Banks are still seeing the fallout from the PPI scandal, despite the years that have passed since it first emerged. The problem is that it is based on problems stemming back even further to historic mis-selling before banks were able to properly record or understand their full customer relationships. Until the past catches up with the future, we’re unlikely to see an eclipsing of future scandals by the lessons of the past, but with each passing year, we move further along the road to financial – and reputational – recovery.
The Financial Ombudsman Service has already highlighted packaged bank accounts as a potential area for concern. But what is important to keep in mind is that whilst there may be some storm clouds on the horizon, we can be confident that the lessons learnt from PPI and increasing regulatory oversight will ensure a future financial landscape focused on serving consumers better.
The big question, therefore, is whether one of these high-profile scandals will happen again – and what is being done to prevent it?
Bombarded with claims
It’s difficult to turn on the television at the moment without seeing a claims advert of some kind – even though these messages are based on events that took place more than 10 years ago. Even though many of the problems of the past may have been solved through a renewed focus on service and more stringent industry regulation, the after effects are hard to shake off.
With many banks choosing to simply pay-out rather than defend these claims, claims management companies (CMCs) found it very easy to profit from the mistakes of the banks. Ironically, it was then the CMCs themselves that attracted the ire of regulators for their overzealous approach to PPI.
Other scandals, including foreign exchange rate rigging, the Libor affair, payday lending and the mis-selling of complex interest rate hedging products to small businesses, have risked causing further damage the relationship between consumers and financial institutions. However, despite these challenges, the sector has actually made great progress in building bridges with both the regulator and the consumer in recent times.
A new public
One of the lasting legacies of PPI has been the introduction of a strong claims culture in the UK, with consumers now more aware of their rights than ever before. For financial services firms, this doesn’t have to be a negative, however increasingly empowered consumers mean that issues will come to light more quickly and can be dealt with sooner, if the right systems are in place.
As a result, many financial services firms in the UK have begun to use complaints to their own advantage and are investing more in their people, processes and systems. By taking this approach, any trends in complaints can be detected early and firms can subsequently adapt systems and have a chance of heading off any major issues before they grow into full-blown scandals.
These changes will give banks the ability to recognise problems that are brewing at the earliest possible stage, and take action accordingly, whilst at the same time assessing with accuracy the likely impact of any upcoming issue. What it won’t do, however, is fix historic issues based on mistakes made by firms in the past.
Root Cause Analysis
Firms are now starting to manage feedback more effectively by looking at the root cause of customer complaints, rather than simply firefighting each issue as it arises. This level of insight is vital, as financial providers need to ensure that fairness is ingrained in the structure of the business. By putting the customer at the heart of a firm’s activities in this way, firms can consistently meet – and in fact exceed – the regulator’s requirements.
Businesses will need to make sure that their approach is standardised, however. For example,if a firm has multiple call centres or points of contact they should all provide the same level of service and have the same ability to deal with customer complaints.
Consumers must have a consistent experience and, especially in the days of social media, mixed messages should be avoided at all costs. As a result, this understanding needs to run from the top of the boardroom to the bottom, since a disjointed approach makes it difficult to extract any worthwhile business intelligence from the data that is being collected.
Will these changes be enough to stop another financial scandal from occurring based on historic issues? It seems unlikely with the Financial Ombudsman Service (FOS)highlighting packaged bank accounts as a possible problem for the industry.
However, the fact the regulator is being proactive and highlighting areas where potential abuses could occur is a positive. Firms should welcome this kind of intervention and start to consider how they can change the way they do business for the better. Whilst recent changes can’t alter historic abuses, they can set firms up for efficient handling of these issues, and pave the way for fair and accurate compensation that reflects the true scale of the problem.
Collecting, collating and analysing customer feedback is something that should have universal appeal for all businesses in this sector. The insight that this activity delivers will help firms to improve internal processes can save cash in the short and long-term and will drive greater revenue and increase customer satisfaction.
The regulator is engaged with the sector and proactive in working with firms who want to do right by their clients. If the business is armed with the right tools to analyse customer complaints, problems can now be dealt with long before reaching crisis point.
