Ian Rand, CEO of Barclays Business Banking
Today’s small and medium-sized enterprises (SMEs) are remarkable for their agility and diversity. They have embraced shifts in technology, such as using the internet to transform their marketing or operations. At the same time, they are reflecting changes in society. For example, the growth of flexible working has led to a surge in the number of sole-trader businesses.
Amid this moving and vibrant landscape, banks play an important role, not just providing the financial plumbing that allows businesses to function, and the finance to help them grow, but also – and critically in my view – the guidance to help them navigate the sometimes confusing world of business and finance.
But just as SMEs continue to change, so must banks. It is vital they keep delivering the benefits of technology that make operating easier and faster. They must also support the full range of business owners, including some whom a couple of decades ago might never have considered an entrepreneurial path.
Unsurprisingly, there is near-universal agreement about the need for banking services to keep evolving. But ask how this will, and should, happen and there is lively debate.
Different approaches both bring benefits
Broadly there are two types of business banking today. On the one hand, there is relationship banking, as practised and promoted by conventional banks. This is the traditional form of banking, with a local manager acting as a partner for clients and using his or her experience to support them.
On the other hand, there is digital banking, providing speed and convenience. There are even digital-only fintechs offering lending and banking services – some apparently promising all an SME could need through an app.
As you might expect, given I work for Barclays, my view is that SMEs today need both fast, effective digital services and also relationship banking. However, I am also adamant about the reasons for this, which are sometimes under-appreciated.
Let’s be absolutely clear: increasing competition in digital services has driven innovation. Furthermore, fintechs’ focus on user experience and the slick delivery of services has increased competition and raised the bar across banking.
But while the benefits of digital services – their speed and convenience – largely speak for themselves, and attract attention for their innovation, the benefits of relationship banking deserve more attention.
Relationship banking has a vital role
For many small businesses, and despite advances in technology, conversation with their dedicated relationship manager remains invaluable. It can help the business owner not only evaluate options, but also lead them to think about opportunities they would never otherwise have considered.
Let’s take the example of an electrician who needs financing for a new van. By just going online they could today quickly access a range of financing solutions, but a conversation with a relationship manager could be far more valuable. If the new van is required because the business is expanding, then that might spark a conversation about what else they need to think about as their business grows. But equally, if the issue is that their current van has broken down, then maybe a short-term overdraft to fund repairs could be a better and cheaper solution. What’s more, a conversation with a relationship manager could be the spark that allows a business to see opportunities and gain confidence to invest in their business.
I am also struck, when I travel to different regions, by the range of conversations our relationship managers have with clients. Not just about finance options, but also about topics as diverse as local accountants and the availability of storage units on the local industrial estate. Their experience and local knowledge mean relationship managers often have valuable networks that can bring wider benefits.
Importantly, the outcome of this type of banking is a strong, enduring relationship that benefits both parties in good weather but also, crucially, in bad. Challenging times are among those when a relationship manager, and specialist staff they can call on for support, can play a particularly vital role in helping a business – and when a lack of these people could cause real problems.
In the days after the recent collapse of Carillion, our relationship managers made over 1,000 calls to SMEs in its supply chain, to tell them that Barclays was ready to support them. That’s not something I believe you can do as well via an app.
Such considerations are important, and not just for business owners but also the economy overall. The importance of SMEs to the UK is easy to grasp when you consider that the latest government figures suggest they account for 16.1 million jobs, or 60% of all private sector employment.
At Barclays, our mantra is relationship-based, digitally driven. This means not just delivering the best of both, but using them together to support our clients – now and into the future. Relationship banking still has a vital role to play, alongside the speed and convenience of digital services, in supporting SMEs and the determined people who lead them.
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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