We need frictionless banking to tackle COVID-19

Digital banking. /VCG

Editor's note: Ravish Bhatia was a Yenching Scholar at Peking University and hosts the Use Case podcast. The article reflects the author's opinions and not necessarily the views of CGTN.

Sometime last week, I was recording a podcast with a banker who had spent more than two decades working with major banks across Asia, and something he said stuck with me. He said in the last 72 hours, he had received phone calls from CEOs of three major banks asking how to go digital as quickly as possible.

What the ensuing lockdowns across nations all over the world in the wake of COVID-19 have meant is that what was supposed to be a bank's five-year strategy to shift to digital-first banking has suddenly become an immediate requirement.

Across the world, individuals, businesses and governments have incurred extreme economic costs by maintaining lockdowns – which thankfully has helped slow down the spread of the virus.

However, thousands have been laid off, several daily wage and migrant earners have left cities unable to make rent, and many more face uncertainty over their survival after the lockdowns end.

To combat this, governments are trying to find a way to revive their economies by putting money in the hands of people and small businesses either through direct or indirect means.

In the U.S., for example, 380 billion U.S. dollars have been allocated under the Paycheck Protection Program (PPP) to provide small businesses with loans for operating and payroll costs. In other countries, like India, the central banks are providing liquidity to banks so that they can pass it off to consumers by reducing the repo rate and providing fresh capital infusion.

But many might be curious about how this money can be effectively transferred to the hands of small businesses and consumers, many of whom live in shanty towns and villages where banking is mostly undertaken through traditional bank branches or shadow banking, when people can't even step out of their houses without risking their health.

Online payment. /VCG

To avail oneself of a loan, one needs to risk stepping out and sitting in a physical branch to complete an often lengthy bureaucratic process. This embedded friction in banking is likely to have an impact on the efficacy of the big liquidity push that governments are trying to undertake. It is also the reason most banks feel the urgent need to go completely digital.

Globally, we spent the last decade absorbing what is often called the first wave of fintech, where mobile-based payments became acceptable. The obvious evolution to that wave is bringing banking 100 percent online, and we are already seeing a wave of technology-first financial companies doing that.

Popularly called as "neo-banks," these banks are a part of a trend that began with firms like Monzo and Atom Bank, where it was possible to avail the entire suite of banking services on a mobile app instead of a brick and mortar institution.

The availability of digital identification systems and the use of alternative data sources to calculate credit scores has meant that it is much easier to approve a loan for someone who previously did not have any formalized banking exposure or credit score.

Why is this important? Because small businesses and individuals across the world without access to formalized banking are also those who have been asymmetrically impacted by the lockdowns compared to larger businesses that have better access to credit. They are also the ones in the most desperate need of access to the capital being infused by governments. Neo-banks and 100 percent digital banks can change that.

In Wuhan, for example, as the city emerges from a complete lockdown, Alipay is providing "zero contact" loans with Mybank, an online bank under Ant Financial that focuses on small and medium-sized businesses. In India, Open is emerging as a popular, completely digital banking service provider that provides credit and banking services to small and medium-sized businesses.

The venture capital industry needs to focus on the opportunity for disruption, and governments also need to ensure that the regulatory environment is conducive to the growth of such services.

The economic impact coming out of the coronavirus crisis will be far bigger than anything our generation has previously seen. Luckily, this generation is also most likely to adopt 100 percent digital banking, which can ensure that the government's efforts to infuse capital into the system are actually passed on those who need it most – without much friction.

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