A quarter of banking customers noted an improvement in customer service over lockdown, research shows
SAS research reveals that banks offered an improved customer experience during lockdown
This represents some good news for banks in an extremely challenging time, with 59% of customers also saying they’d pay more to buy or use products and services from any company that provided them with a good customer experience over lockdown.
The improvement in customer experience also coincides with a rise in the number of digital customers. Since the pandemic started, the number of banking customers using a digital service or app has grown by 11%, adding to an existing 58% who were already digital customers. Over half (53%) of new users plan to continue using these digital services permanently moving forward.
Brian Holden, Director, Financial Services at SAS UK & Ireland, said:
“It’s notable that in times of need customers value being able to communicate with their bank and place an even higher value on good customer service. A rise in the number of digital customers means banks can now reach a wider audience online, leveraging AI and analytics to offer a more personalised experience.
“There is work to be done, though. Even greater personalisation is needed if banks are to win over the 12% of customers who felt banking services deteriorated over lockdown. And this personalisation will need to get right down to a segment of one to properly reflect the unique circumstances some individuals now find themselves in due to the pandemic.”
While the number of digital users grew over lockdown, there is still a quarter (24%) of the banking customer base that have chosen not to make the switch to digital services.
Meanwhile, failure to offer a consistently satisfactory customer experience could prove costly for banks, with a third (33%) of customers claiming that they would ditch a company after just one poor experience. This number jumps to 90% for between one and five poor examples of customer service, so this just underlines how much retail banks can win or lose in these difficult times.
For more insight into how other industries across EMEA performed during lockdown, download the full report: Experience 2030: Has COVID-19 created a new kind of customer?
Swedish Bank Stress Tests in Line with Recent Rating Actions
The Swedish Financial Supervisory Authority’s (FSA) latest stress test results show major Swedish banks’ robust ability to absorb credit losses. The results support Fitch Ratings’ view that short-term risks have abated in recent months, and are in line with Fitch’s assessment of major Swedish banks’ capitalisation at ‘aa-‘, which was a factor when Fitch removed the ratings of Handelsbanken, Nordea (not covered by the FSA’s stress test) and SEB from Rating Watch Negative in September.
The FSA estimated about SEK130 billion of credit losses over 2020-2022 for the three largest banks (Swedbank, Handelsbanken and SEB) under its stress test. This represents about 220bp of their loans, or about 70bp annually. However, the banks’ pre-impairment profitability in the stress test could absorb credit losses of up to about 110bp of loans annually. Fitch’s baseline expectation is for credit losses below 20bp of loans in 2020 and 8bp-12bp in 2021.
Capital remained strong under the stress test. The average common equity Tier 1 (CET1) ratio fell by only 2.8pp (1.9pp if banks did not pay dividends) from 17.6% at end-June 2020. The capital decline was not driven by credit losses, which could be absorbed by pre-impairment profitability, but by risk-weighted asset inflation.
The three banks’ 3Q20 results showed that capital has been resilient despite the coronavirus crisis. The banks had a CET1 capital surplus over regulatory minimums, including buffers, of almost SEK100 billion (excluding about SEK33 billion earmarked for dividends). SEB had a CET1 ratio of 19.4% at end-September, Handelsbanken’s was 17.8% and Swedbank’s 16.8%.
The SEK130 billion credit losses under the latest stress test are lower than under the FSA’s spring 2020 stress test (SEK145 billion), which also covered a shorter period of two years. However, they are still larger than the actual losses incurred by the three banks during the 2008-2010 crisis. This is despite tightened underwriting standards by the three banks in recent years, including, in the case of SEB and Swedbank, in the Baltics, the source of most of their loan impairment charges in the previous crisis.
In its baseline economic forecasts, the FSA assumes a harsher shock to Sweden’s GDP in 2020 and 2021 (-6.9% and 1%, respectively) than Fitch’s baseline (-4% and 3.4%), although it assumes a similar recovery by end-2022. It also assumes real estate price corrections, which appears particularly conservative in light of a 11% housing property price increase over January to November 2020.
