By: Nabil Khalil, Executive Vice-President of R&M Middle East, Turkey and Africa
Worldwide, IT investments in the financial sector grew more than 5% in 2017 and market research firm Gartner has forecast an investment volume of $519 billion for 2018, representing a further increase of 4.1%.
In the Middle East, the Banking and Financial Services Industry (BFSI) leads digital transformation with a 24.5% share of the market in 2015 that is projected to maintain a robust CAGR of 17.9% over the 2015-2021 period[i].
While it is clear that the BFSI sector is currently focusing on modernizing IT, new software and IT hardware alone are not going to be enough. The underlying network infrastructure upon which traffic in the data centre is actually transmitted is often treated as an afterthought and this presents a potential business risk. Unless this critical network layer can deliver the performance expected of today’s applications, users- both customers and employees- will face issues when they try to connect to the Bank’s digital services.
This challenge is exacerbated by the fact that due to competition, digital services are being brought to market at an ever-increasing rate, resulting in an explosion of data traffic. Financial institutions have to think about higher categories of data transmission and fundamentally new LAN infrastructures. Agility and scalability of networks are essential to be able to offer innovative services at all times and to tap into new revenue streams.
There is no way a bank can satisfy future requirements with conventional, static office networks. Unfortunately, the long-term requirements for bandwidth, headroom and scalability are not being paid enough attention to when it comes to investment planning. To date, most financial institutions have LAN infrastructures that were designed to cope with no more than 1 Gigabit Ethernet (GbE). Today however, transmission performance of 10GbE, ten times as much, is required, and in the data centre segment, even greater performance levels have to be ensured.
It isn’t just customer experience that hinges on high-speed connectivity as high-performance communication is becoming a critical corporate requirement as well. Mobile and fixed workplaces, teams working over geographically dispersed locations, virtual applications and multimedia visualizations are all vital elements of the modern Bank and they all have to be able to be connected fast.
Planning for Success
Addressing these needs and developing a network infrastructure for long term success requires forward thinking network planning and the main criteria which play a decisive role in this are:
- Stricter security, risk and compliance requirements.
- Innovative applications such as big data, virtualization, artificial intelligence, cloud computing, mobile banking, decentral transaction concepts such as blockchain.
- Competition from the FinTechs and internet groups.
- The high expectations of customers looking for reliable, secure real time services available everywhere.
Designing for these requirements, the LAN should be planned with the greatest possible headroom. Unlike software and active components like servers and storage, cabling systems have to support new applications and equipment for up to twenty years. For this reason, they should be designed on a modular basis so that they can be extended or upgraded at any time with a ‘plug & play’approach.
Alongside headroom for higher bandwidth and data transmission with no delays, security is the Banks’ greatest concern with respect to networking. Maximum security can already be integrated at the networking level by using systems such as tamper-proof shielding, and Automated Infrastructure Management (AIM) which protects connections from incorrect operation and manipulation through real-time monitoring.
While a LAN with 10 GbE transmission performance would likely exceed the current needs of financial institutions, increased digitization of services, mobility of the workforce and expansion of business to the network edge will soon demand utilization of all available bandwidth. Strategic investments made today, will determine the digital success of financial institutions for years to come and provide them with a platform upon which they can rapidly innovate to gain a competitive edge.
R&M in the Banking Sector:
R&M draws on its comprehensive international experience in the financial sector to support the BFSI industry with specific solutions for structured cabling in office buildings and data centres. The cabling specialist has been supplying renowned Swiss banks for decades. Most recently R&M has shown its specific expertise in major projects in Zurich, London, Cairo, Amman, Abu Dhabi, Mumbai and Shaoxing where it has provided international teams and local support for installation tasks, training sessions, quality assurance and project management.
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.”
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