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Groundhog Day: banks continue to fall into the traps of the past

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Groundhog Day: banks continue to fall into the traps of the past

By AkberDatoo and Jason Pugh, Managing Directors at D2 Legal Technology

A familiar pattern seems to be occurring in financial services: an issue arises, typically an aggressive regulatory deadline, the issue is analysed and a proposed solution devised, a team is engaged, the various source files are reviewed, documents are repapered, and the process is repeated. And repeated. And repeated. 

When the alarm bell rings, how many banks now think: “Here we go again!”?

Proactive, rather than reactive

For too long, we have all been too reactive to the regulatory consequences of the fallout of the financial crisis, whether it’s the next phase of the Margin Requirements for Uncleared Derivatives, Qualified Financial Contract Recordkeeping, Resolution Stay, Brexit, or any other.

Imagine the bank of the future, embracing the digital agenda and optimised through data. Trading agreement negotiation is easy and clients are able to access a platform and negotiate variable terms effectively and quickly; where there is the ability for those documents and their constituent clauses to be tracked and managed against the back catalogue (portfolio) of agreements; when those clauses are automatically consumed by the plethora of downstream systems, collateral, contingent funding, regulatory reporting and risk management. Imagine an automated netting engine collating golden source data from contracts, opinions, parties and products, and being able to assess the legal risk across the entire portfolio, with an in-house legal team that are equipped to challenge and analyse with the dashboard of the future. Imagine being future proofed against the next thing – whatever that should prove to be – isolating issues that need remediation and then remediating effectively.

Does this really need to be so far into the future? The bank of the future should be here today: the technology does exist. We don’t really need blockchain or any other ‘hype’ technology yet to make a material difference, but we need to future-proof for when it does become common place. The time to market can be remarkably quick, and to not be prepared for change has now become the greatest existential threat to our whole raison d’etre.

But what obstacles do banks continue to face?

Embedded in culture

The industry has grown exponentially in the last 30 years and in so doing has developed great complexity. Talented individuals exist throughout these organisations, but frequently they sit in talented pods or siloes. However, in the current cost constrained environment, organisations need to be more effective at delivering demonstrable value to clients in a risk-controlled manner. All of these players have a role to play in the value chain that should achieve real tangible client benefit.

It is simply not acceptable for a function to say this is “not my job”; it needs to align with its partner functions to ensure the job is done effectively, without duplication and certainly without gaps. Organisations need to assess how effectively their operating model is working to see if they are functioning cohesively to achieve a common goal, and in addition to this, they need to have the courage to assess the component parts of their operating model and make appropriate changes. Culture is key, and banks need to work together and have a vision across the siloes in order to succeed.

Learning with data

Assuming that banks have the courage to be open minded to change, it all starts with data.

Often banks that have had a ‘near death’ experience have better core reference data than those that do not, whether it’s in relation to the product, client or legal data domain.

Even those which may have good product and client taxonomies, frequently have poor golden source legal agreement data, meaning they are unable to systematically understand the risks emanating from their broad contractual portfolio in a strategic manner.

Once you have the appetite to embark on the digitisation agenda and start to tag and define attributes and components, then the whole world of technology opens up and the bank of the future comes into play.

Breaking the cycle

If banks want to stop the seemingly interminable alarm clock of Groundhog Day, they have to be brave enough to be self-critical, evaluate the value chains, identify the pitfalls and then remediate the data. Then they can automate, deriving massive efficiencies and enhanced risk management.

Banking

A quarter of banking customers noted an improvement in customer service over lockdown, research shows

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A quarter of banking customers noted an improvement in customer service over lockdown, research shows 1

SAS research reveals that banks offered an improved customer experience during lockdown

A quarter (27%) of banking customers noted an improvement in their customer experience over lockdown, according to research conducted by SAS, the leader in analytics.

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? 

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Banking

Swedish Bank Stress Tests in Line with Recent Rating Actions

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Swedish Bank Stress Tests in Line with Recent Rating Actions 2

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.

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Banking

Future success for banks will be driven by balancing physical and digital services

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Future success for banks will be driven by balancing physical and digital services 3

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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