By Danny Healy, financial technology evangelist, MuleSoft
We’re fast approaching a complete transformation in the way we consume financial services. In the future, the bank as we know it won’t define how its services are delivered, the demands and expectations of customers will. We as customers don’t want to be tied down to a single bank, we want to access financial services where we want, when we want, and how we want.
This follows the landmark open banking movement and PSD2 in Europe, which have forced banks towards being more customer-centric. While banks may have initially seen open banking as a threat, this shift is actually an excellent opportunity for them to deliver more value to customers.
Creating a marketplace
As with any major industry today, finance is built on data. Data is becoming the ‘new oil’, creating a huge opportunity for banks to unlock new sources of revenue if they can build highly personalised customer experiences in collaboration with other banks and service providers. PSD2 and open banking provide the spark for banks to collaborate, prompting them to develop APIs that open up their business capabilities and services for others to tap into. The more open that banks become, the more opportunities they have to join new value chains. As such, viewing open banking as a compliance exercise with the goal of ticking a box is unhelpful. Banks should see open banking as the basis for successful digital transformation.
Essentially, open banking is an opportunity for banks to become curators of financial services, establishing a marketplace in which customers and providers can come to select the best products at the right price. Just as more wealth was able to flow between Europe and Asia as the historic Silk Roads extended further east and west, banks can ensure that more revenue flows through their marketplaces by building reusable APIs that connect to third parties. HSBC, for example, was one of the first UK banks to realise this vision with the release of its Connected Money app, bringing in data from more than 20 rival banks to create a hub from which customers can manage all their bank accounts. More recently, NatWest began triallingMimo, a virtual personal assistant that uses open banking APIs and artificial intelligence (AI) to help customers switch to better insurance and utilities deals.
Creating new opportunities
Success in this new era rests on a re-imagined bank. If a bank wants to position itself as a digital marketplace where consumers can come to satisfy any financial requirement, it needs to re-imagine its business as a platform. This is where the API comes in. Banks need to unbundle and repackage their digital assets as a discrete set of capabilities exposed via APIs. With this approach, every service, process and digital capability within the bank is ‘productised’ and discoverable to others.
This model will naturally begin to create what is known as an application network, creating a digital Silk Road paved with applications, data and devices, all connected via APIs. This makes every asset on the network pluggable and reusable for any team that requires them, even for third parties outside of the bank’s four walls. As a result, the application network lays the perfect foundation for rapid innovation and greater collaboration between banks, fintechs and other service providers, thereby future-proofing banks for success in the years ahead.
The future of financial services
By embracing the application network mindset, traditional banks can behave more like Silicon Valley start-ups, creating new revenue channels by sharing their core banking capabilities and customer base with authorised innovation partners. Mastercard, for example, has turned many of its core services into a platform of APIs and is building an ecosystem around its capabilities. The Mastercard Travel Recommender enables travel agents and transport providers to access customer spending patterns through APIs, offering customers targeted recommendations for restaurants, attractions and activities based on their previous behaviour.
These new opportunities can have a huge impact on banks’ bottom-lines. Recent research found that 36% of organisations with APIs are generating more than 25% of their revenue through those APIs. This shows that APIs will play a central role in enabling the bank of the future, providing a positive catalyst to drive this new business model built on openness and customer choice.
As banks take their first steps toward this vision, it’s critical that they understand going it alone will not deliver value for customers and may see those customers leaving altogether for a nimbler competitor. However, there are huge gains to be made for those brave enough to reimagine their business as a platform and embrace the change that lies ahead. These gains will only be achieved if traditional banks adopt an API-centric mindset that accelerates integration and innovation and provides a seamless customer experience. Unlocking data through APIs and an application network is the best way to stay ahead of the pack as the pace quickens in the race to become the bank of the future.
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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