In the financial services arena, it is an irrefutable fact that banks have been around the longest. These traditional brick and mortar institutions have a host of technologies in their repository that together form the rather diverse underlying infrastructure of the bank. Today, many of these banks often label themselves as modern and high-tech, regardless of the fact that they are fully operational and reliant on systems that originated in the 80s; though perhaps this statement is too kind: some systems date back as far as the 70s. Suffice to say that these systems have been updated, upgraded, overhauled, tweaked and polished over the years, but the point remains that the ideology behind this infrastructure easily predates the mass adoption of the internet, mobile phones were unheard of and no one could foresee internet shopping or Facebook.
The key issue here is not necessarily the age of the platform per se, though it certainly plays an important role, the issue is the ideology: whether or not the technology supports the business model of the bank. Unfortunately these days, the chances are that it doesn’t. With the emergence of alternative payments, to say that banks running on these older systems are overstretched is a colossal understatement. Financial institutions in this predicament appear to deal with impending innovation in one of two ways: to either stretch systems beyond their initial purpose and capability, or to attempt to integrate the virtually unintegratable. In some circumstances, completely autonomous systems are being built that do not deliver any specific or significant value and at what cost? If the platform isn’t supporting the business model it is doing more harm than good and banks may find themselves in a cycle of perpetually increasing maintenance costs to support limited and fragmented innovation.
When discussing how banks can increase market share in payments, we need to take a step back. In order just to maintain market share, something has to change, and currently that something is the inclusion of value-added-services. Banks must adjust their business and operation models to cater for their customers; both end consumers AND merchants.
With all the new, evolving and innovative entrants in the market built on modern infrastructures that both support and drive current and future innovations, being complacent is not an option for the more established banks if they want to stay relevant. This concern needs to be approached on both a business and technological level. It would be a grave mistake to continue to churn out endless promotions to keep customers happy as this approach is not viable in the long run. Technology drives sustainable value: with the right underlying platform, banks can offer quick-to-market, new and exciting services that meet the needs of end consumers and merchants. In short, they can offer value.
The current business landscape is very fast paced, certainly a world away from the financial services market in the 80s, and this landscape, although exciting, also lends itself to numerous uncertainties. Sustaining, let alone growing market share, is only possible when the new product or service a bank wants to deliver is flexible, and in some cases, even disposable. To keep that competitive edge, banks need to have the capability to create something quickly and at very little cost, and if it doesn’t work, it’s ok, time to build something else, quickly and at very little cost. The problem that arises is that most banks can’t do this and those that can invest far too many resources at an extreme cost. Nothing is quick or cheap, not with the technology they have in place. However, the technology that can deliver this ability and the development tools required are available on the market.
There are documented cases where a financial service provider has launched a new product from concept to go-live in two weeks, spending only US$3,000 in the process. Completely new interfaces have been created in an hour! How many banks can raise their hands and declare, “yes we can do this, no problem?” In this increasingly changeable payments landscape, the answer needs to be yes, otherwise the bank’s shelf life is limited and they may soon be out of the game altogether. When was the last time you saw something ground-breaking and innovative built on a legacy system?
From a technology perspective, the following advice can be offered to banks that want to increase their market share:
- New products and services must add value. Using quick-fix plug-ins to keep up with market trends just to be able to say you offer this service will not attract customers. The curious may sign up, but it will only be a small number and the attrition rate will be very high. Banks cannot base their value-added-services around endless promotions or exclusively on their loyalty programmes. This isn’t sustainable in the long run.
- Do not overstretch your technology. Older systems were never built to compete with the modernised technology of today and there are a number of well-publicised, high profile failures that can attest to this. There is no going back from bad publicity and no amount of loyalty points or discounts can make customers forget.
- Invest in integration and stop relying on plug-ins and bolt-ons. This technology only ensures that your infrastructure is increasing fragmented and prone to failure. These quick-fix methods will not result in compelling products and services, competitive differentiation and could exacerbate the risk of system glitches.
- Build a Payment Service Hub. Bring some of the business, processes and systems in-house. If you want to increase market share you need to be a pioneer and you cannot outsource if you want to lead innovation.
- Be prepared for failure. You need to be ready for the failure of business ideas and have the technology to enable you to quickly recover from these.
Listen to your customers. It is all very well and good throwing around the latest terminology, ordering consumer research and talking about the importance of big data – do something with it. Convert this knowledge into opportunities. It is easy to get swept away in the latest gadgetry and lose sight of customer requirements and many financial service providers do, make sure that your business is in touch with your end customers; the consumers and the merchants.
Banks cannot sit on legacy systems and expect to maintain, let alone, increase market share. Today’s customer profile is very different from that of even five years ago. Customers are no longer easily satisfied: they have multiple accounts with multiple service providers and their expectations are high. Gone are the days of customer loyalty for life, today more than ever, customers are prepared to chop and change for a better deal, be it a financial or service related incentive, and banks cannot afford to sit on their laurels waiting for this to happen.
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.”
The Coming AI Revolution
By H.P Bunaes, CEO and founder of AI Powered Banking. There is a revolution in AI coming and it’s going...
Q&A with Joe Steele, Head of Workplace Technology at Starling Bank
In just under a year, many businesses had no choice but to go online and with digital transformation on the rise...
How financial services organisations are using data to underpin future growth
By John O’Keeffe, Director of Looker EMEA at Google Cloud In addition to the turmoil caused by the COVID-19 pandemic, a...
Three questions the financial services industry must answer in 2021
Xformative, a Mastercard Start Path recipient, shares what these questions mean for fintech partners and their innovations This year, fintechs...
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 A quarter (27%) of banking customers noted an...
Is Digital Transformation the Key to Business Survival in the New World?
After a turbulent year, enterprises are returning to the prospect of a new world following an unprecedented pandemic. Around the...
Virtual communications: How to handle difficult workplace conversations online
Have potentially difficult conversation at work, like discussing a pay rise, explaining deadline delays or going through performance reviews are...
Black Friday payment data reveals rapid growth of ‘pay later’ methods like Klarna
Payment processor Mollie reveals the most popular payment methods for Black Friday Mollie, one of the fastest-growing payment service providers,...
Brand guidelines: the antidote to your business’ identity crisis
By Andrew Johnson, Creative Director and Co-Founder. How well do you really know your business? Do you know which derivative of your...
COVID-19 creates long and winding road for startups seeking investment
By Jayne Chan, Head of StartmeupHK, Invest Hong Kong Countless technology and other companies describe themselves as innovators, disruptors or...