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The COVID-19 crisis has had a significant impact on the financial services industry. Some of the effects will be short-term, but a new report from Moody's identifies key long-term effects.

"We expect there will be far-reaching longer-term effects that will fundamentally reshape many aspects of the macroeconomy, business life and consumer behavior," says Stephen Tu, Vice President – Senior Credit Officer at Moody's Investors Service and author of the report. "Identifying the long-lasting impact of this experience will be paramount for credit analysis."

Moody's report identifies three key long-term impacts resulting from the COVID-19 crisis: 1) the expected recession will compel banks to maintain low interest rates for years to come; 2) an accelerated migration to digital processes and service, by both businesses and consumers; and 3) a shift toward social corporate strategies.

1. Low interest rates

Lower, or even negative, interest rates will remain for the duration of the overall financial crisis that most of the world is facing, which will erode profitability for banks that don't borrow on the wholesale markets. "Banks that predominantly finance their lending with customer deposits rather than borrowing on wholesale markets will see profitability eroded by persistently lower interest rates," Tu says.

2. Digital services

Sending most of the country's white collar workers home to work remotely has caused a large-scale shift to digital services and a rethinking of old business habits, the report finds. "The sudden and extreme experience of the pandemic is proving to be a catalyst where old habits are suspended, allowing consumers to experience new digital ways of accomplishing trade and commerce," Tu says.

Customers that may have been reluctant previously to embrace online commerce and banking have been forced to adopt the technology and companies that don't support these services may be faced with a shutdown of revenue.

Expense-heavy information-based businesses, such as financial services companies, are key beneficiaries of the work-at-home trend. "Those firms that more permanently and successfully adopt elements of remote working should have more cost savings to realize as this trend progresses," Tu says.

3. Corporate social behavior

Responding to societal trends, some companies are placing more emphasis on the needs of their stakeholders — employees, clients, society in general and the environment — than their shareholders, a trend that has gained traction among investors and CEOs, according to the report.

"We expect the rising economic hardship caused by the pandemic to accelerate this nascent trend toward stakeholder rather than rentier capitalism," Tu says, noting that the high unemployment rate may contribute to this sentiment.

Financial services companies have always had to balance the desire for profitability with the need to provide for the social good, and "the balance between these two forces has shifted in favor of the latter since the global financial crisis," Tu says.

Steve Salkin is a Managing Editor for ALM. He can be reached at [email protected].

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