By Richard Goold, Executive Director at Moorhouse
As the economy passes the pre-recession peak, the impact on the financial services (FS) sector is clear. Whereas previously traditional FS organisations were king in the marketplace, the move by regulators to open the market to new entrants is creating new competition within the industry. Tesco’s recent decision to launch a current account is a prime example of the way in which the retail banking sector is changing. Tesco might be the first supermarket to launch a current account, but it is by no means going to be the only one to make this move. Established banks cannot rely on existing customers staying with them just because they have been customers for life or even generations. The competitive landscape, ease of being able to switch and increasing expectations of customers are redefining the market. Growth, and in some cases survival, will be dependent on their relationship with the customer and the experience that customers ultimately have with their organisation.
After the government opened up the banking market more widely, there has been an influx of challenger organisations delivering banking services effectively and at competitive rates, leading to disruption of the traditional model. Furthermore, the quality of service that customers now expect has changed significantly in the past ten years. Customers expect organisations supplying services to be more customer focused than in the past which is posing some particular challenges for FS organisations. It is no surprise that retailers seek to enter this sphere as their ‘customer is always right’ attitude is more closely aligned with these new expectations.
Retail banking is a transactional experience which aligns to the strengths of the retail industry. Supermarkets are well poised to disrupt this market as they are adept at focusing on customer experience and can apply this to creating desirable banking services. For example, supermarket retailers can integrate banking services in to existing supermarket space creating more of a one-stop shop for customers. Alongside ample and free parking as well as extended opening hours, customers have far better access to banking services when they want them. Furthermore, supermarkets already possess sizeable customer bases, huge store networks and an excellent knowledge of their customers’ preferences as they are able to access data collected through loyalty schemes. In fact, with the vast amount of data that has been collected through loyalty schemes the opportunity for supermarkets to be both proactive and innovative in offering suitable add on FS products and driving customer loyalty is not insignificant.
Traditional banks must compete with supermarkets and challenger banks to offer a more flexible service that will appeal to customers. This is typified by the seven day service now offered by banks that allows customers to switch their current accounts from one provider to another more quickly and easily. The government is even considering mandating that banks must allow their customers to be able to switch their current accounts immediately. As the emphasis on choice has risen, the power in the relationship has shifted from banks to their customers.
An unexpected consequence of the financial crisis is the rise of shadow banking. As financial institutions have withdrawn from offering certain services, shadow banks have multiplied offering an alternative to traditional banks. Shadow banking, as it stands, ranges from the extremes of unregulated lending services that charge high interest rates, to other sources of funding. In the absence of banks providing necessary services to SMEs, many turned to crowdsourcing and peer to peer (P2P) services as a means of obtaining loans. As other sources rush to meet the need of customers that are unable to obtain loans from traditional organisations, it is these established firms that are losing out. Although the market share of P2P lending accounts is still very small, they are on the rise and collectively can still disrupt the market.
The rise of shadow banking and challenger firms should be a wake up call for the traditional financial institutions. In the wake of the global financial crisis, trust in the banking industry is low and banks must work hard to win the confidence of customers. Traditional FS firms need to change their mindset, otherwise they risk failing to make the investment and changes necessary to stay ahead of the competition.
In the aftermath of the recession, organisations were focused on cost reduction, consolidation and protecting core services. However, it is detrimental to remain in this mindset as the economy recovers and returns to robust growth. Our 2014 Barometer on Change, a survey among 200 of the most senior FTSE, multinational and public sector leaders in the UK, found that only half of businesses are “extremely clear” about their strategy. Around a quarter (22%) of the UK’s biggest organisations say their strategy is only “quite clear”, while only just over half (52%) of business leaders say that their strategy is “extremely clear”, up from 44% in 2013. If FS organisations are to remain competitive, they need to develop a strategy focused on developing a long-term relationship with their customers.
