announced ambitious targets to reduce the amount of financed carbon emissions, requiring new propositions to support their clients’ transition, as well as a more selective focus on clients that have credible climate- transition plans.

Constructive restructuring

While many companies view the recovery as a springboard for growth, sadly, not all companies will survive. Some were struggling before the crisis, others have seen business models impacted by changing customer behaviour and others have had to take on too much debt. An increase in insolvencies is inevitable, not least because of the lower- than-normal rates over the past year, but there remains significant uncertainty around the size and timing of the wave.

Banks have been preparing for this wave, scaling up their restructuring and workout teams, and adapting their operating model to cope with a higher volume of customers in financial difficulty. It is critical that any restructuring activity is done fairly, consistently and quickly so that capital is redirected to help viable businesses grow in the post-pandemic era.