Three ways Covid-19 will change financial services

The Covid-19 pandemic will likely have far-reaching effects on the financial industry for years to come, says a new report from Moody’s Investors Service.

The rating agency acknowledged that many of the long-term effects are not yet known, but highlighted three areas where it expects an enduring impact on the financial sector — interest rates, digital demand and what it calls “stakeholder capitalism.”

In terms of the rate outlook, Moody’s said it expects central banks to keep rates low or negative for “several more years,” potentially squeezing banks’ profits.

The agency also expects the pandemic will accelerate the shift to digital processes and services for both consumers and firms.

“Within financial services, social distancing has created a surge in demand for online commerce, contactless payments and digital cash transfers,” it said.

Further, “financial services companies stand out as a key beneficiary of the work-at-home trend,” the report said. Firms that take advantage of the success of remote working arrangements may be able to generate significant cost savings.

Moody’s also sees the pandemic causing banks and insurers to more seriously weigh the needs of clients, employees and society at large.

“We expect the rising economic hardship caused by the pandemic to accelerate this nascent trend toward stakeholder rather than renter capitalism,” it said.

For example, governments are asking banks to help limit the economic damage through increased lending and by curbing dividends and buybacks — indicating that banks are expected to play a broader social role.

“Banks are likely to be constrained in their ability to act as fully free agents for some time, which may act as a constraint on a significant, sustained recovery in profitability for years to come,” Moody’s said.

Similarly, the agency noted that some insurers are responding to social and competitive pressures “by refunding profit from expected lower loss rates back to their clients, and extending pandemic risk coverage beyond their contractual liability.”

Longer term, it said, “ex-gratia payments may become an option in some cases to preserve customers’ perception of the relevance of insurance, and to avoid harsher societal or regulatory-led business repercussions.”

The Moody’s report also predicted that governments may partner with insurers “to set up insurance schemes that will cover losses in future pandemics.”

Finally, the report noted that environmental, social and governance (ESG) investing could also increase as a result of Covid-19.

“The largest institutional investors and holders of equity, notably sovereign wealth funds and pensions, are increasingly seeking to incorporate broader ESG considerations and get utility from their assets beyond investment return,” it said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.