Maikki Frisk, Mobey Forum’s new Executive Director, talks PSD2 and why digitalisation is banks’ chance for greatness.
It’s been 20 years since Lastminute.com turned the travel industry upside down. Now Airbnb has done it again. Google, Apple and Here have long since done to TomTom what TomTom itself did to the paper map. Not to mention the changes ushered in by eBay, Amazon, Netflix, Spotify, Alibaba and others: Streaming media, e-commerce and mobile commerce are now a fundamental part of everyday life.
The global banking and financial services industry is one of the most essential sectors undergoing digitalisation. Much has been said about the disruptive forces of this wave of change. Its key stakeholders – the world’s banks –are entering a world of huge opportunity. Collaborating within the ecosystem of digital stakeholders, immersing in digital culture and focusing on delivering smart, secure, trustworthy, convenient and relevant digital services to customers offers numerous possibilities.
Transformation ≠ revolution
Banks’ fortitude is, for the most part, a good thing. Transformation doesn’t have to mean revolution. Indeed, the solidity of the global financial services industry is a familiar, reliable and grounding force for its billions of customers. Digitalisation doesn’t threaten the existence of banks, instead it presents a whole range of new opportunities for those that can adjust to the new environment: Better relationships with customers. New services. New revenues. Competitive advantage. Unique position in a trustworthy entity. Commercial expansion. Market leadership.
Learn from past winners
What lessons can banks learn from the digital winners of the last 20 years? Firstly, don’t hang around. When the disruption cycle bites, the winners are quickly established. Secondly, the winners win because they are bold. They embrace change as the new normal and reorganise accordingly. They resist the temptation to defend their ground whatever the cost and instead collaborate openly and constructively with their disruptors, partnering, learning and adapting along the way. Thirdly, they acknowledge that digitally transformed services delivers a better user experience for their customers. They get that the tech alone doesn’t drive change, it is the facility created by the tech that is the key to mass market adoption. Finally, the winners know that data is where it’s at. More than ever before, today’s data can deliver the insights, forecasts and predictions that form the bedrock of a constantly improving user experience and the basis upon which better, more convenient and more relevant services can be developed.
PSD2: A chance for greatness
In January 2018, following the PSD2 compliance deadline, 740 million Europeans will be able to tell their banks to share their personal financial information with more-or-less any third-party service provider they choose. Some banks may view this as a tough gig and begrudge investing in the technologies that will help their competitors to lure business away from them.
There is another way to look at this. Banks are entering this era in a position of incredible strength; they already have their own customers’ account data and now have the chance to aggregate even more, from sources that were previously unavailable to them. They also have their customers’ trust. Thanks to PSD2, that long-awaited ‘single view of all of your financial affairs’ will finally be realised, complete with automated spending analysis, forecasting and advice on how the user might do more with their money. Consider this: who would you rather have deliver this service, a start-up aggregator app, or your bank, which you have likely trusted for years?
One thing is for sure: these aggregators will line up to partner with banks if the partnership will position them as acquisition targets.
Gandhi had it right: Be the change you want to see in the world. Looking at the news, I sense we could all benefit from having a bit more Gandhi in our lives, right now. Sprinkled, perhaps, with a little James Dean: I can’t change the direction of the wind, but I can adjust my sails to always reach my destination.
Can banks adapt?
If banks are to prosper throughout their digitalisation they must take an objective and honest look at their ability to adjust their sails. The threat to their digital future comes mostly from within: can they reorganise to respond appropriately to the new digital market? What must happen operationally, technically and culturally to enable them to be the change? Can they shrug off any negative perceptions of digitalisation and reimagine their digital futures?
Banks that seize opportunities to collaborate with other digital stakeholders in a commercially independent environment, like Mobey Forum, learn from shared wisdom and can use this to identify best practices. These are vital ingredients for success; digital services evolve at a terrific pace, so the more banks can do to immerse themselves in digital culture the better. In one sense, banks are lucky. Unlike, say, the taxi industry, customer loyalty to the banking system runs deeper than the delivery of a fast and convenient user experience.
This won’t last forever. Digital financial service providers are building credibility. New challengers are establishing themselves and growing their user base. Now, banks must decide whether they are comfortable to be pushed down the value chain. If not, they need to take positive steps to reposition themselves in the new market, making use of their data to do so. Many banks have already taken excellent steps on this path.
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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