Customer experience cannot be underestimated. If an organisation truly succeeds at putting customers at the heart of what they do, they are likely to reap big rewards. Whilst many organisations have a customer engagement strategy in place, this must be assessed and revisited every six months at least. Customer engagement is not a box to be ticked each year, it should be a core and strategic focus for all organisations. Developing this strategic focus allows organisations to adopt a big picture view enabling them to see the benefits of each action.
While strategic focus is important, some quick wins early on in a programme can be a good way to motivate staff and create ‘ buy in’. This will help ensure support for these projects and help organisations resist the urge to re-allocate resource to short-term non-strategic initiatives. Without a clear strategy, it is much harder to prioritise and compare actions. FS organisations should create a single view of investments across the business and review them as a whole regularly to make sure they are achieving their objectives.
To take advantage of growth, organisations have to do new things. Unless they can turn strategy into action extremely quickly, they won’t be able to take advantage of the better economic outlook or stay ahead of the competition. However, securing the resources needed to deliver actions is crucial. Building partnerships both internally and externally will help to ensure the right skilled resource, at the right time, at the greatest value. It is up to project managers to demonstrate greater flexibility and be multi-disciplined – they are at their most effective when they can apply business analysis skills and subject matter expertise. There is a greater need for agility, responsiveness and engagement within the industry and it is up to the people within an organisation to ensure that the company has the necessary strategic focus and the means to put this in practice.
Challenger banks are currently the furthest ahead in the sector as they embrace innovation and build a strategy around their customers’ needs. Challenger banks have an advantage as they build their companies from new without being constrained by legacy or technology infrastructure. Unless traditional FS organisations seek to make the necessary changes to their strategy, they may find themselves lagging even further behind. Innovation and transformation in their businesses is going to be crucial to remaining competitive and to ensure that they take advantage of growth.
ECB stays put but warns about surge in infections
By Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters) – The European Central Bank warned on Thursday that a new surge in COVID-19 infections poses risks to the euro zone’s recovery and reaffirmed its pledge to keep borrowing costs low to help the economy through the pandemic.
Having extended stimulus well into next year with a massive support package in December, ECB policymakers kept policy unchanged on Thursday, keen to let governments take over the task of keeping the euro zone economy afloat until normal business activity can resume.
But they warned about a new rise in infections and the ensuing restrictions to economic activity, saying they were prepared to provide even more support to the economy if needed.
“The renewed surge in coronavirus (COVID-19) infections and the restrictive and prolonged containment measures imposed in many euro area countries are disrupting economic activity,” ECB President Christine Lagarde said in her opening statement.
Fresh lockdowns, a slow start to vaccinations across the 19 countries that use the euro, and the currency’s strength will increase headwinds for exporters, challenging the ECB’s forecasts of a robust recovery starting in the second quarter.
Lagarde saluted the start of vaccinations as “an important milestone” despite “some difficulty” and said the latest data was still in line with the ECB’s forecasts.
She conceded that the strong euro, which hit a 2-1/2 year high against the dollar earlier this month, was putting a dampener on inflation and reaffirmed that the ECB would continue to monitor the exchange rate.
The euro has dropped 1% on a trade-weighted basis since the start of the year, but is up nearly 7% over the last 12 months. Against the U.S. dollar, that number rises to over 10%.
Opening the door for more stimulus if needed, Lagarde confirmed the ECB would continue buying bonds until “it judges that the coronavirus crisis phase is over”.
Lagarde also kept a closely watched reference to “downside” risks facing the euro zone economy, which has been a reliable indicator that the ECB saw policy easing as more likely than tightening.
But she signalled those risks were less acute, in part thanks to the recent Brexit deal.
“The news about the prospects for the global economy, the agreement on future EU-UK relations and the start of vaccination campaigns is encouraging,” Lagarde said. “But the ongoing pandemic and its implications for economic and financial conditions continue to be sources of downside risk.”
Lagarde conceded that the immediate future was challenging but argued that should not impact the longer term.
“Once the impact of the pandemic fades, a recovery in demand, supported by accommodative fiscal and monetary policies, will put upward pressure on inflation over the medium term,” Lagarde said.
