|Christer Holloman

covid-19 crisis accelerates the digital transformational trend

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in short

Last month, the World Economic Forum, along with Reuters, engaged fifty economists to debate the direction the global economy might take as we start to emerge from the coronavirus-enforced lockdown. Many letters were tossed around to illustrate the shape of our economic future; a ‘U’, a ‘V’, a ‘W’, an ‘L’, and even a ‘swoosh’ was thrown in for good measure, along with figures ranging from a six-per-cent shrink to 0.7-per-cent growth. What is certain from this discussion is the manifest uncertainty which coronavirus creates – even for our most revered experts.

 

Keep lending but lend safe

 

The uncertainty created by Coronavirus has, understandably, injected fear into the nerve centre of our financial institutions, where major players forecast the greatest loan-loss figures they’ve seen in their history – in the case of Barclays, for example, this is estimated at around double any figure experienced since the bank was established in 1896. 

 

That said, the typically cautious Bank of England, only last week, warned lenders that conservative planning for defaults will serve to restrict ability for banks to write new loans at a time of dire need for businesses. Instead, it asks that banks ease their proposed, draconian measures until a clearer picture of life, post-Covid-19, emerges.

 

This move by the Bank of England, directly or not, has already had some impact. Only two weeks ago, lender Zopa’s CEO, Jaidev Janardana, issued a statement to say the company was halting higher risk lending, explaining: ‘We will, for now, stop originating loans that would have fallen into our C, D and E risk bands. Total originations in April will be 75-80% less than what we were doing at the beginning of the year. As we get more data on customer response to this pandemic, we will reevaluate this decision’ 

 

However, last week, only two weeks after the original announcement was made, Zopa followed up: ‘We now have more data with which to model and have been able to develop and implement new credit policies which are tailored to the current environment. With these in place, we feel it is appropriate to add C risk market loans for borrowers with less exposure to the Coronavirus impact back into our lending mix.’

 

The lesson here: in a time of crisis, lend but lend responsibly.

 

Retail finance and lending

 

Retail finance shows a bright picture. When Barclays issued its annual report for 2019, it showed that loan right-offs in its Partner Finance division were around half that of personal loans and nearly a third of US credit cards, showing a more healthy outlook for the financing option. Of course, since the release of the 2019 report earlier this year Covid-19 has taken hold and the numbers, as in every area of the economy, have been impacted for 2020. However, retail finance started from a strong place to begin with and, as the report suggests, it clearly avoids some of the repayment pitfalls that other payment options can materialise, making it a more trusted and reliable approach to consumer financing.

Prior to the Covid-19 outbreak, the appetite for retail finance was already strong. According to Accenture, the market was a $1.8-trillion golden ticket, with new entrants, such as Klarna, signing over 6,500 new merchants each month.

In addition, only last week, the UK’s Chamber of Commerce issued a letter to Number 10 to share how the organisation saw things returning to normal in the wake of the crisis. In the letter, it firmly proposed: ‘This is a time to be bold. Government should not shy away from sustaining high levels of public spending in order to restart and renew our communities and the economy in the short and medium-term, while not tying the hands of future generations.’

 

This signals a promising boost for retail finance and should be seen as a time to be bold not only by government but also by financial institutions. For many consumers, the security of holding on to their cash is of significant importance at this time of uncertainty and, without additional payment options, many will sit tight and avoid spending altogether. Responsible lending, at the point of sale, provides the perfect solution for those institutions looking to bolster public spending, giving the consumer the freedom to spend now but pay later, as the Corona storm passes. 

 

Be more tech

 

As was the case during the financial crash of 2007, where many tech firms seized their opportunity to solve fresh problems and disrupt markets, this pandemic is no different. Prior to the Covid-19 outbreak, the appetite for retail finance was already strong. According to Accenture, the market was a $1.8-trillion golden ticket, with new entrants, such as Klarna, signing over 6,500 new merchants each month. The game has now changed but the opportunity and hunger for growth is even greater.

 

As we remain in lockdown, and for the foreseeable future beyond, increasingly, key purchasing channels will be digital in nature, sparking greater opportunities for organisations shifting their consumer strategies further towards e-commerce. For some businesses, this will require a pivot; for others a rapid pace change to get ahead; and then some will fall away against the competition – the survival of the most able to adapt.

 

As part of that retail opportunity, where e-commerce becomes a central strategy, point-of-sale finance already offers payment flexibility to the consumer and the technology is there ready to be used. As retailers must look almost exclusively to online in the short-to-medium term, so traditional lenders must look to speed up their rate of digitalisation in order that they too can capitalise on the value retail finance brings to the fore and avoid losing more business to new, market entrants.

 

‘U’, ‘V’, ‘W’, ‘L’ or ‘swoosh’, the upswing is coming

 

Some economists see the post-Corona future as a sharp bounce, others a longer, more drawn out, return. Whatever it looks like, the upswing will come. To be ready amidst the uncertainty requires bold steps, calculated risks and the right choices to be made, now. It’s about being prepared and, at this point, that might mean getting more done with less resource. But one thing is certain: for retail finance that upswing brings with it great opportunity – for new and established businesses; lenders and retailers, alike.

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