BANKING OVERHAUL SHAKES UP THE MARKET
By John Lunn, Executive Director, transformation consultancy Moorhouse
The news that the Bank of England is seeing a big increase in institutions applying for lending licenses could lead to an industry shake up. Until now it looked as if banks had emerged from the financial crisis relatively unscathed, carrying on in similar ways to before, despite having to comply with much stricter regulation. However, regulators have been making changes to try and open the market up and give consumers choices, and it looks like this is starting to take effect. As more financial institutions are granted licenses, banks will have a new challenge as they face increased competition for their customers. There is potential for this to be a real catalyst for change in the industry. Financial organisations must focus on putting the customers at the heart of the business if they want to keep their current customers and win new ones.
There has been an unprecedented demand for lending licences, with three expected to be approved this year. At least six more will be permitted by early 2015. The number of submissions has been so high; the Bank of England may have to employ more staff to deal with these applications. Previously, new lenders needed more capital than the established banks, putting them at a competitive disadvantage. They were also required by the regulator to confirm that the capital had been committed when their backers were often unable to release the funds until the licence was granted. These obstacles have been removed and the process speeded up under the Bank of England’s new approval regime. This was instigated to increase competition in the industry for the benefit of the customer.
By opening the market up to new entrants, regulators are creating the conditions for true competition and giving consumers genuine alternatives to the established operators. This really is a wake-up call for the traditional financial institutions. They have a long way to go to win the confidence of customers; innovation and transformation in their businesses is going to be crucial to remaining competitive with new entrants snapping at their heels. Whichever organisation truly succeeds at putting customers and their experience at the heart of what they do could reap big rewards.
Financial services organisations have also been hampered by the ever increasing regulatory pressures. Moorhouse research undertaken in the UK FS sector in 2012 showed that 85 per cent of senior executives believe regulatory change was preventing their organisation from addressing other urgent business priorities; over half (61 per cent) stating significantly. The need to implement regulatory change is impacting on all ‘business as usual’ activities as businesses are unable to focus on anything other than compliance. However, with the sheer volume of regulation unlikely to slow down, organisations must adapt to ensure that their regulatory change programmes provide more benefits than simply compliance, or they will not have a balanced portfolio of change activity to help them remain competitive and effective.
The key to overcoming these regulatory demands and the threat of new entrants is to see this change as an opportunity to build a culture that puts customers at the heart of the business. Traditional financial service organisations can no longer use the increase in sweeping regulatory reforms as an excuse for not focusing on customer service. Previously, newer banks have struggled with gaining significant momentum and attracting customers from traditional financial organisations.
However, this is not the barrier to new entrants that it once was and this shift is evident in other industries. Changing mobile providers used to be much less attractive as customers would have to change phone numbers if they wanted to change suppliers. For many, this was considered to be too much trouble. Once this barrier was removed – and people were able to swap providers easily and keep the same number – telecommunications companies have had to focus much more on customer service to ensure they retain and win new customers.
This is a taste of what financial organisations are now facing. It is now much easier to change banks as customers’ can simply use a current account switching service. This is a much simpler process as it only takes seven days to happen. As the obstacles in switching banks reduce, customers are going to be much more open to taking their business elsewhere. This, combined with new market entrants, heralds a transformation in the sector.
Since the financial crash, confidence in the banks has fallen and there has been a legacy of negative assumptions about financial organisations. Banks have recognised the need to change their culture to rebuild the public’s trust in them. Barclays, for example, have pledged to publish their complaints data every three months, twice as often as required by the Financial Conduct Authority, as they try to drive down complaints.
However, if FS organisations are serious about winning the confidence of customers, they must examine their portfolios of change activity through the lens of enhancing customer experience and make the necessary changes. The overall aim of legislation is to protect customers and yet too many organisations are more focused on just achieving compliance and avoiding fines. Organisations need to define and maintain a single strategically aligned portfolio of projects that tackle total business strategy, instead of creating separate programmes to tackle regulatory changes.
Financial organisations have been making inroads to improving trust and consumer confidence levels have increased as the economy improves. However, the flood of new entrants into the marketplace is likely to pose a threat to established institutions that are hampered by legacy issues. Improving customer experience is the only way to remain competitive. Financial organisations must ensure they are not hindered by regulation or delay transforming their change programmes to reflect the customers’ needs and wishes.