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Bank cards are still important and challenger banks know it

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How UK Challenger Banks are taking on the High-Street Heavyweights

Why are challenger banks obsessed with their cards? Why are they bothering to make them so bright (Monzo), so metal (Revolut), so portrait (Starling)?  Aren’t bank cards a bit big banky? A symbol of the old way of doing things? Don’t Tom Blomfeld, Nikolay Storonsky and Anne Boden dream of a world without cards, a world where contactless means card less. That’s what consumers should want, right? When you first think about it, it doesn’t make sense. For us consumers we just want to be able to think ‘buy bread’ and it’s bought. Wouldn’t it be more ‘disruptive’ to do away with cards all together (e.g. Apple Pay)? The Facebook ads would write themselves, an open and empty palm with the words “introducing our new card” at the top of the frame. So why are challenger banks still bothering with cards?

Because they’re cool. And cool sells.

Peter Elms

Peter Elms

The impact these cards have on the consumer is way more ‘disruptive’ than any algorithm the challenger banks could dream up. Those pretty pieces of plastic are exploiting evolutionary psychology, in much the same way Apple did, when it decided that the Ipods headphones should be white and not black. That metal or coral card is a classic example of conspicuous consumption.  When you get that card out of your wallet, you’re demonstrating to people that you’re possibly richer and probably more intelligent than the person you’re showing it to. Or at least that’s what you want them to think. It’s a theory as old as mass consumerism itself, first introduced by Thorstein Veblen in his book “The Theory of the Leisure Class” published in 1899, that a product’s ability to show that a person is superior to others is more valuable than the problem it solves. You don’t buy a Rolls Royce because it’s a smoother drive than a Ford Escort.

More than that these new cards also help to create a perception that more people have them, than actually do, due to the way your memory works. In really simple terms, if something is ‘different’, you’re more likely to remember it, if you remember something more than other things (like white headphones) you’ll trick yourself into thinking it’s happening more than it is. That’s why it feels like everyone on the tube is wearing white headphones (they’re not). Add that to the fact that we are social beings (you don’t need to think we should be more like lobsters to agree with this statement), we need to fit in to get on (at one time we needed to fit in to simply survive). If you think everyone else is doing something and you’re being left behind, you’re way more likely to get involved. It’s the oldest marketing trick in the book, the fear of missing out, or #FOMO as they say on social media.

Putting aside evolutionary psychology for a minute, it’s really hard to market an invisible consumer product. If you can’t see something it’s far harder to find out about it. A bank card is one of the simplest ways for a challenger to market itself, it’s a miniature billboard that each of its users carries around with them. Its vibrant colour, shape, or material is a conversation starter, and word of mouth marketing is pretty effective (far more effective than advertising).

So it doesn’t really matter if there’s a smarter way to pay for things, it’s more important that other people think we’re smarter than them. That’s why we’re all going to be relying on cards quite some time to come. Trust me, my card is brighter than yours.

Peter Elms is a Director at Alpaca Communications

Banking

A quarter of banking customers noted an improvement in customer service over lockdown, research shows

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A quarter of banking customers noted an improvement in customer service over lockdown, research shows 1

SAS research reveals that banks offered an improved customer experience during lockdown

A quarter (27%) of banking customers noted an improvement in their customer experience over lockdown, according to research conducted by SAS, the leader in analytics.

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? 

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Banking

Swedish Bank Stress Tests in Line with Recent Rating Actions

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Swedish Bank Stress Tests in Line with Recent Rating Actions 2

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.

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Banking

Future success for banks will be driven by balancing physical and digital services

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Future success for banks will be driven by balancing physical and digital services 3

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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