The ratings of Handelsbanken (AA), Nordea (AA-) and SEB (AA-) are on Negative Outlook due to medium-term risks to our baseline scenario. The rating of Swedbank (A+) is on Stable Outlook, reflecting significant headroom at the current rating level following a one-notch downgrade in April due to shortcomings in anti-money laundering risk controls.
Future success for banks will be driven by balancing physical and digital services
Digital acceleration due to COVID-19 has not eliminated the need for bank branches
Faster service (23%), smaller queues (26%) and longer opening hours (31%) are among customers’ biggest asks of their bank branch, new research from Diebold Nixdorf today reveals. But with 41% consumers saying they would be comfortable to engage with all banking services via an app, it is vital that banks respond to the full spectrum of customer needs – balancing and evolving their offerings on multiple fronts.
A third (35%) of customers say they will always want access to physical, in-branch banking services in some capacity and one in ten (10%) consumers will never bank predominantly online in the future. This demonstrates that there remains an important role for the services a branch provides. This role, however, continues to shift away from purely transactional banking:
A quarter (26%) value face-to-face advice when it comes to their banking needs
One in five (18%) seek advice on different products
17% want to speak to the staff or other customers.
Matt Phillips, Diebold Nixdorf vice president, head of financial services UK & Ireland, said: “The majority of banks have spent the last decade focusing on their digital strategies and investing in improving – or establishing – their online customer experience. However, the data shows that there is still an essential role for physical branches. Banks now increasingly face the challenge of continuing to provide customers with access to a range of physical and as well as digital services, giving them the flexibility to choose the best service for them at any given moment in time.”
When looking beyond the impact of COVID-19, planned branch visits by customers are expected to rebound to 28%, following a dip to 11% during lockdown. And when asked about the new services they’d like to see inside their bank, sixteen percent of respondents said more self-service machines would improve their in-branch experience.
Matt Phillips continues: “In a world that is fast evolving and where the future is digital, there’s no doubt that high street banks must, and are, responding to the needs of highly digital customers. But not every customer requirement is digital. There is still a strong need for physical bank branches and the interaction and services they offer, and striking this balance between physical and digital is where the industry must come together to provide solutions. For example, building a strong, leave-behind strategy is something we’re seeing across the board when banks have to close branches, ensuring customers have access to self-service machines to complete all their transactional needs.”
The Coming AI Revolution
By H.P Bunaes, CEO and founder of AI Powered Banking. There is a revolution in AI coming and it’s going...
Q&A with Joe Steele, Head of Workplace Technology at Starling Bank
In just under a year, many businesses had no choice but to go online and with digital transformation on the rise...
How financial services organisations are using data to underpin future growth
By John O’Keeffe, Director of Looker EMEA at Google Cloud In addition to the turmoil caused by the COVID-19 pandemic, a...
Three questions the financial services industry must answer in 2021
Xformative, a Mastercard Start Path recipient, shares what these questions mean for fintech partners and their innovations This year, fintechs...
A quarter of banking customers noted an improvement in customer service over lockdown, research shows
SAS research reveals that banks offered an improved customer experience during lockdown A quarter (27%) of banking customers noted an...
Is Digital Transformation the Key to Business Survival in the New World?
After a turbulent year, enterprises are returning to the prospect of a new world following an unprecedented pandemic. Around the...
Virtual communications: How to handle difficult workplace conversations online
Have potentially difficult conversation at work, like discussing a pay rise, explaining deadline delays or going through performance reviews are...
Black Friday payment data reveals rapid growth of ‘pay later’ methods like Klarna
Payment processor Mollie reveals the most popular payment methods for Black Friday Mollie, one of the fastest-growing payment service providers,...
Brand guidelines: the antidote to your business’ identity crisis
By Andrew Johnson, Creative Director and Co-Founder. How well do you really know your business? Do you know which derivative of your...
COVID-19 creates long and winding road for startups seeking investment
By Jayne Chan, Head of StartmeupHK, Invest Hong Kong Countless technology and other companies describe themselves as innovators, disruptors or...