How has Covid-19 Impacted the Financial Sector?
The Coronavirus pandemic and subsequent lockdowns have had an extensive impact on every industry globally, and the financial services industry is no different.
The UK’s financial watchdog has said that around 4,000 UK financial firms are at a high risk of going under due to the coronavirus pandemic. The FCA said its survey of 23,000 firms found insurance brokers and investment management businesses suffered lower liquidity during the first lockdown. 59% of respondents expected the crisis to reduce their net income, with 3% of these expecting the impact to be more than 75%. The survey did not cover the 1,500 biggest financial companies, which are regulated for financial stability by the Bank of England.
To get a better understanding of what is happening in financial services, let’s first delve into the pandemic’s effects on the industry’s individual sections.
The insurance industry in the UK is the fourth largest in the world, and with the UK particularly affected by Covid-19 what has been the impact on insurers?
The Association of British Insurers expects the UK insurance industry to pay out a total of £900m for coronavirus-related claims, as expected, travel insurance has been the most affected, with reports of £275m anticipated to be paid to customers affected by cancellations alone. This is the highest annual figure for cancellation payouts recorded; the previous highest year was 2010 following the Icelandic volcanic ash cloud.
In addition, there has been a compounding issue, with all but essential travel banned, and flights at a standstill, fewer and fewer people are booking holidays, and subsequently purchasing travel insurance.
With many insurance companies presuming to report losses this financial year, there is continuing speculation that insurance premiums are due to rise.
According to the Bank of England, the Nation’s collective credit card balance stands at £61.4 billion. With the current state of the economy, primarily due to the coronavirus pandemic, lenders have withdrawn many of their products and tightened their lending criteria.
Several credit cards have disappeared from the market, according to ClearScore, the choice of credit products has shrunk by over half due to the economic fallout of coronavirus. Whilst there are fewer options available for new borrowers, there has been a number of providers offering payment holidays and financial help for their current customers.
Buy Now Pay Later
As many as 35% of adults say they’ve relied more heavily on Buy Now Pay Later schemes since the coronavirus pandemic, and 23% say BNPL suits them better than other forms of debt; however, 13% say the availability of BNPL does make them spend more money than they otherwise would.
Buy Now Pay Later schemes are rapidly becoming one of the most popular forms of borrowing. In a recent review of the unsecured credit market, the Financial Conduct Authority has now stated “BNPL products which are currently exempt from regulation should be brought within the regulatory perimeter as a matter of urgency. The use of BNPL products nearly quadrupled in 2020 and is now at £2.7 billion, with 5 million people using these products since the beginning of the coronavirus pandemic. The emergence and expansion of unregulated BNPL products gives consumers a significant alternative to more expensive credit, but this also comes with significant potential for consumer harm.”
With millions of people facing lower incomes, furlough and redundancies, it’s no wonder that over 1.6 million homeowners took mortgage holidays during the pandemic.
There was also a fall in new mortgages, with lenders tightening their lending criteria, pulling mortgage deals from the market and approving fewer mortgages.
Mortgage deals for first-time buyers with low deposits have been disappearing since the start of the pandemic according to Zoopla, who also stated that the number of mortgages available for buyers to choose from has fallen to the lowest level since 2010.
It’s not all doom and gloom
In conclusion, though the pandemic represents apparent challenges for the financial services industry, it has also bought with it the opportunity for businesses to show their ability to adapt and overcome these hurdles.
Covid-19 has accelerated the need for digitisation, which was something that many banks and financial institutions were slow and seemingly reluctant to adopt pre-pandemic.
There have been immense changes to the way consumers live, work and socialise, as well as how they chose to manage their money. More people than ever have moved to online banking, and businesses have responded by offering more services available to the online world.
The pandemic has seen more financial companies’ priorities shift, focusing more on customer needs, sustainability and humanising their brands.