By Robert B. K. Dewar
Robert Dewar is a professor of computer science at New York University, and president of AdaCore, a company that specializes in providing tools for building reliable software (www.adacore.com).
As we all know, modern banking depends on complex software. Just as we entrust our lives to software when we board a plane, we trust our money to software when we do business with any bank today or when we invest in the stock market. So how are we doing? On planes, pretty well. No one has ever died from a software bug on a commercial airline as far as we know. With banks, not so well! Recently we have seen major problems. Notable among these are the NatWest meltdown that left a very large number of customers without access to their accounts, and the trading software malfunction that caused a major mess on the market, and cost the company half a billion dollars in half an hour. We can read examples of such happenings every week, and of course we know that banks are not eager to disclose problems, so undoubtedly there are major behind-the-scenes problems that we don’t know about, but whenever banks lose money, it is eventually the customers who pay.
What is remarkable about these banking disasters is the tendency to dismiss them as “glitches”. For example we read in The Telegraph: “Up to 12 million NatWest and Royal Bank of Scotland customers are still unable to pay bills or move money after a computer glitch left their accounts frozen.” Now we put the word “glitch” in quotes in the title for a reason. What does this word mean to you? Well a typical dictionary definition (this one is from www.thefreedictionary.com): “A minor malfunction, mishap, or technical problem”. In short the sort of minor mistake that anyone could make any time, and which has an air of inevitability about it. After all who could prevent the occasional glitch? The use of the word is a way of disclaiming responsibility. At least one online dictionary notices what is going on with this word. dictionary.reference.com has a second meaning: “Computers: any error, malfunction, or problem”. Note that the “minor” has disappeared as a qualifier. I certainly bet that if I had been one of those NatWest customers, I would not have been willing to see my serious situation dismissed as minor!
So why the difference between banks and planes? And what is to be done about it? Is banking software somehow much more complex than avionics software? Definitely not! Is there some fundamental difference between software requirements for planes and banks? Not that I can see! The difference is simply one of due care and expectations. On planes, we are very aware of how critical the software is, and we have developed technologies that come very close to guaranteeing freedom of serious errors in avionics software. These include rigorous development procedures, and the use of standards such as DO-178B, to which all avionics software must conform, to help guarantee reliability. We don’t make an absolute claim of 100% perfect software. Even when using such procedures, and there have been examples of bugs found, but for sure software is not the weak link in avionic safety. Banks, on the other hand, are developing software in secret using the same kind of lax procedures that bring software to your PC that crashes frequently. They are far too happy to dismiss such mishaps as glitches, fix them as quickly as possible, and hope that they can get away without causing too much mayhem!
Could we and should we expect more? To me the answer is a resounding yes! When Tesco discovers that it has been selling tainted meat to customers, it’s a major news story and the repercussions are going to be heard for a long time. But Tesco certainly does not attempt to dismiss this as a glitch. But when a banking software error causes major mayhem, we are much too ready to accept this kind of error as inevitable. Why can’t we demand that our banks exercise the same kind of care in writing software that we expect of aircraft manufacture? The technologies, in the form of more reliable programming languages, more reliable procedures, rigorous testing requirements, use of mathematical proof techniques, formalised specification etc. are well known. Furthermore, given the huge cost of bank software failing either because of plain bugs, or vulnerabilities to hackers bent on evil, it is probably less expensive to do things right?
So, why does the current situation continue? Partly it’s just what people are used to. Our students in universities are not trained in the techniques and tools needed for reliable software. Let’s just take one technical example that’s easy to understand. When you are testing software, it’s obviously a good idea to make sure that every line of code has been tested at least once. Furthermore, if you have a test of the form:
if Credit > 0 then Record_Credit; else Send_Bill; end if;
then it is obviously a good idea to test both possibilities. This is called coverage testing, and is a very standard technique that is required for all avionics code development. A few years ago, teaching a graduate course in programming languages at New York University, I asked my students, most of whom were professional programmers, many working at banks, “How many of you have used coverage testing in your work?” The answer: one out of about eighty students! And this is just an elementary first step in improving reliability of code. The infamous “long-line” AT&T bug which took out all long distance telephone service for 7 minutes (back in 1990 when we expected telephones to be reliable) was due to some code that had never been executed. If you google for “List of Software Bugs”, you will find a Wikipedia article full of similar events.
Another reason, really we should say excuse, that is sometimes given is that in banking, requirements change too rapidly to make it practical to test software and make it reliable. In the wake of the trading glitch we mentioned earlier in this article, the FTC suggested the possibility of requiring trading software to be tested before it was deployed. An Op-Ed piece in the New York Times the next day claimed this was a ludicrous idea, because the development and deployment of such software was so dynamic that testing was impractical. Well sorry! We expect banks to take care of our money. We appreciate new developments like ATM machines that can scan checks, but we don’t need such bells and whistles tomorrow. We do need to be sure that our money is in reliable hands, and it is time to insist that banks clean up their acts and ensure that the software we and they depend on works properly. No lesser standard of care is acceptable!
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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