By Falk Rieker, global VP, global head of IBU banking at SAP SE
Well before COVID-19 shook up business practices and upended personal lives, the banking industry was heavily focused on digital transformation and digital disruption. Experts warned that banks should prepare for everything from startups providing 24×7 services to fintechs and pure technology companies disrupting the financial services market. Without this preparation, how could these firms compete with other banks?
Now, catalyzed by the global pandemic, banks need to refocus. Concerns about digital disruption and non-traditional competition are no longer the priority. Future success will be determined by how well banks innovate and stay ahead of the technological curve.
At the recent SIBOS conference, there was a lot of talk about the need to embrace innovation. The importance of the cloud for financial services companies who want to innovate using intelligent technologies such as machine learning, artificial intelligence, and blockchain was highlighted.
And bank leaders are beginning to take note. A recent SAP & Oxford Economics research study found that 83% of leaders are prioritizing innovating on existing products and services. But banks must also look ahead, brainstorming and adopting visionary methods to apply the technology.
Brainstorm problem-solving possibilities
For example, how can intelligent technologies help banks break down long-established internal silos? We see many examples where a customer is trying to communicate with a bank about some need or problem. Perhaps the customer tries the chat feature but doesn’t get a helpful answer. Maybe there are multiple interactions with a call center agent, or it takes an entire lunch break to resolve a simple problem.
Could AI technology be used to monitor these negative customer interactions and identify where service is subpar? What if AI provided real-time information to the bank agent, guiding the agent to a quicker resolution for the customer? Not only would banks have happier customers, but they could lower wait times and improve the efficiency of the call center. With seamless connectivity and end-to-end process integration, the bank could reduce the friction experienced by customers.
But that’s just the beginning. Banks are becoming digital platforms. They will have the ability to offer non-banking services alongside their banking services. Their cloud-based, open platform will allow them to easily plug-in any third party services. Given that, what if next-level technology and a commitment to innovation could make customers’ lives better?
This pandemic is creating extreme financial stress for many customers, who are struggling with layoffs, reduced income, and a lack of government assistance. Yet some customers might hesitate to call the bank to say that they lack the funds to pay their mortgage this month. What if the bank could use AI or machine learning to identify customers who need assistance and then proactively reach out to those customers to offer help? The right combination of processes and intelligent technologies could help the bank become a trusted advisor to its customers, increasing loyalty and making people customers for life. Some advanced technologies can help companies analyze customer tone of voice or sentiment, which could allow them to quickly understand and respond to service or product issues. The resulting insight would help enable tactical closed-loop follow-up, increasing customer satisfaction and loyalty.
Apply intelligent technologies in new ways
We’re already beginning to see some banks prioritizing innovation as a way forward. Some firms are turning to intelligent technologies such as AI and machine learning to ferret out fraud signals from the noise of other transactions coming through the banking engine. With their unprecedented speed and processing power, these technologies excel at rapidly identifying incidences of fraud and data patterns that indicate suspicious activity.
For example, Lloyds developed a new tool that uses AI to sniff out fraudulent activity before victims’ accounts are compromised. Using biometrics, the technology identifies the patterns of how a customer typically uses Internet banking, with details such as the time needed to enter personal information or patterns in user movements around the screen. If a fraudulent user attempts to access the account, the software freezes access and contacts the customer. The bank estimates that this innovative technology already prevented fraudsters from illegally acquiring more than £4 million.
Another example is Coöperatieve Rabobank U.A. (Rabobank), a European bank that created a straight-through processing (STP) lending factory that reduced loan processing times from weeks to hours. Leveraging intelligent technologies such as machine learning helped Rabobank achieve an STP degree of 97%. Rabobank is also using conversational AI for invoice handling. The bank’s AI-enabled chatbot Billy is designed to handle repetitive questions from suppliers about invoices. Billy, which is available 24×7, went live while the Netherlands was gripped by COVID-19 and had gone into lockdown. It was perfect timing: By freeing staff from the effort of looking up standard invoices, Billy enabled workers to address a growing number of specific questions during that period. With the chatbot taking over repetitive tasks, both employee and customer satisfaction increased. And Billy has been able to manage 100 to 150 conversations every day.
Other examples include financial services companies that use contract intelligence solutions, which rely on machine learning, to execute hundreds of hours of attorney effort in just seconds. And according to a recent article by Imtiaz Adam, startup payment service Face++ allows consumers in China to use the Alipay mobile app to transfer money using just their face.
Stay ahead of the curve
Like these companies, your bank can begin taking action. But don’t limit your vision to what other financial services providers are doing. Instead of viewing innovation as a means of keeping pace with your competitors, try to envision what your customers and employees want and need – and then figure out how to use intelligent technologies to deliver that experience.
You can innovate to lead. The best time to get started is right now.
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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