By Dominic Vincent Ligot
The world’s financial infrastructure is collapsing. So they say.
It’s a theme that is oft-repeated. You only have to log on or open your newspaper and stories about problems in the banking world come thick and fast. Fraud, the spats about Brexit, looming financial disasters and misdeeds – it all comes rolling out, spiced up with rumour and gossip, colouring the public idea of the role of banks.
Hardly a surprise then, that despite the industry’s admirable growth and the central roll it has played in society for hundreds of years, the public regards the banking community with suspicion. Issues like security breaches, poor customer service and lack of service evolution all figure heavily in the public mind, while those who work within banking look to the stars and do their best to allay such concerns.
To win back customer confidence and forge a successful path in the face of unparalleled digital disruption, individual banks (and the whole industry) need to look hard at their long-established business models and operational practices. A few banks have already started out on the digital transformation journey – embracing new technologies and tapping into existing data resources to create improved products and services. Big Data and analytics are the key to all this, but their full potential still remains largely unrealised. Banks now need to take practical steps towards creating data-driven business opportunities from the areas where the public has the wrong impression.
Start with the most under-appreciated dataset. Payments reveal a great deal about each user – how much they’ve paid, what they paid for, who was paid, the banks involved, transaction time and location, and so on. In fact, a customer’s payment profile says much more about her, or him, than any social media metric or record. Payments data is highly accessible and can pinpoint lifestyles, detect which companies make up a supply chain, and plot spending trends by time or place. At the same time, although customer data is not as dynamic as payments data, in banking systems it can be attached to other profiles such as payments and credit history to enhance analytics and create successful “Next-Best-Offers”.
Should banks be worried about the Fintech boom? Not necessarily. Banks have both the resources and the ability to retain their position in a way that start-ups really don’t. They just need to adopt a bit of Fintech thinking. Banks can try some of these simple and practical things in the short term that could make a significant difference:
- Play with some data around a recommendation engine – It can be done as an experiment with a few people. Group customers by preference, products by customer, and transactions by pattern similarity. Everyone’s always looking for the elusive ‘Single Customer View’, but guess what? A ‘Partial Customer View’ linking two to three product portfolios is already enough to get started.
- Look closer at payment and behaviour data – Payments can help banks understand the sequence of events that leads to somebody leaving the bank. Payments can reveal hidden social networks within a bank’s portfolio. Customer-to-customer, customer-to-merchant, company-to-company, product-to-product – what could you do if you knew these relationships?
- Fraud and compliance – As mentioned before, banks are incredibly adept at regulatory compliance and fraud mitigation. But the industry needs to start getting better at text analytics and using web behaviour to detect high-risk patterns. Insights such as ‘who clicked on what before fraud happened’ can be very enlightening. These days, companies can match weblog data with branch data and check the difference between web and in-branch behaviour.
- Service experience – In the brick-and-mortar era it was ‘Location, Location, Location’. Now, in the digital era it’s ‘Customer, Customer, Customer’. Use event data to spot processes that are causing problems for your customers and fix them. Contact Centre logs are a hidden source of insight. It doesn’t take much to parse them for sentiment and recurring patterns. There could be new products hiding behind these complaint logs, if only banks were inclined to look.
- Improve the mobile experience – Many banks have mobile apps but they usually concentrate on facilitating payments, fund transfers, and account management. What if a local bank’s app could act like Mint and provide the user with cool ways to manage budgets, see financial profiles at a glance, and even offer helpful advice? You can parse those mobile servers for hidden patterns in data (location profiles, IP addresses, mobile browsing, etc) – the ‘fingerprints’ of customer satisfaction.
Okay, these five things won’t turnaround troubled relationships on their own but they could be the first, tentative, steps towards reconciliation.
And once the ‘relevance’ and ‘confidence’ fences have been mended and an enterprise-wide digital transformation strategy embedded, banks can get back to developing meaningful, long-term, data-driven customer relationships instead of settling for a diminishing series of ad hoc, one-night stands.
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.”
RegTech 2020: The rise of Open Banking
This month on the RegTech 20:20 podcast, host Alex Ford is joined by industry experts Gavin Littlejohn, Chairman of The Financial Data and Technology Association (FDATA) and Jamie Leach, Regional Director of FDATA ANZ and Founder of Open Data Australia, to discuss developments in Open Banking, and the place of RegTech.
Today, the focus is on the digital customer experience and the insight offered indicates that there has been a major shift in the FinTech ecosystem as a source of potential innovation for banks, rather than being a direct competitive challenge.
In the podcast, Alex quizzes Jamie on the concept of sharing data and the impact of the introduction of Open Banking rules under the Consumer Data Right (CDR) in Australia. Jamie shares that it is an exciting time to be involved in the sector:
“…what we really need to consider is that Open Banking in Australia is very different to Open Banking in the UK. Really, what has spurred Open Banking in Australia under the Consumer Data Right is the pursuit of creating greater competition and greater innovation, while allowing consumers to do more with their data.”
Gavin, who has many years of experience in the industry and, as well as his role with FDATA is also a key member of the UK Open Banking Implementation Entity, speaks on the theme of advocating Open Finance in the UK.,’
Delving deeper into Open Banking, he highlights the fact that it has been an interesting journey and states that “the important thing to understand is the difference between the UK’s Open Banking order and the wider payment services directive.”
Not only concentrating on Australia, Jamie also works across the sector in the UK and, also looking at its evolvement here, she suggests that the people creating the rules are now taking notice, adding: “We are just getting started – the UK has been at it for nearly three years and it is still gaining momentum.”
With regards to future predictions, Jamie believes “It’s going to take 12, 18 or 24 months before we see any mainstream major adoption and where the potential of Open Banking can go in this market”
Moving to the differences between Open Finance and Open Banking. Gavin defines the latter as “payment initiation and access to payment data, which enables a third-party provider or fintech with a customer relationship to initiate a payment and get access to the data relating to transactions.”
“…the concept of Open Banking is a bit like electricity – you don’t use it directly; you use an appliance that uses it. This could mean loans, money management apps, or cloud accounting platforms, which all use Open Banking.”
Throughout the episode, both guests provide interesting insights and hint at the significant potential of Open Banking.and the connection to RegTech within this domain.
It is clear that what we see today is only the beginning. Despite the industry still being in the early stages of implementation in almost all cases, there is increasing interest in moving beyond this to include a far broader spread of financial products.
You can listen to the full episode at https://www.encompasscorporation.com/regtech2020-podcast/ or across all major platforms, including Apple Podcasts, Google and Spotify.
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