Virginie Hollebecque, Head of Enterprise and Public Sector, EMEA, at Ciena
Disruptive technologies and a drive towards digitally driven services haven’t left many industries untouched, and retail banking is no exception. Today, the banking model is being shaped by customers’expectationsof other retail and online experiences.The result isBranch 2.0, a new generation of retail banking that places an emphasis on ‘service creativity’ andimproving customer interactions with technology. This shift is also influenced by new regulations, the Banking Reform Actin the UK, for example, has opened up competition between institutions, creating more flexibility and better options for consumers. In other words, banks will need to step up and compete to remain relevant.
In this increasingly competitive and digital world, retail banks cannot afford to miss out on any opportunity to make the most of every customer engagement. However, a bank’s primary point of contact with the customer is no longer at the retail branch – branch visits to RBS and NatWest alone have reduced by 30% in the last four years and the British Bankers’ Association (BBA) reported that about 1,800 transactions take place each minute on smartphones. Customers no longer expect a strictly transactionalinteraction; they now require an ‘Apple store experience’ where value-added consultation is delivered in-store, supplemented with online, mobile and phone support. We are seeing evidence of this already: Barclays is moving 6,500 traditional cashiers to roles more focused on customer advice, making headway with video, announcing new one-to-one video services for premier account holders and trialling cheque deposits by phone by allowing customers tosubmit images of the cheques via a mobile banking app.
As a result the in-branch experience will be reserved for significant milestones, such as applying for a mortgage, but also largely enabling convenience, guidance and dealing with complaints that will dependon instantly accessible services beyond simply referencing customer data. There will be heavy use of video for telepresence consultation or training seminars, apps and access to the bank’s websites, all of which will lead to a greater dependence on online and digital services. Customers will also need a high degree of security, delivered through an assured network infrastructure and offered as a valued reason to conduct business at the branch. In addition, branches will need to ensure resiliency, disaster recoveryand high availability, at all times at all points of contact -in-branch, online or at ATM’s.
Future network strategies
Branch 2.0 sets to deliver greater benefits to retail banks with improved customer service byintegrating multiple resources into one, seamless in-store experience. The network is a crucial component of this ecosystem; supporting voice, video and data, scaling for small local branches and large head offices, ensuring consistent data centre connectivity, and enabling advanced business applications such as surface computing, information and transaction terminals, interactive media and multifunctional ATMs. The network also needs to be flexible and scalableenough to accommodate peaks in demand, say the lunchtime rush.
It is crucial that the network can deliver these services with improved profitability and productivity. This will mean improving agility by removing technology hurdles imposed by legacy circuits andbest-effort IP networks, and move instead to Carrier Ethernet services. Carrier Ethernet enables the speed, security, price and flexibility ‘Branch 2.0’ requires. Flexiblenetwork services mean banks can deliver new on-demand services and bring them to market faster to ensure a competitive advantage.Carrier Ethernet also enables banks to minimise costs and ensure business processes can scale effectively, while maintaining security and control over critical network functions. New applications can be quickly introduced without network redesigns and a single, familiar Ethernet interface enables convergence of all services over a common network infrastructure, simplifying operations. Sophisticated Ethernet-based architectures can transform the abilities of the network to effectively, efficiently and safely connect branches to branches, branches to customers and customers to content.
Future strategies will see this evolve to another level, with the introduction of network function virtualisation (NFV).NFV is the concept of replacing proprietary, single-purpose hardware appliances – such as encryption and firewalls – with software-based versions that run on low-cost server hardware and can be flexibly chained together to form unique services. This promises to enable branches to serve business and customer needs more quickly and cost-effectively and mitigate application performance and information security concerns.Overall, NFV will simplify the infrastructure needs at the branch, lowering operating costs while enabling the introduction of new applications and sources of revenue. Integrating these technologies into Branch 2.0 will be a crucial part of keeping the local branch relevant for customers.
Standing up to the pressure
Retail banks are facing immense pressure to transform their traditional, full-service retail branches while simultaneously offering online digital services to maintain a competitive edge with today’s consumers. To successfully deploy both initiatives, banks will need to invest in branch infrastructure to ensure their networks can support the plethora of new services.
While investment in networks remains steady for the majority of the industry, the investment in branch networks has to be in the right pace to ensure the network supports the bank’s move towards Branch 2.0. With the stakes this high, failure to invest in the right network architecture could result in our recognisable high-street institutions falling by the wayside as innovative, nimble banks take their place. Focusing on agile, flexible, yet secure network resources is the key to delivering the digitally driven service model.
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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