By: Rajashekhara V MaiyaAssociate Vice President & Lead Product Manager-Finacle Product Strategy at Infosys Limited
Retail banks continue to focus on innovation…
While the results of the 4th edition of the annual study on innovation in retail banking, presented by Efma and Infosys, largely mirror those of the previous surveys, they also differ in subtle, yet significant ways. For instance, in the 2nd edition of this study, 61% of surveyed banks said that they had invested more in innovation compared to the previous year, compared to 11% who had done just the opposite. Two years later and in the midst of a challenging environment, 73% of the 300 bankers surveyed confirm increasing innovation investment compared to 2011, whereas just 6% say they have scaled it down. Also, while European respondents continue to assess their innovation performance rather pessimistically, this year a little over half concede that they have become more innovative. Other differences observed in the 2012 survey include a growing threat perception from disruptive innovation, owing no doubt to the entry of non-banking players from the telecom, retailing and technology space, and an increasing use of open innovation by banks. For example, Barclaycard’s crowd-sourced credit card and ING Bank’s customer experience center were both built through open innovation.
The findings of the 2012 study indicate that retail banks worldwide are now firmly committed to innovation. And while innovation understandably plays second fiddle to risk, balance sheet and cost management, 79% of banks acknowledge that it is strategically important to the future of their business. They are also quite certain of its direction, which is clearly towards channels, customer service and experience.
…to drive customer acquisition and revenue
In the 2009-2011 surveys, respondents said that innovation was critical to both growth and efficiency, perhaps somewhat more to the latter. The latest study marks a shift in thinking, because for the first time, customer acquisition and revenue growth clearly outrank cost efficiency and compliance as the key drivers of innovation, in all the four regions, namely, Europe, Middle East and Africa, Asia Pacific and the Americas. 75% of respondents are increasing investment in channel and customer service innovation in order to achieve these goals. Region-wise, European banks appear to be the least enthusiastic about investing in channel innovation, reporting only a net balance of 59% (proportion of banks increasing investment minus those decreasing investment). All the other regions report a greater than 70% figure, with Middle East and Africa leading the way with 89%.
Channels, especially online and mobile, are a top innovation priority
The choice of channel comes as no surprise: nearly 2 out of 3 banks say they are highly innovative in the online channel, whereas more than half say the same about mobile. What is somewhat surprising is that although 87% of banks concur that IT is important (or very important) to channel innovation, the branch channel continues to consume more of the IT budget than any other; however its share is lower than that of online and mobile combined.
Personal Financial Management tools are the most popular innovation in the online channel; 29% of banks have already introduced them, and another 60% are planning to do so within 3 years. Social media is another area of interest and around 1 in 4 banks have integrated some services with Facebook and other sites. ICICI Bank, India’s largest private sector bank offers a Facebook banking service providing account information, promotions etc., which links back to the bank’s website; it is the first Indian bank to provide more than just marketing information through social media. Interactive options like web chat or click to call, designed to improve customer experience, are also catching on; 1 in 5 banks surveyed have them already and almost all of them will do so in the next 3 years. This intent is clearly visible in Alior Sync, a new service from Poland’s Alior Bank, which it deems the world’s first virtual bank providing videoconferencing access to staff as well as documents and desktop sharing.
The list of mobile-related innovations features advanced visualization and mobile payments at the top. The first – better known as augmented reality – is on offer at 38% of banks in the form of branch and ATM locating services; a comparable number of banks facilitate the second through contactless and P2P payments and mobile commerce. On the other hand, personalized location-based offers and mobile wealth and advisory services are yet to take off, and will take about 3 years to catch up with some of the more popular mobile innovations.
With regards to channel strategy, 86% of banks said that multi-channel integration was important, followed by 81% for the single customer view and 72% for multi-channel analytics. These capabilities are critical and complement innovation to deliver a superior customer experience.
But action on the ground does not match intent
However, the above expectations are tempered by other, less optimistic findings. Arguably, the most significant one is that even today, only 2 in 5 banks have the structure and metrics to measure their innovation performance. Next, the enthusiasm for channel innovation is belied by poor adoption – as per the survey, nearly 60% of banks have deployed less than a fifth of the 22 channel innovations that are listed. Fortunately, the speed of adoption is picking up, and it is expected that nearly half the banks will have deployed nearly half these innovations in a year’s time.
No two regions are the same
In Europe, where innovation is the fifth priority after risk and cost management and others, the online channel draws the highest share of IT investment, which is consistent with the region’s high Internet penetration, led by the countries in North Europe.
For banks in the Middle East and Africa, the mobile channel is clearly where the focus of investment lies, which is understandable given its role in building financial inclusion in countries with poor banking penetration. Although banks are upbeat about their innovation performance, they seem to have achieved it with an informal approach; relatively, fewer banks in this region have a formal innovation structure.
Asia, with its diversity, faces a wider variety of innovation issues and challenges. Surprisingly, banks rate innovation in the online channel ahead of that in mobile. At the same time, they are keen on attracting the large, young population of their countries with new, high technology innovations.
American banks have a different priority to the rest. For them, customer service and customer experience innovation takes precedence over channel innovation. Within the latter, the online channel is considered more important than the branch or mobile.
Financial inclusion is a goal for some
Although the attitude and approach to innovation is consistent across regions, banks from the developing world have an additional responsibility to promote financial inclusion in their markets. Here, mobile channel innovation is offering able support – and sometimes even leading – traditional inclusion models leveraging banking correspondents, agents and microfinance institutions.
In India, Eko, a correspondent of the State Bank of India and ICICI Bank serves nearly 1 million customers through a low cost distribution and payment channel comprising over 1,300 small retail outlets offering no-frills bank accounts and basic financial services. Agents and customers transact with core banking systems using mobile text messaging.
Ghana’s Ecobank was awarded African Banker’s 2011 “Microfinance Project of the Year Award” for its financial inclusion platform. A multi-channel branchless model comprising 185 agents, 100 ATMs, POS terminals and SMS banking serves over 60,000 customers.
The 2012 study shows that banks worldwide have a similar, positive attitude to innovation, which they are backing up with higher investment, better performance and a clear focus on online and mobile channels.
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...