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How can traditional players close the gap on challenger banks?

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How traditional playerscan close the gap on challenger banks

Mark Jackson, Head of Financial Services at Collinson 

Earlier this year, Starling Bank and Monzo became the top two banks in terms of customer satisfaction in the UK, knocking incumbent

First Direct from the number one spot [1]. Interestingly, this news coincided with a decline in interest in app-only start-up banks, with lack of trust being one of the key deterrents. In fact, trust in banks holding and maintaining privacy and security of personal information has increased from 31% globally in H1 to 42% in H2, while trust in new digital banks and financial service providers has declined, according to RFi Group’s latest half-yearly “Global Digital Banking Report” [2].

This suggests that for early adopters, digital-only banks have a high customer satisfaction. However, these new kids on the block are having a harder time convincing the rest of the public to switch from more traditional established banks brand, which have developed long-standing relationships and trust with their consumers.

TSB’s recent online banking chaos, which was preceded by a failed switch between IT platforms, is a good example of the severe reputational damage that negative customer experience in the digital landscape can have on a bank.[3]

In some cases, it can take years to recover and rebuild trust with customers.

Despite TSB’s recent issue, on the whole traditional banks are starting to close the gap on the digital disruptors. However, in order for these incumbent banks to stay ahead of the game, it’s important to adhere to four key pillars where customers are concerned: trust, digitalisation, collaboration and personalisation.

Leverage the power of trust

In recent years, as more and more challenger banks have entered the market, trust and security has become a vital currency for the traditional banking player due to their perceived reliability with regards to private data protection. This sits against the backdrop of several high-profile attacks within the last few years, most notably HSBC in 2016[4]. Whilst it was targeted, the defences that it had in place were sufficient to guard against a data breach. So, the bank was actually able to use this attack to reinforce trust amongst its customers as it successfully protected their data.

Attacks such as this are only on the rise and the culprits are becoming ever more brazen in targeting high-profile brands. A recent study showed that during the first half of 2017, data breaches across all companies resulted in over 1.9 billion records leaked globally. This is a dramatic increase compared to the 721 million records leaked during the previous six months[5]. Meanwhile, the average data breach cost to a UK organisation, across all sectors, is estimated at £2.48m, equivalent to £98 per impacted individual[6]. The key is for companies to invest in the most robust security, so they are armed and ready should a hacker strike.

So, whilst traditional financial institutions have so far managed to keep things at bay, they can’t afford to be complacent. In today’s competitive banking landscape, it has quickly become a necessity to use trust to differentiate themselves to customers.

Improved digital banking offering 

As digital usage in banking around the globe continues to grow[7], the overall digital banking experience is set to continue to play a more important role in influencing customer’s decision making when choosing a bank. In fact, our global research into the Mass Affluent consumer found that 81 percent used mobile apps to manage their finances, and almost two thirds (63 percent) made digital payments whenever possible.

Traditional players need to cater for the new breed of consumers who expect a seamless, simple and engaging digital experience that’s ‘always on’. HSBC has successfully embraced this shift, with the launch of its Connected Money app7, which allows customers to easily access their account information from multiple providers within one central hub. One of the first of the established banks to market with an ‘Open Bank’ app, it is likely HSBC’s competitors will follow suit. This is one of the first tangible outcomes of the European Commission’s PSD2 legislation that is expected to have a positive impact on customer experience.In the long term, the use of APIs and AI tools such as robo-advisors, more intelligent automation, and advanced analytics will help banks to attract and retain customers. However, unless incumbent banks continue to refine their digital banking experience, they risk being left behind.

Embrace collaboration 

Over the last couple of years, the number of fintech start-ups has increased from a few to a few hundred, covering every aspect of the financial sector. New entrants are using technology to deliver simple processes in new, improved and more efficient ways.

Those financial institutions that are embracing the disruptors by forging partnerships with them will undeniably reap the benefits. This strategy will allow them to sharpen operational efficiency and respond to customer demands for more innovative services. The aforementioned HSBC app was born out of a partnership with ‘Bud’, a UK fintech, demonstrating the benefits to all parties. However, even with collaboration, incumbents still face challenges with legacy IT architecture, operational silos and an outdated leadership culture. To succeed, traditional banks will need to move quickly to embrace a significantly different future.

 Personalisation, flexibility and choice 

In addition to the basics of security, speed and customer experience, many consumers want the entire banking experience to better respond to their individual needs. In an era where customers are increasingly choice-rich and time-poor, an off-target offer is more likely to drive customers away than increase brand loyalty. Ultimately, to appeal to the new breed of customer, traditional banks need to create personal connections with their customers.

