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Impact of COVID-19 on Retail Banks

Organizations around the world have been significantly impacted by COVID-19 pandemic and are still grappling with its consequences that are speculated to persist into an unforeseeable future. Organizations in the financial services sectors are no exception. But, according to Daniel (2020), banks have been dealing with different challenges including higher operations costs, new technology and changing customer expectations, all within a changing regulatory landscape - even before the pandemic. Therefore, the COVID-19 pandemic is just another challenge added to the mix of challenges. This essay seeks to evaluate the sources of issue faced by retail banks during the COVID-19 pandemic and the actions they have taken to address those issues.

COVID-19 presented banks with various challenges including decreasing profit margins, highly competitive threats from ‘challenger banks’ (i.e. online-only financial service providers), and adherence to stricter regulatory requirements (Baicu et al, 2020). Moreover, Wojcik & Ioannou (2020) observed that in the wake of COVID-19, retail banks began to face more challenges associated with the lockdown-related shock in demand and supply of banking services, a phenomenon which will continue to shape the future of banking business. Additionally, Flogel & Gartner (2020) wrote that the expenses incurred during the COVID-19 pandemic are likely to cause a cost and revenue mismatch for most retail banks, making it harder to sustain normal operations. As a rejoinder, Korzeb & Niedziolka (2020) pointed out that the severe impacts of COVID-19 pandemic on business profitability likely to cause the increase of non-performing loans as well as non-performing assets.


But the COVID-19 pandemic has not only caused such direct challenges to retail banks but also indirect challenges. For instance, Setiawan & Fatimah (2020) observed that fraudsters and criminals have taken advantage of the mass confusion, fear, uncertainty and the vulnerability that comes from it to sell fake banking products, engage in phishing and loan moratorium fraud – stealing from customers and impacting on the retail banks. Setiawan & Fatimah (2020) also noted that unfortunately, customers unethically collude with the fraudsters to commit financial crime and claim for damages from the bank. Banks, therefore, must deal establish risk management measures to keep fraudsters at bay.

COVID-19 pandemic has impacted more on mortgage business of retail banks compared to other lines of businesses. As unemployment reaches unprecedented levels, many households are struggling to maintain their mortgage payments – a major problem reminiscent of the 2008-09 financial crisis, even though there are some key differences. For instance, as opposed to the 2008-9 financial crisis, most governments, through banking regulators, have acted quickly to minimize the initial impact of the pandemic on borrowers. For example, in the USA, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was introduced to grant relief options for loans backed by the federal government, which covers 70% of the homeownership (Daniel, 2020). However, according to the Mortgage Bankers Association (2020), this relief has somehow given a significant burden on retail banks giving mortgage services because they now must pass the missed payment to investors.

As a result of the uncertainty and ongoing lockdown associated with COVID-19, the household spending and that of the wider economy has significantly been affected (Gossling et al, 2020). Whereas government guarantees in major economies such as the UK offer some cushioning to corporates and SMEs, the intensifying earning challenges as a result of increasing loan defaults and weakening business volumes have proved challenging for most retail banks (Ozili & Arun, 2020).

The uncertain future economic outlook has had a significant negative impact on the near-term retail bank performance (Thomas & Chackole, 2021). Against this backdrop, Kalmani & Shilpa (2020) speculates that if the subsequent economic recovery grows weaker, banks will face more challenges with weak asset quality and low profitability, especially the banks that had weaker risk buffers before the pandemic. However, Setiawan & Fatimah (2020) observed that most UK retail, banks have built stronger risk buffers over time, and can therefore absorb more credit-loss costs without significantly depleting their capital reserves – even in a more challenging environment.

To continue financing the economy amid the increasing credit risk, banks have been called upon to evaluate the difference between a purely temporary impacts meant to recover in the short term, and longer-lasting impacts that may require managerial actions and reclassification. In doing so, according to Korzeb & Niedziolka (2020), banks must look forward to information update, especially in the sense of how information can be integrated into the risk management parameters, given the unique nature of COVID-19. But this may not last longer than the existing cyclical economic downturns caused by financial factors such as decline in oil prices (Baicu et al, 2020).

Furthermore, Flogel & Gartner (2020) argued that banks have considered updating their default rates and aligning them to the waivers or cushioning policies introduced by regulators and other authorities - so that that they match up the temporary nature of the pandemic as well as the expiring creditworthiness of their clients. In the spirit of adapting to the environment, Setiawan & Fatimah (2020) observed that banks have defined recovery rate timescales that are most appropriate for them and enable them to achieve positive results. However, these measures are largely medium-term and are largely been derived from loan recovery policies that could introduce more forms of deferred payments or agreements that cause longer loan maturity periods (Baicu et al, 2020).

Banks have also sought to change their securitization landscape to deal with changing credit terms and debt restructuring. According to Setiawan & Fatimah (2020), several banks in the European market have recently completed significant disposal operation of non-performing loans, leading to a significant reduction in the non-performing loans ratio. As one of the prominent trends in Europe’s banking sector, the disposal of impaired loans, the emergence of a secondary market for bad debts and the amalgamation of large assets in the construction industry are likely to persist.

