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Quick take: How the pandemic changed commercial banking

  • The commercial lending market has changed throughout the pandemic, as supply/demand imbalances and macroeconomic factors caused narrowing margins.
  • The pandemic forced banks to speed up digital processes in their commercial segment as businesses were forced to conduct their operations online.

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Quick take: How the pandemic changed commercial banking

At the beginning of 2021, the outlook towards the pandemic and its impacts on the economy began to show some silver linings. 

On the supply side, there was abundant liquidity from banks after a year of being more withdrawn towards lending.

But the demand wasn’t really quite ready to meet that supply. Companies had sufficient capital set aside thanks to PPP proceeds and savings from pared-back operations.

This created an imbalance in the market, intensifying competition for a larger share of a shrinking pie. This forced banks to find new strategies for driving up yields, according to Gita Thollesson, senior strategic business advisor at Q2. 

In her most recent report on the state of commercial banking, she outlined five main takeaways from her analysis of the market in 2021: 

  • The banking market is poised for a rebound: Inflation continues to drive loan demand as companies are looking to get financing before interest rates rise.
  • Favorable credit outlook: With low delinquency rates, charge-offs at historic lows and negative loan loss provisions, banks are optimistic about credit quality.
  • Net interest margins continue to be under pressure: Spread compression and intensifying competition have pressured margins.
  • Accelerating banking transformation: Stable and rigid processes had to become more agile due to demand for digital solutions, remote working, AI, branch closings and fraud.
  • Retaining relationship primacy has taken hold: Commercial banks have deepened their focus on becoming a customer’s primary bank.

Declining unemployment numbers and the economy showing more signs of strength poised corporations to uptick their spending and start making more investments compared to pandemic times. 


These investments, however, may not spur the commercial banking market’s long-awaited resurgence in loan demand. Corporations have been flush with capital and many can finance even the most ambitious expansion initiatives with existing deposits rather than tapping the bank loan market, Thollesson told Tearsheet. 

But this is now starting to change as they began utilizing their deposit accounts, signaling a return to the bank loan market to fund their expansion activities. 

Digital transformation

While the shift towards digital banking has been more prominent in consumer segments, the commercial market has lagged behind in terms of transitioning towards new technologies and digital capabilities. 

But the pandemic really forced banks to make the switch as businesses needed to be able to conduct operations digitally, Thollesson said. 

For example, new customer onboarding used to be one of the biggest obstacles to achieving a new relationship, as the company needed to send someone physically into the branch to sign paperwork. But that’s now changed to digital onboarding, making it easy and seamless to replace the need for in-person visits. 

It takes a lot of effort to win a new customer, and can be an even greater hurdle to hold onto that relationship. Thollesson noted that in her series of discussions with banks, a relatively new term – primacy – kept popping up. 

“The banks that we spoke to were all very fluent in talking about the benefits of primacy, not just in strengthening relationship profitability, but also in terms of relationship stickiness – in other words, holding on to a customer. If you have the full relationship, customers tend not to shop as much. And if they do shop, then the primary bank at least gets a last look. So there’s tremendous benefit in achieving primacy,” she said.

But even though banks had set relationship primacy as a priority, many hadn’t established specific tactics to execute against this strategy. 

“It was a situation where everyone knew that this was critical, but they didn’t have a concrete plan. Over time, banks started to actually put tactics in place, and some are further along than others. But execution is absolutely the biggest challenge,” Thollesson told Tearsheet. 

And quick onboarding and competitive pricing aren’t enough to lock in the business relationship – there are a lot of internal obstacles that banks need to overcome. Thollesson noticed many examples where banks priced competitively expected to win the full relationship, passing that opportunity along to a treasury partner, and then falling off the radar because they didn’t have a way of communicating seamlessly across the different constituents. 

“It’s not just about fulfilling a loan request, it’s about finding a full solution that taps into all the different banking solutions available to help the company achieve their business goals,” she concluded.

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