The retail landscape is already making some great headway in this space. To get to know its customers better and enhance their relationship with the brand, menswear brand Hackett created an invitation-only experiential programme, offering truly unique Hackett experiences, rewards and benefits. The staff collected minimal personal details, as well as data such as clothing sizes, helping to improve understanding of their customers through the delivery of an enhanced experience.

Banks, unlike retailers however, have always had access to rich customer data. More often than not, they fail to reap the maximum benefit offered from this. Using advanced analytics, they could gain additional insight into the behaviour and preferences of their customers. By deep diving into this data, banks can quickly build up a mind-map of their customers. This concerted awareness puts an end to the guessing game in relation to what financial products customers are interested in or likely to purchase next. This allows banks to tailor marketing collateral, ensuring that the right message is delivered at right time for that particular individual, helping to cement customer loyalty in the long run.

Final thoughts

Trust remains a vital currency between banks and their customers, but recent events surrounding TSB have reminded us how easily it can be shattered and how difficult it can often be to rebuild. However, demonstrating dedication to providing ‘on the go’ services to customers by investing in digital strategy and development of the latest apps can instil confidence in consumers.

With the onslaught of new entrants to the market, which inevitably redefines a bank’s role in a consumer’s life, it is essential for traditional banks to create a strategic partnership roadmap, to ensure banks get the most out of these collaborations, both for themselves and their customers.

These banks need to utilise every resource they can to understand the individual needs of their customer, showing their commitment to remaining relevant and in turn, driving greater satisfaction, paving the way for a long and loyal marriage between bank and customer.

[1] Smart Money People’s ‘Best British Bank’ Awards,1st March

[2] https://www.rfigroup.com/content/media-release-banking-sector-continues-evolve-digital-only-banks-are-losing-appeal-globally

[3] https://www.theguardian.com/business/2018/apr/27/tsb-it-meltdown-banking

[4] https://www.theguardian.com/money/2016/jan/29/hsbc-online-banking-cyber-attack

[5] Gemalto Breach Level Index

[6] Ponemon Institute – 2017 Cost of Data Breach Study

[7] https://www.rfigroup.com/content/media-release-banking-sector-continues-evolve-digital-only-banks-are-losing-appeal-globally

7 https://www.finextra.com/newsarticle/32074/hsbc-launches-connected-money-app

Banking

Take on more risk or taper? BOJ faces tough choice with REIT buying

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Take on more risk or taper? BOJ faces tough choice with REIT buying 1

By Kentaro Sugiyama and Leika Kihara

TOKYO (Reuters) – The Bank of Japan (BOJ) is under pressure to relax rules for its purchases of real-estate investment trusts (REITs) so that it can keep buying the asset at the current pace, highlighting the challenges of sustaining its massive stimulus programme.

The fate of the rules, which limit the central bank’s ownership of individual REITs to a maximum of 10%, could be discussed at the BOJ’s review of policy tools at its March 18-19 meeting, with an industry estimate putting nearly a third of its REIT holdings at close to the permissible threshold.

Given Japan’s fairly small REIT market, the BOJ may struggle to keep buying the asset unless it relaxes the ownership rule or accepts REITs with lower credit ratings, analysts say. The BOJ currently buys REITs with ratings of AA or higher.

“There’s a good chance the BOJ could tweak the rules for its REIT buying at the March review,” said Koji Ishizaki, senior credit analyst at Mizuho Securities.

The issue underscores the tricky balance the BOJ faces at the March review, where it hopes to slow risky asset purchases without stoking fears of a full-fledged withdrawal of stimulus aimed at weathering the prolonged battle with COVID-19.

As part of its stimulus programme, the BOJ buys huge amounts of assets such as exchange-traded funds and J-REITs.

It ramped up buying last March to calm markets jolted by the pandemic, and now pledges to buy at an annual pace of up to 180 billion yen ($1.68 billion).

The BOJ last year bought 114.5 billion yen worth of J-REITs, double the amount in 2019, bringing the total balance of holdings at 669.6 billion yen as of December, BOJ data showed.

The surge of its portfolio has led to the BOJ owning more than 9% for some REITs. An estimate by Mizuho Securities showed the BOJ owned more than 9% for seven out of the 23 REITs it held as of January, including Japan Excellent and Fukuoka REIT.

The BOJ did not immediately respond to a request for comment. The central bank normally does not comment on policy, besides public speeches and briefings by its board members.

BOJ Governor Haruhiko Kuroda has said the review won’t lead to a tightening of monetary policy.

But many BOJ officials are wary of relaxing rules for an unorthodox programme like J-REIT purchases, which critics say distorts prices and exposes the bank’s balance sheet to risk.

“Unless markets are under huge stress, it’s hard to relax the rules,” said an official familiar with the BOJ’s thinking.