Even if the real economy has experienced a big hit by the COVID-19 pandemic, the banking systems have also not been spared. According to Korzeb & Niedziolka (2020), banks must deal with changing means of service delivery such as the creation of more space for social distancing in the banking hall, as well as the digitization of most systems to ensure they remain operational regardless of less physical interaction. This is not only for the sake of adhering to the government’s COVID-19 rules but also an ethical practice because they owe the responsibility of protecting customer’s health and well-being. Thus, the banks have to strike a balance between saving on the costs associated with these changes and the ethical responsibility of protecting customer’s lives. However, Baicu et al (2020) argued that these disruptions are somehow positive because they have influenced digitization of the sector and enhanced the banks’ ability to deliver excellent customer service.

Even the most branch-centric banks are now forced to use customer service channels that they had never thought of using before or even placed as part of their strategic items. Baicu et al (2020) argue that this part is particularly challenging for banks because, despite the reduced physical interaction with their customers, they must demonstrate that they are still in proximity with the customers. But, with a clear understanding of the operational gaps they are facing, some banks have maintained more contact with their customers than before COVID-19 by being more inclined to transform their digital platforms in partnership with the financial technology community.

COVID-19 pandemic has also tested the banks’ operational resilience in terms of how innovative they can be to ensure continuity in business. The social distancing requirements and curfew have forced banks into developing and implementing artificial intelligence, robotics (e.g. advanced BOTs) and mobility systems (e.g. promoter systems and authorization) that can be applied in this critical pandemic moment to enable easier operations in the absence of employees (Thomas & Chackole, 2021). COVID-19 pandemic has necessitated banks to reimagine their operations several ways including fast-tracking their technological innovation, developing new strategies for branch banking, reinventing customer service and re-evaluating their operating models. Regarding fast-tracking technological innovation, as Setiawan & Fatimah (2020) noted, banks have realised that demand for digital banking has is growing at an unprecedented rate and the trend is likely to continue for the next couple of years. Consequently, most banks have made it a priority to move into the digital space, triggering consumer behavioural shift amid the change in customer expectation and inclination towards contactless interaction (Setiawan & Fatimah, 2020). Moving forward, banks should assess all their operational processes, services and products to identify any gaps in the customer journey as well as any obstacles towards the elimination of physical interaction. Furthermore, the rate of digital adoption as well as technological enhancements should be a key performance indicator for banks. This requires constant collaboration and partnership with fintech to increase their capacity and meet the growing customer needs.

Another important recommendation is how they can humanize the front-facing digital channels, especially in humanized services such as advisory complain management and sales. They can do this by adopting smart banking solutions such as virtual banking and video banking that can be useful in providing the much-desired human interaction.

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Meanwhile, banks must also reimagine their branch-banking strategies even as customer traffic in the branches reduce. Their overall channel strategy should be re-evaluated to reduce their overreliance in the branches as a source of revenue. The banking hall channel can be replaced with a humanized digital channel. However, the remaining physical branches should consider social distancing as one of its key elements – incorporating it into the operating systems by design.


Baicu, C.G., Gârdan, I.P., Gârdan, D.A. and Epuran, G., 2020. The impact of COVID-19 on consumer behavior in retail banking. Evidence from Romania. Management & Marketing. Challenges for the Knowledge Society, 15(s1), pp.534-556.

Daniel G. 2020. CARES Act provides relief to some homeowners during coronavirus outbreak, US Government Accountability Office Watch Blog, April 28.

Flögel, F. and Gärtner, S., 2020. The COVID‐19 Pandemic and Relationship Banking in Germany: Will Regional Banks Cushion an Economic Decline or is A Banking Crisis Looming?. Tijdschrift voor economische en sociale geografie, 111(3), pp.416-433.

Gössling, S., Scott, D. and Hall, C.M., 2020. Pandemics, tourism and global change: a rapid assessment of COVID-19. Journal of Sustainable Tourism, 29(1), pp.1-20.

Jian, Q., challenges and policy responses to labor relations under pandemic prevention and control: china’s experiеnce in building decent work. «ТРУД И СОЦИАЛЬНЫЕ ОТНОШЕНИЯ» Рецензируемый научный журнал, p.81.


Korzeb, Z. and Niedziółka, P., 2020. Resistance of commercial banks to the crisis caused by the COVID-19 pandemic: the case of Poland. Equilibrium. Quarterly Journal of Economics and Economic Policy, 15(2), pp.205-234.

Mortgage Bankers Association 2020. “Share of mortgage loans in forbearance increases to 8.53%,” June 8, 2020.

Ozili, P.K. and Arun, T., 2020. Spillover of COVID-19: impact on the Global Economy. Available at SSRN 3562570.


Thomas, B. and Chackole, D.S., 2021. Economic Impacts Of Covid 19. European Journal of Molecular & Clinical Medicine, 7(7), pp.5812-5819.

Wójcik, D. and Ioannou, S., 2020. COVID‐19 and Finance: Market Developments So Far and Potential Impacts on the Financial Sector and Centres. Tijdschrift voor economische en sociale geografie, 111(3), pp.387-400.

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