Benign market indicators support Lagarde’s argument. Stocks are rising, interest rates are steady and government borrowing costs are trending lower, despite some political drama in Italy.
There is also around 1 trillion euros of untapped funds in the Pandemic Emergency Purchase Programme (PEPP) to back up her pledge to keep borrowing costs at record lows.
The ECB has indicated it may not even need it to use it all.
“If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full,” Lagarde said.
Recent economic history also favours the ECB. When most of the economy reopened last summer, activity rebounded more quickly than expected, indicating that firms were more resilient than had been feared.
Uncomfortably low inflation is set to remain a thorn in the ECB’s side for years to come, however, even if surging oil demand helps put upward pressure on prices in 2021.
With Thursday’s decision, the ECB’s benchmark deposit rate remained at minus 0.5% while the overall quota for bond purchases under PEPP was maintained at 1.85 trillion euros.
(Editing by Catherine Evans)
Bank of Japan lifts next year’s growth forecast, saves ammunition as virus risks linger
By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) – The Bank of Japan kept monetary policy steady on Thursday and upgraded its economic forecast for next fiscal year, but warned of escalating risks to the outlook as new coronavirus emergency measures threatened to derail a fragile recovery.
BOJ Governor Haruhiko Kuroda said the board also discussed the bank’s review of its policy tools due in March, though dropped few hints on what the outcome could be.
“Our review won’t focus just on addressing the side-effects of our policy. We need to make it more effective and agile,” Kuroda told a news conference.
As widely expected, the BOJ maintained its targets under yield curve control (YCC) at -0.1% for short-term interest rates and around 0% for 10-year bond yields.
In fresh quarterly projections, the BOJ upgraded next fiscal year’s growth forecast to a 3.9% expansion from a 3.6% gain seen three months ago based on hopes the government’s huge spending package will soften the blow from the pandemic.
But it offered a bleaker view on consumption, warning that services spending will remain under “strong downward pressure” due to fresh state of emergency measures taken this month.
“Japan’s economy is picking up as a trend,” the BOJ said in the report, offering a slightly more nuanced view than last month when it said growth was “picking up.”
While Kuroda reiterated the BOJ’s readiness to ramp up stimulus further, he voiced hope robust exports and expected roll-outs of vaccines will brighten prospects for a recovery.
“I don’t think the risk of Japan sliding back into deflation is high,” he said, signalling the BOJ has offered sufficient stimulus for now to ease the blow from COVID-19.
NO EXIT EYED
Many analysts had expected the BOJ to hold fire ahead of a policy review in March, which aims to make its tools sustainable as Japan braces for a prolonged battle with COVID-19.
Sources have told Reuters the BOJ will discuss ways to scale back its massive purchases of exchange-traded funds (ETF) and loosen its grip on YCC to breathe life back into markets numbed by years of heavy-handed intervention.
Kuroda said the BOJ may look at such options at the review, but stressed a decision will depend on the findings of its scrutiny into the effects and costs of YCC.
He also made clear any steps the BOJ would take will not lead to a withdrawal of stimulus.
“It’s too early to exit from our massive monetary easing programme at this point,” Kuroda said. “Western economies have been deploying monetary easing steps for a decade, and none of them are mulling an exit now.”
(Reporting by Leika Kihara and Tetsushi Kajimoto; additional reporting by Kaori Kaneko; Editing by Simon Cameron-Moore & Shri Navaratnam)
World Bank, IMF agree to hold April meetings online due to COVID-19 risks
WASHINGTON (Reuters) – The International Monetary Fund and the World Bank have agreed to hold their spring meetings, planned for April 5-11, online instead of in person due to continued concerns about the coronavirus pandemic, they said in joint statement.
The meetings usually bring some 10,000 government officials, journalists, business people and civil society representatives from across the world to a tightly-packed two-block area of Washington that houses their headquarters.
This will be the third of the institutions’ semiannual meetings to be held virtually due to the pandemic.
(Reporting by Andrea Shalal; Editing by Chris Rees
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