($1 = 107.0200 yen)

(Reporting by Kentaro Sugiyama and Leika Kihara; Editing by Muralikumar Anantharaman)

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Banking

German watchdog puts Greensill Bank on hold due to risk concerns

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German watchdog puts Greensill Bank on hold due to risk concerns 2

By Tom Sims and Tom Bergin

FRANKFURT/LONDON (Reuters) – Germany’s financial watchdog warned of “an imminent risk” that Greensill Bank would become over-indebted on Wednesday as it imposed a moratorium on the lender making disposals or payments.

BaFin’s move is another blow to the bank’s owner, Greensill Capital, which said on Tuesday it is in talks to sell large parts of its business after the loss of backing from two Swiss asset managers which underpinned key parts of its supply chain financing model.

Greensill, which was founded in 2011 by former Citigroup banker Lex Greensill, helps companies spread out the time they have to pay their bills. The loans, which typically have maturities of up to 90 days, are securitized and sold to investors, allowing Greensill to make new loans. Greensill’s primary source of funding came to an abrupt halt this week when Credit Suisse and asset manager GAM Holdings AG suspended redemptions from funds which held most of their around $10 billion in assets in Greensill notes, over concerns about being able to accurately value them.

Two sources told Reuters on Wednesday that SoftBank-backed Greensill Capital is preparing to file for insolvency, adding that the sale talks were with U.S. private equity firm Apollo.

Greensill and Apollo did not immediately respond to requests for comment on Greensill’s insolvency preparations, which were earlier reported by the Financial Times, or on the sale talks.

Japan’s SoftBank, which has invested $1.5 billion in recent years in Greensill, also declined to comment.

BaFin said an audit found that Greensill Bank could not provide evidence of receivables on its balance sheet purchased from mining tycoon Sanjeev Gupta’s GFG Alliance. GFG did not respond to a Reuters request for comment on BaFin’s findings.

“The moratorium had to be ordered to secure the assets in an orderly procedure,” BaFin said in a statement, adding that the Bremen-based bank would be closed for business with customers. It declined to elaborate.

Greensill Capital said in a statement that Greensill Bank always “seeks external legal and audit advice before booking any new asset.”

CASH RETURN

Greensill Bank had loans outstanding of 2.8 billion euros and deposits of 3.3 billion euros at the end of 2019, rating agency Scope said in an October report, which did not detail the bank’s exposure to GFG.

The bank is a member of the Compensation Scheme of German Banks which means deposits up to 100,000 euros ($120,740) are protected. The German regulator said withdrawals were not currently possible, but gave no further detail in a statement.

Prosecutors in Bremen said earlier they had received a criminal complaint from BaFin regarding Greensill Bank, but did not provide further details on it.

In Britain, meanwhile the financial regulator took action against GFG’s own trade finance arm Wyelands Bank. The Bank of England’s Prudential Regulation Authority said it had ordered Wyelands to repay all its depositors. It said in a statement that it had been engaging closely with Wyelands, but did not say why it had taken the action.

GFG said Wyelands, which had over 700 million pounds ($979 million) of deposits according to its latest annual report, would repay deposits and planned to “focus solely on business advisory and connected finance”.

A GFG spokesman declined to comment on the BoE statement.

Credit Suisse said on Wednesday it is looking to return cash from its suspended funds dedicated to supply chain finance, which is a method by which companies can get cash from banks and funds such as Greensill Capital to pay their suppliers without having to dip into their working capital.

“Given the significant amount of cash (and cash equivalents) in the funds, we are exploring mechanisms for distributing excess cash to investors,” Credit Suisse said in a note to investors on its website.

Credit Suisse said that more than 1,000 institutional or professional investors were invested across its funds.

($1 = 0.8282 euros)

($1 = 0.7153 pounds)

(Reporting by Tom Sims and Patricia Uhlig in FRANKFURT and Tom Bergin in LONDON; Additional reporting by Brenna Hughes Neghaiwi and Oliver Hirt in ZURICH; Editing by Alexander Smith)

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Banking

Britain to review surcharge on bank profits

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Britain to review surcharge on bank profits 3

LONDON (Reuters) – Britain’s finance minister Rishi Sunak has said the government will review the surcharge levied on bank profits, in a bid to keep the UK competitive with rival financial centres in the United States and the European Union.

Sunak said in his Budget statement on Wednesday he was launching the review so that the combined tax burden on banks did not rise significantly after planned increases to corporation tax.

Leaving the surcharge unchanged would make UK taxation of banks “uncompetitive and damage one of the UK’s key exports”, the government said in its Budget document.

Changes will be laid out in the autumn and legislated for in the forthcoming Finance Bill 2021-22, the document said.

The surcharge on bank profits raised 1.5 billion pounds for the government in 2020, the document showed.

It is separate to the more lucrative bank levy on bank balance sheets, which raised 2.5 billion pounds.

(Reporting by Iain Withers, Editing by Huw Jones)

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